You Can't Put Money in a Health Savings Account Once You're on Medicare. A House Bill to Change That Comes With Tradeoffs

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  • A bipartisan measure that's pending in the House would modify the way health savings accounts interact with Medicare.
  • Under current rules, you cannot contribute to an HSA once you enroll in Medicare — even if only Part A.
  • Although the bill would remove that limitation, it also aims to change two current HSA benefits that apply to the 65-and-older crowd.

Under a bill pending in Congress, Medicare beneficiaries would be allowed to set aside money in health savings accounts — something they currently can't do.

However, it also would change a couple of the benefits that come with HSAs for anyone who's 65 or older.

Called the Health Savings for Seniors Act and recently introduced in the House, the bipartisan bill (H.R. 7435) revives past legislative efforts to let individuals on Medicare contribute to HSAs. With many workers using these accounts in conjunction with their employer health plan, more people are likely to reach age 65 — the point at which you become eligible for Medicare — with an HSA in tow.

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"Many clients who have established HSA accounts think that they can continue funding the HSA past enrollment in Medicare," said Elizabeth Gavino, founder of Lewin & Gavino and an independent broker and general agent for Medicare plans. "They're usually surprised to find out they can't."

The bill's tradeoffs? It would remove the ability to use HSA withdrawals to pay for Medicare premiums — something that's currently allowed. It also would eliminate penalty-free withdrawals for nonmedical expenses in the 65-and-older crowd as now permitted.

At the end of 2021, there were 32 million of these accounts — up 8% from 2020 — holding an aggregate $98 billion, according to a report from investment consultant Devenir. The firm expects that to grow to 38 million accounts with $150 billion in assets by the end of 2024. 

Annual contributions to HSAs (for 2022) are limited to $3,650 for individual coverage and $7,300 for family coverage. (The limits next year will be higher). People age 55 or older can put an extra $1,000 in per year.

HSAs come with a triple tax benefit: Contributions are tax-deductible, earnings are tax-free and withdrawals also are untaxed as long as they are used to cover qualified medical expenses. Roughly 28% of workers are enrolled in such a plan, up from 17% in 2011, according to 2021 research from the Kaiser Family Foundation.

However, you can only contribute to an HSA if you have a so-called high-deductible health care plan — and Medicare falls outside that category. Beneficiaries can use their HSA funds to pay for medical expenses, but cannot set up a new HSA or contribute to one.

While people who are still working can sign up for Medicare at age 65, many choose to continue using their employer's health plan alongside Medicare Part A (hospital coverage) and, perhaps, Part B (outpatient care). If the employer plan is a high-deductible one paired with an HSA, they can continue making those pretax contributions to the account only if they delay signing up for Medicare altogether.

"A lot more companies are going to high-deductible plans, and a lot more people are working longer," said Kathleen Holt, associate director for the Center for Medicare Advocacy. "And they're stumbling into these rules around HSAs."

For 2022, a high-deductible health plan is one with a deductible of at least $1,400 for an individual or $2,800 for family coverage, with maximum annual out-of-pocket costs (not counting premiums) of no more than $7,050 (for an individual) and $14,100 (family plan). That excludes out-of-network costs.

The Medicare program does have something similar to HSAs called medical savings accounts, although they are not broadly used — roughly 5,600 beneficiaries were in health plans that used them in 2019, according to the Kaiser Family Foundation.

These so-called MSAs are paired with a high-deductible Medicare Advantage Plan (which some beneficiaries choose), but individuals cannot contribute to the account. The insurer that offers the plan makes the contributions — an amount that could vary from year to year — and you can make tax-free withdrawals to cover medical expenses.

Also, MSA plans do not include Part D prescription drug coverage, according to the Centers for Medicare and Medicaid Services.

It's uncertain whether the House bill will gain any momentum. While the 2019 version of the measure accumulated co-sponsors, it never made it out of committee.

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