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 As long as those funds are used to pay for qualified medical expenses, that money can be withdrawn tax-free. If the funds are withdrawn to pay for non-qualified medical expenses, state and federal income taxes will apply.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 Either or both premium expenses can be withdrawn from the HSA tax-free.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 The amount withdrawn from the HSA to pay for these premium expenses will need to be reported as a non-qualified medical expense when a person files their tax return, and income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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