Health Savings Accounts & Medicare

August 31, 2020

As the population ages, a growing number of Americans will soon become eligible for Medicare. Those enrolled in a high-deductible health plan (HDHP) with a Health Savings Account (HSA) will have to choose between electing Medicare or continuing to contribute tax-free dollars to their HSA.

HSAs & Social Security Benefits

To be eligible for an HDHP and HSA tax benefits, the insured may not be covered by any other health insurance plan or reimbursement arrangement. This becomes an issue when an HSA participant (or the participant’s spouse) applies for Social Security benefits after the participant’s age 65 Medicare eligibility date, as this also makes the participant eligible for Medicare A coverage. Once enrolled in Medicare, participants are no longer eligible to contribute to an HSA even though the funds are still available to them. An employee (or employee’s spouse) could continue under an employer’s group health plan and receive both Social Security and Medicare benefits.

Medicare A coverage is not optional and cannot be refused even if the benefit is not wanted. Medicare A coverage is also retroactive for six months from the date the employee elected to commence Social Security. Thus, the Medicare-eligible employee who receives Social Security benefits while participating in the HSA plan has unwittingly become covered by Medicare A and now is ineligible for the HSA income tax deduction. Participating in the HSA plan prior to the commencement of Medicare A coverage is permitted, but the income tax deduction is prorated for the year in which participation began and excludes the part of the year when Medicare A coverage is effective.

After Medicare election, HSA funds are still available for payment of uninsured medical expenses, as well as Medicare Part B and D premiums, but no additional contributions may be made.  One advantage is the inreased flexibility to spend HSA dollars after age 65 without the 20% penalty on spending for non-eligible expenses. 

In summary, when the employee is given a choice between an HDHP and regular health insurance plan, it is likely preferable to avoid participating in the HDHP in the calendar year in which Social Security and Medicare A coverage begins.

Medicare Legislation

About a year ago, the HSA industry started talking to lawmakers about making HSAs eligible for senior citizens on Medicare. A bill with bipartisan support was introduced at the end of 2019 and there is currently an effort underway to get sponsors for a companion bill in the Senate which would allow Medicare enrollees to set up and fund an HSA.   

There is a misconception in the market that Medicare is generous and covers everything, but there are a variety of services that are either not covered or have some sort of donut hole or cost sharing.  The average Medicare beneficiary will spend over $3,100 out of pocket per year. 

Remember that Medicare is an individual policy. HSA Council research conducted in 2019 surveyed public opinion and found overwhelming voter support for HSAs. Two questions were asked:

1. Should Seniors on Medicare be able to keep contributing to an HSA if they already have one when they go on Medicare?
2. Should seniors have the option to purchase an HSA, if they want one, once they are on Medicare?

In both cases, over 80% of voters approved these ideas regardless of party affiliation. Chard Snyder will keep you updated on any development with the interaction of HSAs and Medicare.