Thanks to the retirement age increase (and the general state of life), many people are still working and insured through their employer when they turn 65 and qualify for Medicare. Or, maybe they retired but their spouse is still working and they have health coverage that way. In these situations, you may wonder what happens with your HSA, or health savings account, when you sign up for Medicare.

This page discusses the benefits of an HSA, how to use it to pay for healthcare expenses, and potential penalties and liabilities you could face by having an HSA and Medicare.

What are the benefits of an HSA?

HSAs are great, because they let you pay medical expenses tax-free. To take advantage of that tax benefit, you must be enrolled in a high-deductible health plan and meet certain requirements.

When you have an HSA, you'll be sent a debit card or checks linked to your account that you can use to pay for eligible medical expenses. These include:

• Copayments
• Coinsurance
• Deductibles
• Premiums (in some cases)

Other qualified expenses not covered by your health plan, such as:

• Dental expenses
• Vision expenses
• Insulin and diabetic supplies
• Over-the-counter medication

HSA funds roll over from year to year, so you'll never lose your savings, and you can contribute up to the government-mandated maximums until you're enrolled in Medicare.

There are various tax benefits associated with having an HSA. First, contributions are pre-tax or ta-deductible. You also don't pay taxes on the account's growth, and if withdrawals are for eligible expenses, you don't pay taxes on those withdrawals.

Another benefit is that the money in your HSA can also be invested in tools like mutual funds or stocks, which can help grow your balance faster.

Potential tax liabilities when you use an HSA and have Medicare

When you contribute funds to an HSA, they are pre-tax, which means you don't pay taxes on that money.

However, if you continue to contribute to your HSA after you enroll in Medicare, there may be tax penalties depending on your situation.

• You may be subject to back taxes on any contributions you made after your enrollment date. Those contributions are added back into your taxable income for the year.
• Contributions made after enrollment could be considered "excess" by the IRS, which are taxed an additional 6 percent when withdrawn.
• If you enroll in Medicare during an HSA testing period, or the full year after you enroll in an HSA midyear, you'll pay back taxes and an additional 10 percent tax.

Both Medicare and the IRS recommend you stop contributing to your HSA at least 6 months before enrolling to help avoid tax penalties.

Can you have Medicare and a health savings account?

You may only make contributions to a health savings account if you have a high deductible health plan and no other type of insurance. This means that you cannot make contributions to an HSA while you have any "Part" of Medicare without incurring penalties (please see above).

However, you can use an HSA to pay medical bills, copayments, deductibles, and other expenses after you enroll in Medicare. There are no rules barring you from using funds in your HSA after you leave your high deductible plan. Once funds are exhausted, though, you may not replenish them. This is because Medicare is considered a health plan, so you're no longer eligible to contribute to the HSA. You also cannot set up an HSA after you're enrolled in Medicare.

Will you owe the Part B late enrollment penalty if you keep your HSA?

If you don't enroll in Medicare right away because you're not yet retired or receiving Social Security benefits, or you have other creditable coverage, you can continue contributing to your HSA.

Creditable coverage means:

• You are "actively" employed (or your spouse, if the coverage is through their employer)
• The company employs more than 20 people
• The company's coverage pays first, before Medicare would

If you meet these criteria, you wouldn't owe a late enrollment penalty when you sign up for Part B. You can then enroll in Medicare when you retire during your special enrollment period (SEP).

You will not owe the late enrollment penalty if you keep your HSA, but you cannot contribute to your HSA if you sign up for Medicare when you're eligible.

If you have coverage through your spouse, the same rules apply. Once your spouse qualifies for Medicare, they can enroll during their SEP and wouldn't owe a penalty.

When would you owe the late enrollment fee?

If you don't enroll in Medicare when you're eligible, you could owe a late enrollment penalty. For example, if you turn 65 and don't have another health plan, you'd pay the penalty if you decide to enroll in Medicare later.

For Part B, the late enrollment fee means your monthly premium would increase by 10 percent for each 12-month period you could have had Part B but didn't. Plus, you'd have to pay for all healthcare costs out-of-pocket until you had coverage.

If you choose not to enroll when you're eligible AND you don't have creditable coverage elsewhere, you will not qualify for an SEP. Therefore, you must wait for Medicare's General Enrollment Period to sign up. This occurs every year from January 1 through March 31, with coverage beginning on July 1.

Can you use HSA funds to pay your Medicare premiums?

Many healthcare costs can be paid using HSA funds, including Medicare premiums.

This includes Part B, Part C, and Part D premiums. If you do have to pay a premium for Part A, which most people don't, that can also be paid for using your HSA funds.

Can you pay Medigap premiums with your HSA funds?

Medigap isn't considered a qualified medical expense, so you cannot use your HSA funds to cover the costs of these plans without paying taxes.

If you choose to use an HSA to pay the Medigap premiums, you'd need to pay taxes on the funds withdrawn to make those payments.

What is a Medicare Medical Savings Account?

Medicare Medical Savings Accounts, or MSA, is a consumer-directed Medicare Advantage plan that is similar to an HSA.

The MSA plan combines a high-deductible insurance plan with a medical savings account that can be used to pay your healthcare costs.

This special type of high-deductible Medicare Advantage plan covers your costs once you meet a higher yearly deducible, which can vary by plan. The MSA plan also deposits money into a special type of savings account that can be used to pay for healthcare costs prior to meeting the deductible.

These plans offer everything Medicare Advantage plans must cover, which includes all Part A and Part B services. Additionally, they may offer extra benefits like:

• Vision
• Dental
• Hearing
• Long-term care

MSA plans do not cover Part D prescription drugs, so you must sign up for standalone Part D plan.

There is no premium to pay for MSA plans, but you must continue to pay your Part B premium.

Do you have Medicare questions? We have answers.

Do you have questions about your Medicare coverage? One of our licensed insurance agents can answer your questions and help you decide which is the best Medicare plan for your unique needs. Call 888-992-0738 to get started.