HSA’s and Medicare can be tricky to maneuver. Not only do you have to worry about what you can use your funds on when you’re in retirement, but you also need to know how to avoid a taxable event when you’re about to retire from work.
You cannot use HSA funds to pay for Medicare Supplement premiums.
In today article, we’ll explore what a person can use HSA funds to pay for in Medicare and what they can’t pay for with HSA funds.
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HSA's and Medicare: The Complete Guide (Video)
What Is An HSA?
HSA, with stands for a Health Savings Account, is a companion fund used when you sign up for a High Deductible Health Plan. These plans have large out of pocket costs before you receive any coverage.
According to Healthcare.gov, 2020 HDHP plans must have a minimum deductible of $1,400 for an individual and $2,800 for a family. The maximum out of pocket is $6,900 for an individual, $13,800 for a family (not including out of network service.)
Due to their high deductibles, premiums for these plans are incredibly inexpensive.
To offset these large deductibles, the federal government allowed people that use HDHP’s to contribute money tax-free to an HSA. HSA’s are known to offer three tax advantages to contributors:
- Contributions are tax-free, up to their annual limit (2020 limit is $3,550 for an individual and $7,100 for a family.)
- Investment gains in the HSA are tax deferred (like your 401k plan.)
- If you use proceeds (earnings from investments and what you contribute) on qualified medical expenses, they are non-taxable.
Can I Still Contribute To An HSA When Using Medicare?
The tax benefits associated with HSA’s are available because of the risk that a HDHP participant takes. The tax code that drives HSA’s specifically mentions that a person cannot have secondary coverage and get the tax advantages of an HSA.
Medicare is considered secondary insurance. So coverage would negate the benefits of having a HDHP with the associate Health Savings Account.
Medicare Part A: If I'm Getting It Free Should I Sign Up?
For most working Americans, Medicare Part A is premium free. Since there’s no cost associated with it to the beneficiary, most people sign up for Part A at age 65. This is generally a good idea.
Usually, Medicare is a secondary insurance behind your work plan. That means your work plan must pay it’s portion first. Anything that’s left over can then be submitted to Medicare afterwards. Most times Medicare doesn’t pay anything due to the deductible and primary insurance coverage. However, in extreme medical crises that require hospitalization, Medicare does pay a portion of your bill after your work insurance.
In the case of HDHP’s, even signing up for Medicare Part A can eliminate the tag advantages of the Health Savings Account if you’re still contributing. It’s one of the only times that I highly suggest that you DO NOT APPLY FOR PART A if you still want to contribute to your HSA.
Can My Employer Still Contribute For Me?
No contributions can be made to your HSA, without causing a tax issue, if you plan to sign up for Medicare with an HDHP. If your employer continues to contribute, you can expect the IRS to look for their cut. This is true even if you told them to stop and they continue.
In the event that you have an overage, you have to include the overage in your income, plus incur a 10% penalty.
IRS Publication 969 dictates what qualifies as a HDHP, HSA, the contribution maximums and penalties for over-contributing.
When Should I Stop Contributing To My HSA Plan?
According to CMS (the agency that oversee’s the Medicare program,) you should stop contributing to your HSA 6 months before you sign up for premium free Part A.
This is because Premium-free Part A retroactively backdates 6 months. Since you can no longer contribute to a Health Saving Account after you have Medicare coverage, all of those contributions would be added to your income, plus the additional 10% penality.
What Medicare Costs Can I Pay With My HSA Funds?
Medicare is interesting in what it allows HSA funds to be used for. Most Medicare related costs are covered and available for HSA distribution. This includes the following:
- Medicare Advantage Premiums
- Medicare Part B Premiums
- Medicare Part D Premiums
- Long-Term Care Insurance
- Medical Costs including deductibles, co-pays, and co-insurance
- Prescription costs
Can I Use My HSA Funds To Pay For A Medicare Supplement?
Unfortunately, Medicare Supplement (also known as Medigap) premiums cannot be paid with HSA funds.
This means that you would need to use other funds to cover these costs such as retirement benefits and other sorts of benefits. However, based on the amount of funds that you have accumulated, there’s a good chance that you can afford a lower cost plan.
This has to do with the level of “risk” that you’re willing to accept instead of transfer to the insurance company. Because you’re willing to pay more with your HSA funds (which can be used for Medical treatment without incurring a penalty) the insurance play will be cheaper.
Example Of Cost Savings
Tom has a Health Savings Account with $60,000 and enters Medicare.
Tom can no longer contribute to his HSA fund because he has Medicare as his insurance plan. However, his account continues to grow because the funds that are inside are accruing interest.
Most people without a savings plan in place would look at Plan G as it covers all Medicare approved costs except the Part B deductible. Tom gets a quote for Plan G and it’s $98 a month.
However, because Tom has such a large savings in his HSA, he can safely withdrawal up to $2,400 a year (based on the 4% rule) without touching the principal of $60,000.
Tom can look at a High Deductible Plan G, because the maximum deductible is $2,340. Medicare works the exact same way in regards to deductibles for Part A and B. Afterwards, he’s covered the exact same way as a Traditional Plan G after he’d pay the Part B Deductible.
The cost of High Deductible Plan G is $38 dollars a month. This saves Tom over $720 dollars a year with no difference in coverage. Only paying the High Deductible Medicare Supplement deductible with his HSA plan instead of paying the insurance company to cover it.