Health Savings Account (HSA) And Medicare Basics
If you’re someone who has taken advantage of health savings accounts your entire life or are new to the concept of using the pre-taxed income to reduce the cost of your medical bills, there are some important changes to understand now that you’re eligible for Medicare. Once you enter the federally managed, senior healthcare program, it becomes increasingly difficult to navigate the system, which can end up costing you in penalties. When it comes to your HSA and Medicare, here’s everything you need to know.
What Is A Health Savings Account?
A health savings account (HSA) can only be used in conjunction with a high deductible health insurance policy. An HSA allows you to contribute pre-taxed funds to a savings account, which can then be withdrawn and used to pay for eligible medical expenses. Your HSA can also be used as a way to save for retirement, and the money can be used for things outside of medical costs, like living expenses.
Health insurance providers often offer HSAs along with their high deductible policy options, but that’s not the only place you can get them. Most other financial institutions, organizations, like banks and credit unions, also offer health savings accounts. Lastly, your employer may include an HSA as part of their benefits if they allow you to choose a high deductible health plan (HDHP).
How They Work
As mentioned above, your HSA is only available if you choose to enroll in high deductible coverage. That means you sign up for a policy with lower than normal monthly premiums, but higher than average out-of-pocket expenses. There are limits to high deductible health plans that would qualify for an HSA, so make sure you meet the eligibility requirements before getting covered. In 2019, the limits for HSA-qualifying high deductible health plans and HSA contributions are as follows:
- Maximum annual HSA contribution of $3,500 (up from $3,450 in 2018).
- Maximum annual deductible of $1,350 (the same rate from 2018).
- Maximum annual out-of-pocket limit of $6,750 (up from $6,650 in 2018).
- Maximum annual HSA contribution of $7,000 (up from $6,900 in 2018).
- Maximum annual deductible of $2,700 (the same rate from 2018).
- Maximum annual out-of-pocket limit of $13,500 (up from $13,300 in 2018).
Once you find a qualifying HDHP, you’ll need to set yourself up with an HSA as well. At this point, you’ll need to decide how much you’d like to contribute to your health savings account, so long as it doesn’t exceed the annual maximum contribution limit. The benefit here is that unlike a regular savings account, with an HSA, you aren’t taxed on the money you put in. In fact, as an added benefit, you can even lower your income and taxes altogether by putting money into your HSA.
After you set up your contribution amount, you’re probably wondering how you can access your funds. The easy thing about an HSA is that you have direct access to the money, and can use it at anytime on qualified expenses. Depending on your HSA provider, you will either receive old paper checks or a debit card. You can pay for your medical expenses with each, but premiums usually don’t fall under eligible expenses.
What happens if you don’t use your funds before the year is over? Unlike flexible spending accounts (FSA), your funds will actually roll over into the next year. So, you don’t have to worry about over contributing or not using up all your funds, because you will still have access to whatever you don’t use in the following calendar year.
Can You Have An HSA And Medicare?
No, once you are enrolled in Medicare, you can no longer contribute funds to your health savings account. Although, you are still allowed to withdraw funds from your HSA to pay for eligible expenses, which now may include living expenses. The reason being, as mentioned above, health savings accounts are only allowed to be used with high deductible health plans, and since Medicare doesn’t fall under that category, you can no longer contribute tax-free income to your expenses.
If you are enrolled in Medicare, you should make sure to talk to your HSA provider to ensure that they switch your contributions from whatever your previous amount was to zero dollars. If you forget, it could end up costing you. If you still have funds left over in your account when you do enroll in Medicare, don’t worry, you’ll still be able to withdraw the funds tax-free, you’re just no longer allowed to make contributions.
If you are eligible for Medicare but still employed, you do have the option to stick with a high deductible health plan for the remainder of your employment. In that case, you would still be allowed to contribute funds to your HSA, and withdraw them as normal. Just remember to make the necessary adjustments when you finally become a Medicare beneficiary.
Can You Withdraw Existing Funds?
Yes, you do have the ability to withdraw existing funds from your HSA even when you are enrolled in Medicare, and you still won’t pay any taxes on that money. It’s one of the key benefits of health savings account over traditional savings accounts like a 401k or IRA. There is also no age minimum for when you have to withdraw your funds. You have the ability to let your HSA sit for as long as you like, and can withdraw funds at any time.
IRS Penalty For HSA And Medicare
Throughout the article, you may have noticed a few warnings about contributing pre-taxed money into your health savings account. The reasoning behind that is you may find yourself in hot water with the IRS (Internal Revenue Service).
For starters, if you are a Medicare beneficiary contributing funds to your HSA, you are not paying taxes on that money, even though Medicare is not considered an HDHP. You will be liable for paying back taxes on those funds, along with account interest, excise taxes, and additional income taxes.
The money you contribute to your HSA after enrolling in Medicare can also be considered excess contributions. When withdrawing those funds, you may end up paying an additional 6% excise tax. There is also what is known as a testing period for your health savings account, which would subject you to a 10% income tax. All things considered, make sure to avoid all these potential penalties by halting your contributions to your HSA altogether.
Should You Delay Medicare To Keep You HSA?
The answer to this question primarily depends on your situation and needs. If you are still employed, relatively healthy, and think you can save more money by enrolling in a high deductible health plan, then you should consider delaying your Medicare enrollment. The reason being, high deductible plans are incredibly cheap up front and still afford you the option of contributing additional funds to your HSA. This not only gives you more money to use towards your out-of-pocket costs but reduces the amount of taxable income you make. This option can save you a lot of money.
However, if you find yourself making frequent trips to the doctor, or have any surgeries coming up, you may want to stick with Medicare enrollment. You may not be able to contribute funds to your HSA, but you’ll be enrolled in some of the most comprehensive health coverage on the market. You’ll have access to added benefits, and can even enroll in an Advantage or Medigap plan to minimize or eliminate your out-of-pocket expenses.
If you’re looking to get started with a health savings account, or more information about alternatives, you can start with FirstQuote Medicare. With experienced agents ready to help guide you through the process, you’ll make sure you’re signing up for the plan that fits your needs best. Compare your HSA and Medicare options today, and get the coverage you deserve.