Understanding Medicare’s impact on health savings accounts

The rise of high-deductible employer health plans has created an unpleasant surprise for some older employees: anyone on Medicare is no longer allowed to make tax-free contributions to a health savings account (HSA).

To the further consternation of many such employees, anyone age 65 or older receiving Social Security benefits must, by law, also be signed up for Part A of Medicare. This requirement, seemingly unrelated to their health plan, also will end their ability to make HSA contributions.

A little history

In 2003, Congress authorized HSAs as part of the law that also brought Part D drug plans into existence. HSAs are only available to those with a high-deductible health plan.

The beauty of an HSA is that it is funded with pre-tax dollars and its holdings can be invested, like a 401(k). When spent, any earnings on these investments also are exempt from income taxes, like a Roth IRA, so long as the expenditures are for qualifying medical expenses. Unlike flexible spending accounts, HSA contributions do not have to be spent by the end of each year but can be carried over indefinitely.

There are minimum deductions needed for a health plan to qualify as high-deductible, and they may change each year.

Here are the 2024 HSA contribution rules:

An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,600) can contribute up to $4,150 — up $300 from 2023 — for the year. The maximum out-of-pocket is capped at $8,050.

An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $3,200) can contribute up to $8,300 — up $550 from 2023 — for the year. The maximum out-of-pocket is capped at $16,100.

Eligible individuals, 55 or older, can contribute an additional catch-up contribution of $1,000 per year. If your spouse is also 55 or older, he or she may establish a separate HSA and make a “catch-up” contribution to that account.

You have until the tax filing deadline (typically April 15) to make contributions to your HSA for the previous year.

While most HSAs are linked with employer insurance plans, any qualifying high-deductible plan can permit the insured person or family to open an HSA. This includes private health plans and those sold through Affordable Care Act exchanges. Employer plans generally set up HSAs for participating employees, but people also can work with financial institutions to create HSAs.

Although people with Medicare may not contribute to an HSA, they can continue to use remaining funds within an existing HSA account

IRS Form 8889 is used to report your annual HSA activity. Form 5329 is used to report excess contributions. If you use a tax preparer, you should work with them on how to file these forms, including whether you need to amend any past-year tax returns that were filed before you learned that some or all of your HSA contributions in a past year were illegal.