Medicare and Health Savings Accounts: What You Should Know

Health Savings Accounts and how they relate to Medicare
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Health Savings Accounts can be a way to build up funds to pay for your future medical expenses. Luckily, even though Medicare is not a high deductible health plan, you can still use your HSA funds to pay for out-of-pocket Medicare expenses. It’s important, however, to know that you must stop contributing to your HSA once you sign up for Medicare or face excise taxes on the excess contributions.

To learn more about Health Savings Accounts and Medicare, the expert insurance agents with Malhotra & Assoc. Insurance are here to help. 

What are Health Savings Accounts?

Health Savings Accounts (HSAs) are a type of marketplace health insurance plan that works with a high deductible health plan. The point of these savings accounts is to build up a cash reserve to use for medical expenses. Each year, money is put into the health savings account to use toward qualified medical expenses or the out-of-pocket costs of high deductible health plans. When you withdraw from your account to pay for medical expenses, this withdrawal is tax-free. They help pay for the deductibles, coinsurance, and copayments of your health plan. 

You can contribute to a health savings account like an investment fund. The money that you don’t use rolls over to the next year, in most cases, which allows the account to grow and provide a safeguard against future unforeseen medical expenses that could otherwise overwhelm your savings. The account can even earn interest, making these accounts serve as a type of medical retirement fund.

How Do Health Savings Accounts Relate to Medicare?

Health savings plans can only be used with high deductible health plans. Medicare is not a high deductible health plan. Therefore, you encounter restrictions when you have an HSA and sign up for Medicare.

However, there is a Medicare Advantage plan that includes both a savings account and a high deductible health plan. This is known as a Medicare Medical Savings Account (MSA) plan.

What is an MSA Plan?

MSA plans will combine a high deductible health plan and a savings account that will be used to pay for health care expenses. The high deductible part of the MSA plan will only start covering costs once you meet the high annual deductible. This deductible will vary by plan.

The savings account part of the plan will have money deposited into it, which can be used to pay your health care expenses and ultimately go towards your deductible. Do keep in mind that the amount that is deposited into the account will always be less than the yearly deductible.

HSA Contributions

As Medicare itself is not a high deductible health plan, you are not allowed to make contributions to your health savings account while you have Medicare. Once you sign up for Medicare Part A, you cannot contribute to your HSA.

If you have other creditable coverage, such as through an employer, you can delay signing up for Medicare and continue to contribute to your HSA without having to worry about paying late enrollment penalties later on.

You should stop contributing to your HSA six months before you plan to enroll in Medicare. Medicare coverage can be retroactive for six months to no earlier than the first month you became eligible for Medicare. If you contributed to your HSA during the six months of retroactive coverage, you can be charged a 6% excise tax on those contributions. If you find yourself in that position, you can withdraw them to avoid paying the excise tax.

Using HSA Funds for Paying Medicare Costs

Even though Medicare is not a high deductible health plan, you can still use your HSA funds to pay for Medicare expenses. You can use HSA money to pay your Part A premiums, Part B premiums, Part D premiums, Medicare Advantage premiums, copayments, and coinsurance. Know that you cannot apply your HSA funds to your Medicare Supplement premiums, because they do not count as qualified medical expenses.

Often, Medicare premiums are taken directly out of your Social Security payment. If you have paid your Medicare premiums out of pocket, you can make a withdrawal of funds from your HSA to reimburse yourself.

Want to learn more about Medicare costs and out-of-pocket spending? Speak with an agent from Malhotra and Assoc. Insurance today.

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