Health savings accounts, or HSAs, can be a useful savings tool for people with high-deductible health plans. But once you’ve enrolled in Medicare, you can no longer contribute to an HSA. This can get tricky, so it’s helpful to understand how it works.

HSAs are tax-advantaged accounts that let you save and use pretax money for medical expenses. You can use the money in these accounts to pay for costs like copays and deductibles, eligible health care, dental and vision expenses, over-the-counter medications and prescription drugs.

To save to an HSA, you must have a high-deductible health plan, or HDHP. In 2023, an HDHP is defined by the IRS as a plan with a deductible of at least $1,500 for an individual or $3,000 for a family, with an out-of-pocket expense cap of no more than $7,500 or $15,000, respectively.

Can you have an HSA with Medicare?
Medicare is the federal government’s health coverage for Americans age 65 and older and others living with certain disabilities or chronic conditions.

If you established an HSA before you enrolled in Medicare, you can still use the funds from the account. But in order to save to an HSA, you must be enrolled in an HSA-eligible health plan and you can’t be covered by other insurance, such as Medicare. This means you can’t contribute to an HSA (or establish an account if you don’t have one) once you’re enrolled in Medicare.

There’s a six-month contribution look-back period if you sign up for Medicare after age 65 (although not before the month you turn 65), which means you receive retroactive health coverage and can’t make contributions during that period. To avoid penalties, you should stop saving to your HSA six months before you enroll in Medicare.

Can an HSA be used for Medicare premiums?
Once you’re enrolled in Medicare and over age 65, HSA savings can be used to pay premiums for Medicare Parts A, B, C and D; they can’t be used for Medicare Supplement Insurance premiums, however.

When you’re 65 and older, you can also use HSA money to pay premiums for employer-sponsored health care. Additionally, being 65 means you can take distributions from your HSA for nonmedical expenses without paying a penalty, although you’ll still pay income taxes on the money. For maximum tax savings, use HSA money for qualified medical costs only.

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What are the penalties for using an HSA with Medicare?
There’s no penalty for having an already established HSA when you’re enrolled in Medicare, although you can no longer set up a new HSA. However, if you save to an HSA while you’re enrolled in Medicare, you may be hit with IRS penalties on what are considered “excess contributions,” including a 6% excise tax charge.

This applies to the six-month look-back period for HSA contributions when you sign up for Medicare past age 65. If you’ve delayed signing up for Medicare, Medicare coverage is retroactive for the six months before you enroll, not including any months before your 65th birthday month. If you’ve made HSA contributions during any of the look-back months, including your birthday month, you’ll owe tax penalties.

If you’ve saved to your HSA during look-back months, you can often contact your HSA administrator and reverse overcontributions. It’s best to do this before you file income taxes for that year.

Can you delay Medicare and keep using an HSA?
If you have current health coverage through an employer (or spouse’s employer) with 20 or more employees, you can delay signing up for Medicare Part A and Part B at 65 and continue to contribute to an HSA. However, you’ll also have to delay enrolling in Social Security because receiving Social Security automatically enrolls you in Medicare Part A.

COBRA and retiree health insurance don’t count as current employer coverage, so you shouldn’t delay enrolling in Medicare if you have this kind of health coverage. It’s also smart to talk to your benefits coordinator before choosing to delay Medicare Parts A and B; your employer health plan may require you to enroll in Medicare.

Once you have lost employer coverage or stopped working, you’ll have eight months to enroll in Medicare before you’ll face penalties.

» MORE:  HSA vs. FSA: Differences and how to choose

If you have additional questions about Medicare, visit Medicare.gov or call 800-MEDICARE (800-633-4227, TTY 877-486-2048).