Once you enroll in Medicare, you’re no longer eligible to put pretax funds in an HSA. You can use money already in your HSA to pay for some Medicare costs, but there’s a tax penalty if you put pretax money in an HSA.

A health savings account (HSA) is an account you can use to pay for your medical expenses with pretax money. You can put money in an HSA if you meet certain requirements.

You must be eligible for a high-deductible health plan and you can’t have any other health plan. Because Medicare is considered another health plan, you’re no longer eligible to contribute money to your HSA once you enroll.

While you can still use any funds in your current HSA to cover expenses like Medicare premiums, copayments, and deductibles, there’s a tax penalty if you contribute more money after enrolling in Medicare.

Here’s more about how HSAs work with Medicare.

To contribute to an HSA, you need to be enrolled in an HSA-qualified health plan with a high deductible. You also can’t have any other health coverage. This includes Medicare.

Once you’re enrolled in Medicare, you can no longer contribute pretax money to your HSA.

You can keep contributing to your HSA by not enrolling in Medicare right away. You can defer Medicare enrollment if you’re 65 years old but not yet retired or receiving Social Security retirement benefits.

You won’t face a late enrollment penalty as long as you have a health plan from your employer. You can then enroll in Medicare when you do retire. Retirement qualifies you for what’s known as a special enrollment period. The same rules apply if you have coverage through your spouse’s job.

Instances when you will not receive a penalty

For example, if a married couple has health insurance through one spouse’s employer. The employed spouse turns 65 years old but isn’t planning to retire yet.

The couple can both stay on the employer’s health plan. If it’s an HSA-qualified plan, they can continue to contribute.

The couple can both enroll in Medicare when the employed spouse retires. They’ll both qualify for a special enrollment period because they’ll both lose their prior coverage after retirement.

The couple won’t be able to contribute to the HSA anymore, but they will both be able to use funds from it toward future healthcare costs.

As in the example above, you’ll need to have a health plan in place to delay Medicare enrollment. You’ll be charged a late enrollment penalty if you don’t.

Instances when you would receive a penalty

As another example, let’s say a retired person chooses not to enroll in Medicare when they turn 65 years old. They don’t have another health plan and pay all health costs out of pocket.

In this case, they’ll pay a late enrollment penalty if they do decide to enroll in Medicare later.

For Part B, their monthly premium will increase by 10% for each 12-month period they could’ve had Medicare Part B but didn’t. For example, if they waited 2 years to enroll, they’d pay an additional 20% on top of the standard Part B premium for as long as they have this coverage.

In addition, they’ll have to wait for open enrollment to sign up since they won’t qualify for a special enrollment period.

You can use the funds from your HSA to pay healthcare costs, including your Medicare premiums.

Qualified medical expenses include:

Medicare Part B (medical insurance) has standard costs, including a monthly premium and an annual deductible. Additionally, you’ll pay 20% of the Medicare-approved cost for most covered services. You can use the funds in your HSA toward any of these costs.

You can also use your HSA toward your Medicare Part A (hospital insurance) costs. While most people don’t pay a premium for Part A, there’s a deductible to cover each year. You’ll also pay a daily coinsurance amount once a hospital stay lasts more than 60 days in a benefit period.

Your costs for Medicare Part C (Medicare Advantage) and Medicare Part D (prescription drug coverage) will depend on the plan you buy. Each plan will have its own costs for premiums, deductibles, and copayments. You’ll be able to use HSA funds toward any of these costs.

Can I use my HSA to pay Medigap premiums?

Medigap, also known as Medicare supplement insurance, is optional coverage that can help you pay some of the out-of-pocket costs of using Medicare. A Medigap plan is not considered a qualified medical expense. This means you can’t use the money in your HSA toward the cost of these plans without paying taxes.

You can use the money toward Medigap premiums, but you’ll need to pay taxes on the money you withdraw to do so.

All the money you contribute to an HSA is pretax. As long as you’re eligible, you’ll be able to contribute to your HSA and not pay taxes on that money. However, you won’t be eligible anymore once you’re enrolled in Medicare.

You’ll pay tax penalties if your HSA contributions and your Medicare enrollment overlap. The amount of penalty you’ll pay depends on the situation. Scenarios you might encounter include:

  • You’ll be subject to back taxes on any contributions made after your Medicare enrollment date. Your contributions will be added back into your taxable income for the year.
  • Your contributions after you’re enrolled in Medicare might be considered “excess” by the IRS. Excess contributions will be taxed an additional 6% when you withdraw them.
  • You’ll pay back taxes plus an additional 10% tax if you enroll in Medicare during your HSA testing period. An HSA testing period is the full year after you enroll in an HSA and midyear if you make the maximum contributions when you first sign up. So, if you signed up for an HSA in July 2021 and contributed a full year’s amount, your testing period would have ended in January 2023.

Let’s look at some examples of how this might play out:

Example scenario 1

Steve has an HSA account and enrolls in Medicare. His Medicare start date is October 2023. Steve continues contributing $500 a month to his HSA until the end of 2023. Steve would owe back taxes on the $1,500 in contributions he made after he enrolled in Medicare.

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Example scenario 2

Mary starts contributing to an HSA in July 2022 and contributes the maximum yearly amount. She turns 65 years old in June 2023 and enrolls in Medicare but keeps making her $500 monthly HSA contributions.

Mary will owe back taxes on the $4,000 she contributed between June and December. She’ll also be assessed another $400 of taxable income because her HSA was still in its testing period.

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The IRS and Medicare recommend that you stop contributing to your HSA 6 months before you enroll in Medicare to avoid these penalties. This is especially true if you’re enrolling in Medicare later. When you enroll in Medicare after you turn age 65, the IRS will consider you to have had access to Medicare for 6 months prior to your enrollment date.

In general, it’s a good idea to stop HSA contributions if you’re planning to enroll in Medicare anytime soon. That way, you can avoid any tax penalties and save money.

Medicare offers what’s called a Medicare savings account (MSA). This plan is similar to an HSA, but there are a few key differences.

Just like a standard HSA, you’ll need to be enrolled in a high-deductible plan. With an MSA, this means you’ll need to select a high-deductible Medicare Advantage plan. Once you’ve selected a plan, things will look a little different than your HSA. Some differences include:

  • You don’t make your own contributions. Instead, your MSA plan will deposit a lump sum of money into a bank account for you at the start of each benefit year.
  • You won’t pay a monthly premium beyond the standard Part B premium.
  • Providers can’t charge you more than the Medicare-approved amount for services.

Once your MSA is set up, you can use the money in the account for your healthcare expenses. The money you spend out of the account will count toward your plan’s deductible. If you don’t use all the money in your MSA, it’ll roll over to the next year. If you do use all the money, you’ll pay your costs out of pocket until you reach your deductible.

Only services covered by Medicare parts A and B will count toward your deductible. So, while you can spend your MSA funds on a service Medicare doesn’t cover, it won’t count toward your deductible. This could leave you with more to pay out of pocket later.

  • You’re not eligible to make pretax contributions to an HSA after you enroll in Medicare.
  • You can use the money you already have in an HSA to pay your Medicare premiums, deductibles, and copayments.
  • You’ll pay taxes on any pretax contributions you make to an HSA after you enroll in Medicare.
  • You need to stop contributing to an HSA 6 months before you enroll in Medicare.
  • You can sign up for an MSA if you want a similar program after you enroll in Medicare.