Yes, you can have an HSA when you age into Medicare. But of course, there are rules and limitations.
First, what is a Health Savings Account?
HealthCare.gov describes an HSA as “A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.
HSA funds generally may not be used to pay premiums.” You may contribute to an HSA only if you have a High Deductible Health Plan (HDHP). This type of health insurance plan only covers preventive services before the deductible. Your HSA balance rolls over year to year building up reserves for services that you may need later in life. You can contribute to your HSA up to your retirement. Your last contribution needs to be 6 months prior to you starting Medicare coverage.
Sourced from the IRS, Revenue Procedure 2022-24: The IRS announced an increase for 2023 limits for HSAs to $3,850 for self-coverage only and $7,750 for family coverage. If you are age 55 or older, HSAs allow catch-up contributions of an additional $1,000. HDHP minimum deductibles are $1,500 for self-only plans and $3,000 for family plans. Also, HDHPs have a maximum out-of-pocket amount of $7,500 for self only plans and $15,000 for family plans.
What Medicare Expenses Can I Pay with my HSAs?
You can use the accumulated HSA money tax-free to pay for eligible medical expenses at any time. After you turn 65, you can even withdraw money tax-free from an HSA to pay your deductibles, copays, coinsurance and Medicare premiums for Medicare Part A, Medicare Part B, and Medicare Part D prescription drug plans and premiums associated with Medicare Advantage plans. The Medicare premiums associated with Part A, Part B, and Part D are typically automatically paid directly from your social security benefits. You then can withdraw money tax-free from your HSA to reimburse yourself for those expenses. Just remember to keep records of the costs.
Note: **It would be wise to seek guidance from your accountant in this case. We are not accountants and do not give tax advice.
Do not confuse paying your Medicare premiums with paying for your Medigap plan or prescription drug plan. You can use the HSA to pay your Medicare premiums, but not the cost of your Medigap plan.
There is a lot of advice that tells people if they're past age 65 to stop contributing to their HSA, or to stop their employer from contributing, six months before retirement. Why? Medicare has a six month look back for retroactive coverage. This can be very confusing and if done improperly can lead to penalties for overcontributing or you could be forced to back out of those contributions. Fortunately, the overcontributions can be reversed in many situations by simply contacting their HSA administrator before filing income taxes for the year in which there was an overcontribution.