Can You Have an HSA With Medicare?

People older than 65 can use money from tax-free Heath Savings Accounts to cover the costs of insurance premiums. This benefit is one of the few instances in which HSA funds can be spent on insurance premiums. Workers who are retired or nearing retirement age can use HSA's to supplement their nest egg, and extra money once they have maxed-out their Individual Retirement Account contributions.

HSA Basics

• Health Savings Accounts are sort of like 401k accounts. Workers divert a portion of their pre-tax income to the account. This lowers adjusted gross income, and therefore the workers tax bill. In exchange for these tax benefits, federal regulation restrict the use HSA money to medical care. To qualify for an HSA, workers must be enrolled in a high-deductible health insurance plan. These plans feature lower annual premiums, but higher out of pocket expenses.

Pilot Program

• In 2006, "The Wall Street Journal" wrote about a Medicare pilot program under which private insurers could offer high-deductible plans to seniors with Medicare. Some of the plans featured out-of-pocket expenses of up to $4,000, but no monthly premium cost. Under these plans, seniors are betting that their health costs in one year will be relatively low, or that they will have enough money in the Health Savings Account to cover any catastrophic illness.

Risks and Benefits of High Deductible Plans

• High deductible plans with HSA's are typically marketed to younger workers who expect little health care expenditures. The hope is that workers can save enough money in their HSA, which carries over from year to year and can be can bear interest, to meet the deductible during emergencies. In 2010, high-deductible plans had maximum out-of-pocket expenses of $11,000 for family coverage. The Government Accountability Office noted the high-deductible plans may not be appropriate for persons with chronic diseases, high expected medical costs and people with children.

Qualified Medical Expenses

• HSA funds can only be spent on qualified medical expenses -- which are defined and described in Internal Revenue Service Publication 502. Funds spent from an HSA on items that do not qualify are taxed as income, and subject to additional tax penalties. With a high-deductible plan, not all medical expenses are counted against the deductible. For example, heating pads may qualify as a medical expense for HSA purposes, but not for the purposes of a deductible. Therefore, an HSA plan may be appropriate for some seniors who have high medical costs but don't often visit a doctor. But be wary: the rules on HSA expenditures can be voluminous.