Saving for the Future
Health Savings Accounts (HSAs) are accounts that are funded by pre-tax income and these funds remain untaxed so long as they are used for qualified medical expenses. HSAs are generally overseen by an employer or if it is an individual HSA, it is overseen by a bank, credit union, or insurance company. Anyone can open a health savings account if their medical insurance plan is a high-deductible health plan. However, when you’re enrolled in Medicare, your options change substantially because Medicare is considered insurance and is not a high-deductible health plan. Many people who age into Medicare eligibility actually have an HSA. What do you do with your HSA once you can enroll in Medicare? What is the best legal option for you, and how will it affect your finances? These are important questions to ask as you plan your retirement or help your loved ones plan for theirs.
Medicare and IRS Compliance
You are unable to open an HSA or contribute money to an HSA if you have any other insurance other than a high-deductible health plan. Though you can no longer contribute to your HSA with Medicare, you can still make withdrawals for qualified medical expenses. It can be confusing for consumers to navigate the rules because Medicare is overseen by the Department of Health and Human Services and HSAs are overseen by the Department of Treasury. Here are some points to consider:
- Some individuals decide to put off Medicare enrollment in order to continue work and continue before tax contributions to their HSA.
- An individual is still able to open a HSA if eligible, despite a spouse enrolling in Medicare.
- HSA funds can be used to cover copayments, premiums, prescriptions, and more despite being enrolled in Medicare.
- It is completely legal to use HSA funds to pay for the medical expenses of your spouse and any tax dependents even if they aren’t themselves HSA-eligible.
Deferring Medicare Enrollment
There is no real reason to defer Medicare enrollment when eligible. Many decide to defer enrollment if they are still employed and can continue making contributions to their HSA. However, waiting to enroll in Medicare can result in steep penalties. The late enrollment penalty for Medicare Part B alone is 10 % for each year after your 65th birthday and continues for the rest of your life. Find out more about Medicare late enrollment penalties here.
Planning for Your Future Today
You can reduce your medical costs by enrolling in a high deductible health plan either through an employer or individually. This insurance plan comes with a lower monthly premium but a higher deductible. Talk with your employer or banker about opening a health savings account to help you pay your deductible by using tax-free HSA funds. When prioritizing your health, your medical needs will be minimal and the funds in your HSA will accumulate until you are a senior, at which point you can enroll in Medicare, stop contributing to your HSA, and use the funds for your Medicare premiums. Upon your death, your HSA funds will be liquidated and distributed to a beneficiary of your choice who will be able to use the funds for any purpose. This is the way that programs are designed for the consumer, and how you can best benefit from them.