How Does Medicare Affect HSA Usage?

Qualified High Deductible Health Plan (HDHP) participants can use Health Savings Accounts (HSAs) to help cover their deductible responsibility. But what happens when they become eligible for Medicare? 

Medicare Basics

Medicare is a federal health insurance program for those aged 65 and older as well as younger Americans with certain disabilities or End-Stage Renal Disease. Each of Medicare’s four parts offers a different type of coverage:

  • Part A – Covers inpatient hospital stays, skilled nursing facility care, nursing home inpatient care that is not custodial or long-term, hospice care, and some home healthcare.
  • Part B – Covers medically necessary services and preventive services not already included under Part A.
  • Part C – Covers all Original Medicare Part A and Part B services through private, Medicare-approved companies. Also known as a “Medicare Advantage” plan, Part C may also offer some extras, including prescription drug coverage.
  • Part D – Offered by insurance companies and other private, Medicare-approved companies, Part D adds prescription drug coverage to Original Medicare and some Medicare Cost plans, Medicare Private-Fee-for-Service plans, and Medicare Medical Savings Account plans.

HSA Basics

An HSA is a tax-advantaged benefit that allows people enrolled in a qualified HDHP to make tax-free contributions to a designed medical savings account. Participants own their HSA accounts and use the funds to pay for eligible medical expenses. Distributions from the HSA for eligible expenses are tax-free. In addition, the owner earns tax-free interest and investment income on the HSA balance.

Once the HSA owner reaches age 65, they can use the account as a supplemental retirement fund. After age 65, withdrawals for any purpose other than eligible medical expenses are taxed as income at the account owner’s then-current rate.

Medicare and HSA Usage

HSA owners who enroll in Medicare face a few restrictions. The ability to make tax-free HSA contributions is contingent on active HDHP enrollment. However, Medicare does not qualify as an HDHP, so once enrolled in Medicare, the HSA owner can no longer make tax-free contributions to the account. However, they can spend any funds already in the HSA account under the rules that apply to HSA owners who are 65 or over.

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