Individuals who have a High Deductible Health Plan (HDHP) –and only have HDHP coverage—can contribute funds on a pre-tax basis to a Health Savings Account (HSA). They can use these funds for qualified medical expenses. If funds are used for nonqualified medical expenses, the funds will be subject to a 20% penalty and taxed as ordinary income (if the individual is under 65 and not disabled).

Since Medicare is not considered an HDHP, beneficiaries are not eligible to make HSA contributions.  Once you have any part of Medicare, your annual contribution limit is prorated, and then reduced to $0 for the first full year you have Medicare. See the calculation chart below.

HSA funds can be used to pay for Medicare Part B (medical coverage) and Part D (prescription coverage) premiums and premiums for employer-sponsored health coverage. Additionally, those 65 or older or disabled may make distributions from their HSA for any reason—however, if the distribution is not used for qualified medical expenses, the distribution is taxed as ordinary income. Note that Medigap or other premiums are considered nonqualified medical expenses. Contact a tax expert for more information.

If you are turning 65 but will continue working and stay on an employer-sponsored group health plan, you may be able to delay enrollment into Medicare. Some beneficiaries choose to just enroll in Medicare Part A, since many are eligible for premium-free Part A. Just remember that individuals with any part of Medicare are ineligible to make HSA contributions.

If you or your spouse’s employer has less than 20 employees, you may need to enroll in Medicare in some cases, even if you stay on the group health plan. Contact your plan administrator for more information.

The number of months that you didn’t have Medicare: ___

Divide by 12. Result: ___

Multiply by annual contribution limit. Result: ___

By: Steven Thomas Smith

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