Medicare and HSAs – A Few Important Things to Know

Medicare and HSAs; Retired Couple; ActivePresident Trump’s 2019 budget proposal is creating some buzz around Medicare and HSAs. If you’re eligible for Medicare and have an HSA, here are some things you need to know.

What is Medicare?

Medicare is a federal health insurance program for people 65 and older, certain younger people with disabilities, and people with End-Stage Renal Disease. There are four parts to Medicare:

  1. Part A. Covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home healthcare
  2. Part B. Covers certain doctors’ services, outpatient care, medical supplies, and preventative services.
  3. Part C. Offered by a private company that contracts with Medicare to provide you with all Part A and Part B services. Most Part C plans offer prescription drug coverage.
  4. Part D. Adds prescription drug coverage to Original Medicare, some Medicare Cost Plans, some Medicare Private-Fee-for-Service Plans, and Medicare Medical Savings Account Plans. These plans are offered by insurance companies and other private companies approved by Medicare.

What is an HSA?

A Health Savings Account, or HSA, is a tax-advantaged benefit account that allows people who are on a qualified high deductible health plan (HDHP) to make tax-free contributions to a medical savings account. HSAs are owned by the participant who uses the account to pay for eligible medical expenses. Distributions from the HSA that are used for eligible expenses are tax-free. In addition, the owner earns tax-free interest and investment income from the HSA funds.

Once the HSA owner is retired, he or she can use the account as a supplemental retirement fund. The HSA can continue to be used for eligible medical expenses, or spent on other expenses without penalty. However, if used for non-eligible expenses, those distributions are taxed as income.

Medicare and HSAs

For Medicare and HSAs, there are a few restrictions. To contribute to an HSA, a person must be enrolled in an HDHP. However, when an HSA owner’s Medicare coverage begins, he or she can no longer contribute to the HSA. Keep in mind, though, the HSA balance is available for other out-of-pocket medical expenses.

In order to continue making HSA contributions, the HSA owner should not apply for Medicare, Social Security or Railroad Retirement Board benefits.

Changes on the horizon?

President Trump’s 2019 budget proposal would allow Medicare beneficiaries who have an HDHP to make tax-free contributions to their HSA, as reported by ECFC. The following is from the Administration’s budget proposal:

Give Medicare beneficiaries with high deductible health plans the option to make tax-deductible contributions to Health Savings Accounts and Medical Savings Accounts—Currently, Medicare beneficiaries in high-deductible health plans are not allowed to make tax-deductible contributions to their Health Savings Accounts (HSAs) or Medicare Savings Accounts (MSAs).  This proposal would give Medicare beneficiaries greater flexibility to take control of their health.  It would allow beneficiaries enrolled in Medicare MSA Plans to contribute to their MSAs, subject to the annual HSA contribution limits as determined by the Internal Revenue Service.  Beneficiaries would also have a one-time opportunity to roll over the funds from their private HSAs to their Medicare MSAs.  Beneficiaries who elect this plan option would not be allowed to purchase Medigap or other supplemental insurance.  Medicare beneficiaries who have an employer-sponsored high-deductible health would also be allowed to make contributions to their HSAs, although Medicare would not cover any of the deductible.

If you’re an HSA owner, keep an eye on this development. During the 2016 presidential campaigns, HSAs were central to then-candidate Donald Trump’s healthcare plan. It appears that President Trump and his administration still consider HSAs crucial to consumer directed healthcare.

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