Using Medicare and Health Savings Accounts Together

Understanding What You Can and Cannot Do

It is possible to use a health savings account (HSA) for out-of-pocket Medicare expenses. However, you must be eligible for an HSA and must plan ahead of applying for Medicare in order to do this.

Family looking at medicare health savings account information
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Out-of-Pocket Spending with Medicare

Medicare is not free. There are monthly premiums, deductibles, copays, and coinsurance. Some items, drugs, or services may not be covered at all.

Medicare costs add up quickly. An analysis by the Kaiser Family Foundation noted that the average Medicare beneficiary spent $5,460 out of pocket for health care in 2016.

The out-of-pocket expenses may include:

  • Medicare Part A (inpatient/hospital coverage): As long as you or your spouse has paid more than 40 quarters (10 years) in Medicare-taxed employment, you get coverage premium-free. However, using that coverage will cost you. For each hospital stay up to 60-days long, you will pay $1,408 in 2020.
  • Medicare Part B (outpatient/medical coverage): Everyone pays Part B premiums. Unless you qualify for a Medicare Savings Plan (MSP), the least you would pay based on your income bracket is $144.60 per month ($1,735.20 per year). With the exception of certain preventive screening tests, you will also pay 20% for any services.
  • Medicare Part C (Medicare Advantage plans): Some people will enroll in Medicare Advantage instead of Original Medicare (Part A and Part B). Even if you have a premium-free Medicare Advantage plan, you are still required to pay Part B premiums.
  • Medicare Part D (prescription drug plans): Part D plans are run by private insurers and therefore have variable deductibles, premiums, and copays. Some Medicare Advantage plans incorporate Part D coverage into their plans.
  • Medicare Supplement Plans (Medigap): People who stick with Original Medicare may elect to sign up for a supplement plan to help reduce costs. In 2020, premiums for those plans range from $50 to $300 per month ($600 to $3,600 per year) depending on the plan you use and where you live.

Who Is Eligible for an HSA

Health savings accounts are one way to put aside money for any medical expenses you may have now or in the future. This includes future Medicare out-of-pocket expenses.

Not everyone is eligible for an HSA. First and foremost, you must be enrolled in a qualifying high-deductible health plan. Like any health plan, coverage does not begin until you spend a certain amount of money out of pocket, i.e., the deductible amount.

Because these plans require you to pay more upfront than the average plan, they are seen as a financial burden and an HSA is allowable as a means to provide tax relief.

Even if you have a high-deductible health plan, you cannot sign up for an HSA if you have access to another health plan. This excludes separate dental, vision, and long-term care insurance, however, since these benefits are not covered by many high-deductible plans.

In terms of other health coverage, you cannot have a flexible spending account (FSA) or health reimbursement arrangements (HRA). You also cannot be enrolled in Medicare at the time you open a plan although you can continue to use one as you will read below. Finally, you cannot be a dependent individual on someone else's tax return.

How Health Savings Accounts Work

Similar to an IRA or 401K, funds can be deposited into an HSA without being taxed but you can only put so much money into the account every year. In 2020, you can contribute up to $3,550 as an individual or $7,100 as a family.

If you enter those funds into the health savings account yourself, you can then apply for a tax deduction that year. If your employer enters those funds from your paycheck, that part of your income is not taxed from the start and a tax deduction is not necessary.

Money in an HSA accrues via investment earnings and interest but is not taxed. When money is taken out of the account and used for qualifying medical expenses, it is still not taxed. If money is taken out of the account and used for non-medical reasons, however, you will face an income tax on the amount spent plus an additional 20% tax.

Using an HSA for Medicare Expenses

You cannot sign up for an HSA if you are enrolled in Medicare. You also cannot contribute funds to a preexisting account and must stop making contributions at least six months before you enroll or otherwise face financial penalties. That does not mean you cannot use a preexisting account to pay off your Medicare expenses.

Currently, you can use a health savings account to pay for a number of Medicare expenses. Qualifying expenses include monthly premiums for Part A, Part B, Medicare Advantage, and Part D. Coinsurance, copayments, and deductibles for Parts A through D can also be paid for this way.

Non-Medicare expenses that qualify include premiums for long-term care insurance and over-the-counter medications (but only if you get a written prescription for them). Keep in mind that monthly premiums for Medicare Supplement plans do not qualify under HSA rules.

How to Maximize Your HSA for Medicare

Depending on your circumstances, it may be in your best interest to build up an HSA to use once you transition to Medicare. By setting aside tax-free earnings now and minimizing future income taxes, you could potentially save thousands of dollars when you retire and are more likely to be on a fixed income.

To do this, you will want to fund your HSA as long as possible before signing up for Medicare. For this, you need to understand the Medicare calendar.

You become eligible for Medicare when you turn 65 years old (enrollment starts three months before and ends three months beyond your birth month). If you are receiving Social Security or Railroad Retirement Benefits at the time, you will be automatically enrolled in Medicare Parts A and B.

Likewise, someone who is on Social Security Disability Insurance (SSDI) will be automatically enrolled in Medicare after 24 months (2 years). Everyone else has to apply for Medicare on their own.

Although Medicare eligibility begins at 65 years old, the current retirement age for Social Security is 67. Many people defer retirement until 70 years old to maximize their Social Security earnings with delayed retirement credits.

If you work past 65 years old and you are still eligible for employer-sponsored health care, you may want to postpone signing up for Medicare and keep contributing to your HSA.

You can delay Medicare enrollment using the Special Enrollment Period if your employer hires at least 20 full-time employees. In that case, you have eight months to sign up for Medicare from the time you leave your job or lose your employer-sponsored coverage, whichever comes first. Otherwise, you will face Medicare late penalties.

There may be potential changes to HSA rules down the road. President Trump proposed that working seniors on high-deductible Medicare Advantage plans (Original Medicare is not considered high-deductible) be allowed to continue contributing to their health savings accounts. This idea was introduced as part of the FY 2021 Federal Budget.

A Word From Verywell

Health savings accounts can be an effective way to invest in the future. They decrease your overall tax burden and allow you to invest and grow your savings. It can be especially important to have these funds available once you retire and are more likely to have a fixed income. Note you can use an HSA to pay for qualifying Medicare expenses but you cannot contribute funds to an HSA while you are on Medicare.

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Article Sources
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  1. Cubanski J, Koma W, Damico A, Neuman T. How much do Medicare beneficiaries spend out of pocket on health care? Kaiser Family Foundation. November 4, 2019.

  2. Internal Revenue Service. Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans. Updated February 18, 2020.

  3. HHS FY 2021 Budget in Brief. U.S. Department of Health and Human Services.