A current House bill could affect HSAs and Medicare beneficiaries
Many Americans are unaware about current rules and proposed ones regarding contributing to an HSA and being on Medicare.
As health insurance costs continue to rise, many employers are giving their employees HSA plan options to lower healthcare costs. HSA plans have grown in popularity with over 32 million active HSA accounts in America.
Many Americans are unaware that if you decide to work past 65. once you start Medicare, you can no longer have any contributions to your HSA. A bill in the House of Representatives could change that and allow continued contributions to an HSA when enrolled in Medicare.
Description of an HSA
HSA is an acronym for Health Savings Account. These accounts set money aside to cover qualifying medical costs. In addition, to the funds being used for qualifying medical expenses, they also have significant tax benefits.
To qualify for an HSA account, you must enroll in a qualifying high-deductible health insurance plan. A qualifying high-deductible plan must meet the following criteria:
- Deductible $1,400 individual $2,800 family
- Maximum out-of-pocket $7,050 individual $14,100 family.
Medicare doesn’t meet the criteria of a high-deductible account. Because it isn’t considered a high-deductible plan, it’s ineligible for use with a contributing HSA account.
Current Medicare and HSA rules
If you contribute to an HSA account and are enrolled in Medicare, you’ll be accessed a 6% excise tax penalty. You can use your HSA funds to cover qualifying medical costs. Your HSA funds can also be accessed to pay your Medicare Parts A, B, C, and D premiums.
Most Medicare beneficiaries are 65 years old or older. Once you are 65, you can withdraw money from your HSA for non-medically related uses without a penalty. Medicare Supplement premiums aren’t eligible to be paid using an HSA account.
Proposed changes to Medicare and HSA rules
If the new changes are passed, eligible beneficiaries could enroll in Medicare and continue making HSA contributions. For some, this is fantastic news. Unfortunately, beneficiaries that rely on their HSA funds to pay their Medicare premiums would lose the ability to do so.
Seniors could no longer access their HSA funds for non-medical related uses without being accessed a penalty. This change will have a significant impact on seniors that use that benefit.
FAQs
How much can I contribute to my HSA annually?
For 2022 HSA contributions are limited to $3,650 for individuals and $7,300 for family coverage. You’re allowed to contribute $1,000 more, if you are 55 or older.
Any excess contributions wouldn’t be tax deductible and is considered taxable income.
What happens to my HSA upon turning 65?
Under current law, if you turn 65 and delay all parts of Medicare, there will be no change in how your HSA contributions work. If you elect to start Medicare, you’ll no longer be able to make contributions to your HSA without a 6% excise tax penalty.
With the new legislation, this would change. You’ll be allowed to contribute even if you enrolled in Medicare. The penalty would be removed.
Is it wise to max out my HSA contributions?
If you have the means to contribute the maximum, then there isn’t a reason not to do so. You may want to consider if it makes more sense to put the extra amount into your 401K.
It would make sense to consider the amount that your employer contributes. This would ensure you make the best decision for yourself.
Summary
The new legislation would allow people on Medicare to continue contributions to their HSA accounts. This change would also eliminate the ability to pay Medicare premiums with the funds or use the money tax-free for non medically related expenses.
We can expect the contribution limits to increase significantly in 2023 with the increases in the cost of living.
