February 20, 2024 | IXSolutions

Many people ask if they can still have a Health Savings Account (HSA) after they turn 65 and enroll in Medicare (or qualify for Medicare due to other reasons). The answer is yes; however, once someone is enrolled in Medicare, they will no longer be able to make new contributions to their HSA.

This means you can have an HSA and draw down on the funds until those funds are exhausted. As long as those funds are used to pay for qualified medical expenses, that money can be withdrawn tax-free. If the funds are withdrawn to pay for non-qualified medical expenses, state and federal income taxes will apply. There is normally a 20% penalty that also applies when funds are used to pay for non-qualified medical expenses, but that penalty is waived for individuals who are age 65 or older.

Are Medicare premiums considered a qualified medical expense?

The HSA rules provide that all Medicare premiums (excluding those for Medicare Supplement/Medigap policies) are considered a qualified medical expense. That means any insurance premium attributed to Medicare Parts A, B, C, or D can be paid tax-free from an individual’s HSA.

For practical matters, most people don’t have to pay a premium for Part A because they have paid Medicare taxes or were married to someone who paid Medicare taxes, but there are some limited circumstances where a premium may apply.

On the other hand, most people do have to pay a premium for Part B, and that premium amount varies by income level. Part B premiums are usually deducted from a person’s Social Security Income check. This means a person will have to reimburse themselves tax-free from the HSA for the Part B premium expense rather than paying the premium directly from the HSA.

Part C refers to the Medicare Advantage program which is a way of receiving Medicare coverage through a private insurance carrier. Part D refers to the Medicare prescription drug program. Part D can be purchased as a stand-alone benefit, or it can be coupled with a Medicare Advantage plan. Either or both premium expenses can be withdrawn from the HSA tax-free.

While Medicare Supplement/Medigap plans aren’t considered a qualified medical expense, HSA funds can still be used to pay for these premium expenses. The amount withdrawn from the HSA to pay for these premium expenses will need to be reported as a non-qualified medical expense when a person files their tax return, and income taxes will apply.

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For a disability extension to be available, the following criteria must occur:

1) The qualifying event must be attributed to termination of employment or a reduction in hours; and

2) A qualified beneficiary must be considered disabled by the Social Security Administration at any time during the first 60 days of COBRA coverage; and

3) The qualified beneficiary must notify the plan administrator of the disability determination within 60 days after the latest of a) the date of the Social Security disability determination, b) the date of the qualifying event, c) the date of the loss of coverage associated with the qualifying event, or d) the date the qualified beneficiary is informed of the requirement to provide notice of a disability, such as through the COBRA Initial Notice or a Summary Plan Description (SPD); and

4) The qualified beneficiary must provide notice to the plan administrator before the end of the 18-month period following the qualifying event.

Although the primary purpose of the extension of coverage is to allow the disabled qualified beneficiary to remain on COBRA until they are eligible for Medicare, the disability extension applies to all qualified beneficiaries. That means all family members who had coverage at the time of the qualifying event are eligible to receive an extra 11 months of COBRA coverage, not just the disabled family member. This is true even if the disabled family member does not elect COBRA because the extension applies independently to each of the qualified beneficiaries. This is confirmed in Treas. Reg §54.4980B-8 Q/A-1(b), Example 2.

During the first 18 months of COBRA coverage that are attributed to a loss of coverage because of termination of employment or a reduction in hours, the plan administrator may charge qualified beneficiaries up to 102% of the plan premium. During the 11-month disability extension, the plan administrator may charge qualified beneficiaries up to 150% of the plan premium.

It should be noted that a disability extension is not the only way that the maximum duration of COBRA coverage can be extended. For example, there could be secondary qualifying events that occur, but those topics are not addressed in this article.

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