If you’re interested in learning about a triple-tax benefit plan, then look no further than health savings accounts, also referred to as HSAs for short.
HSAs established by the Internal Revenue Service provide three distinct tax advantages for Medicare-eligible individuals:
— Your contributions reduce your taxable income.
— Any investment growth within the account is tax free.
— Withdrawals used to pay for qualified medical expenses are tax free.
[READ: Medicare vs. Medicaid: What Is the Difference?]
What Is an HSA (Health Savings Account)?
An HSA is a savings account that allows contributors with high-deductible health care plans to make tax-free deposits to save and pay for qualified medical expenses.
It is a tax-advantaged financial tool designed to help people grow their earnings and make withdrawals tax-free for certain medical expenses not covered by health plans.
Individuals can seamlessly carry their HSA when transitioning between jobs and health care insurance plans. Some employers may incentivize HSA utilization by making initial or yearly cash contributions to the account.
Unlike savings in a flexible savings account, which expires within a year, money in your HSA accumulates without expiring at the end of the year. Individuals typically have the option to keep them in cash or choose from a range of investments that remain in the account year after year and can build up over time. HSAs can earn interest that is not subject to taxes.
[Read: What to Do When Your Doctor Leaves Your Health Plan.]
How Does an HSA Work?
If you’re working, the money comes out of your paycheck before taxes. This reduces your gross income and, therefore, your taxable income.
On the other hand, if you don’t work, you need to find a health care plan that has HSA eligibility. (If you’re unemployed or retired and you cannot find an eligible plan, you cannot participate.)
Whether you contribute to your HSA from your paycheck or if you pay out of pocket, both options are tax deductible.
After the money is in your account, you usually can access it via a debit card or checks connected directly to your HSA. You can withdraw funds from your HSA to pay for qualified medical expenses without being taxed.
“Unspent HSA funds roll over on a yearly basis that helps you create tax-free savings to pay for medical care when you need it,” says Allyson Heumann, a professor of practice in the strategy, leadership and analytics minor at Tulane University in New Orleans. “However, any funds from an HSA that are used to pay for non-qualified medical expenses are taxable.”
[Ranking the Most Painful Medical Conditions]
What Can You Use an HSA to Pay for Tax Free?
Before you use your HSA, make sure the medical expense is covered.
Qualified medical expenses include:
— Doctor’s visits and copayments.
— Dental treatments (such as routine cleanings, fillings and orthodontics).
— Vision care (including glasses, contact lenses and eye surgery).
— Physical therapy.
— Laboratory and diagnostic fees and services.
— Medical equipment (such as hearing aids, crutches and wheelchairs).
HSA funds are not permitted for use in paying private health insurance premiums.
How Much Can You Contribute to an HSA?
Annual HSA contribution limits for 2024 are significantly increasing, according to the IRS.
The annual limit on HSA contributions for self-only coverage will be $4,150, a 7.8% increase from the $3,850 limit in 2023. For family coverage, the HSA contribution limit jumps to $8,300, up 7.1% from $7,750 in 2023.
“The new changes are a major increase, but with rising inflation that has led to higher out-of-pocket costs for employees,” Heumann says.
Who Is Eligible for an HSA?
To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements.
— You are covered under a high-deductible health plan (HDHP), which has a deductible of $1,350 or more for singles and $2,700 or more for families. Self-employed health care consumers can contribute to an HSA.
— You have no other health coverage except what is permitted. For instance, if you and your spouse have family coverage with an HDHP plan, you can’t generally have any other health coverage. However, you can still be eligible if your spouse has non-HDHP coverage, provided you aren’t covered by that plan.
— You aren’t enrolled in Medicare.
If you enroll in Medicare, you can no longer make contributions to an HSA. For individuals with qualified employer health insurance who may qualify to delay Medicare enrollment past age 65, it’s especially important to understand how getting Medicare coverage impacts your HSA.
How to Use HSA for Medicare Premiums and Other Expenses
Funds in an HSA can pay for some Medicare expenses, including your Medicare and Medicare Advantage plan premiums, deductibles, copays and coinsurance. Keep in mind, money in an HSA fund cannot be used to pay for Medigap premiums.
“You may use your HSA funds, free of tax and penalty, to pay for Medicare Parts A, B and D premiums,” says Jesse Slome, director of the American Association for Long-Term Care Insurance of Westlake Village, California. “Even if your Medicare premiums are being automatically withheld from your Social Security benefits, you have the option to make tax-free withdrawals from an HSA to reimburse yourself.”
What Happens to Your HSA Once You Enroll in Medicare?
After you enroll in Medicare Part A or Part B, you’re not allowed to make any future contributions to an HSA. If you plan to keep working and want to continue building up your HSA, you might consider delaying Medicare enrollment. If you’re signed up for Social Security benefits, enrolling in Medicare Part A is mandatory.
But there’s good news. You can withdraw funds tax-free to pay for qualified medical expenses even after you enroll in Medicare. You can even use your HSA to pay for some Medicare expenses including your Medicare Part B, Part D and Medicare Advantage plan premiums, deductibles, copays and coinsurance.
Late enrollees in Medicare face a unique situation. When enrolling in Medicare after turning 65, coverage is retroactive for the six months preceding enrollment but not before the individual’s 65th birthday. This becomes a concern for those over 65 contributing to an HSA who delay Medicare or Social Security enrollment, triggering automatic Medicare Part A enrollment.
Individuals caught in this scenario may need to issue a revised tax return or face potential tax implications. The six-month lookback period serves the purpose of backdating Medicare coverage to avoid leaving individuals without health insurance while they transition from employer health coverage. Current regulations grant automatic six months of retroactive health coverage to those applying for Medicare Part A or Part B after turning 65, rendering them ineligible to make or receive HSA contributions for the months that are covered. This may lead to refunding contributions or facing penalties for over-contributing.
Bottom Line
HSAs are tax-advantaged savings accounts designed for allocating pre-tax funds specifically to cover qualified medical expenses. Utilizing tax-free dollars within an HSA to cover deductibles, copayments, coinsurance and certain other medical costs could potentially reduce your out-of-pocket health care expenditures.
When you enroll in Medicare, contributing to an HSA is no longer an option. However, you retain the option to use HSA funds to pay for qualified medical expenses, which may include certain Medicare costs.
It’s critical to research your options and talk to financial advisors to make an informed decision around the best time to enroll in Medicare and how that may affect how you cover health care costs.
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HSA and Medicare: Using HSA To Pay for Medicare Premiums originally appeared on usnews.com
Update 02/02/24: This story was published at an earlier date and has been updated with new information.
