August 14, 2023

Maximizing Health Care Savings in Retirement With an HSA

Depending on your medical needs and those of your family, you may have enrolled in a high-deductible health plan that allows you to pay for medical expenses using a health savings account (HSA). Because contributions go into an HSA pre-tax, grow tax-deferred and are distributed tax-free when used for qualifying costs, this option has gained popularity over the last several years.

However, once you become eligible to enroll in Medicare, using an HSA becomes a bit trickier. While both health care programs are designed to fund medical expenditures, they have very different rules and requirements. If they are not followed properly, the tax benefits of the HSA can be severely diminished. To help unravel the differences and get the most out of your money, we’ve broken down some commonly asked questions about these options.

Can I have an HSA if I’m enrolled in Medicare?

Yes, you may keep your existing HSA account after you have enrolled in the Medicare program. The existing funds can be used to pay for qualified medical expenses such as certain Medicare premiums, deductibles, copayments and coinsurance.

However, you cannot continue to contribute to an HSA once you are enrolled in any part of Medicare because Medicare is not considered a qualified health plan, per HSA guidelines. This rule also applies if you only enroll in Part A, which for most people there is no premium for these benefits.

Because you can’t continue making contributions, retirees who delay enrolling in Medicare until some point after they turn 65 will need to take precautions. Specifically, they will need to stop making HSA contributions up to six months prior to their enrollment to avoid any excess contributions.

Can my spouse have an HSA if I’m enrolled in Medicare?

Yes, if you are enrolled in Medicare, but your spouse is not, they can open an HSA account and contribute to it. Of course, they must be covered by their own high-deductible health plan and can’t be enrolled in Medicare.

What expenses will my HSA cover if I’m on Medicare?

From over-the-counter cold medications and bandages to diagnostic tests and surgery, an HSA account can be used to pay for hundreds of qualified expenses. Dental, vision and hearing costs, such as teeth cleanings, eyeglasses, contacts and hearing aids, are also covered. You can use funds from your HSA to pay for Medicare Part B, C and D premiums and deductibles. However, you cannot use your HSA fund for a tax-free distribution to pay for your Medicare Supplement premiums.

If you have questions about which services are covered, the IRS has published an extensive list of qualified medical expenses. You can also check with your HSA provider.

Whose medical expenses can I cover with my HSA account?

You may pay for qualified expenses tax-free using your HSA account for yourself, spouse, children, stepchildren, adopted children and tax dependents, even if they are not covered by your high-deductible health plan or enrolled in an HSA.

If something happens to me, who inherits my HSA?

While the inheritance of an HSA depends on the designation you make when setting up your account, there are three standard guidelines:

  • Your spouse can inherit your HSA upon your death and use it as their own.
  • If a non-spouse (such as a child) is named as a beneficiary, the account will no longer be treated as an HSA upon your passing. The fair market value of the HSA at the time of your death becomes taxable income for the beneficiary in the year they receive it. The inheritor will need to report the amount on their tax return and pay applicable taxes.
  • If you do not designate a specific beneficiary or if your estate is named as the beneficiary of your HSA, it will become part of your estate after your death. The distribution will be determined by the terms of your will or state laws if you do not have one. The fair market value of the HSA at the time of your passing may be taxed on your final return.

What if I contribute to my HSA while enrolled in Medicare?

Any contributions after your enrollment in Medicare would be considered an excess contribution to your HSA. An excess contribution could result in tax implications or cause you to incur penalties. If you have made an excess contribution to your HSA, you have until the tax filing deadline of the following year to remove the excess contribution and any associated earnings to avoid tax penalties. If the excess contributions are not removed in time, the amount will be subject to a 6% excise tax (which is separate from your regular income tax), and this will be assessed each year until it is corrected.

Depending on your circumstances, HSAs are a great way to grow your savings, which you can later use to fund your medical expenses in retirement. However, their complex rules become even more muddled when you enroll in Medicare. If you have questions about maximizing the advantages of an HSA to cover health costs, reach out to your advisor. If you are not presently working with one, we would love to help you. Please schedule a short phone call or virtual conversation with our Client Development team.

Source: For informational and educational purposes and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed reliable, but its accuracy and completeness may not be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-5904

About the Authors:

Angela Muckler
As an Associate Regional Director, Angela is dedicated to providing support to advisors and their teams in various aspects of their business. Her goal is to build a strong relationship with every individual she works with, better understand the challenges they face and look for opportunities to help them grow. Angela’s passion for comprehensive financial planning and problem solving enhances her ability to connect firms with resources that ultimately help their clients.

Scot Colgrove, CFP®
As an Onboarding & Integration Advisor, Scot helps newly acquired offices and teams transition into Buckingham as smoothly as possible. To support their acclimatization, he and his colleagues lead training on new systems and processes. He serves as an advocate for the joining firms and makes the transition as anxiety-free as he can for them.

Content Topics

Stay Connected With Buckingham

Want more resources like this? Click here to receive financial insights, articles, videos and webinar invitations.

Sign Up For Email