Medicare and HSAs Don’t Mix
Health Savings Accounts (HSAs) are designed to have a triple tax benefit.
- Contributions are tax deductible.
- Assets in an HSA may grow tax free.
- Distributions for medical expenses are tax free.
However, once you enroll in Medicare your eligibility to contribute to an HSA is cancelled. If you made HSA contributions while covered by Medicare, you face tax fines and penalties.
What if you are covered by your employer? Reaching age 65 doesn’t require you to enroll in Medicare. If you employer has credible insurance coverage, you may decline Medicare and continue your employer’s coverage.
You DO NOT want to enroll in Part A hospital coverage. It is free; but it will disqualify you from contributing to your HSA. (Be sure your employer doesn’t expect you to enroll in Medicare Part A.)
Be Aware of a few traps.
You are working for an employer who has a qualified high deductible health plan combined with an HSA. You are enrolled only in your employer’s insurance plan. You decide you want to start your social security benefits while still working. When you enroll for social security, you are automatically enrolled in Medicare Part A. You just became disqualified for an HSA.
You delayed enrolling in Medicare to continue your employer’s insurance coverage. You are also contributing to an HSA. You retire and enroll in Medicare.
Medicare will retroactively enroll you for 6 months in Part A coverage. To avoid tax penalties, you need to stop contributing to your HSA 6 months before you begin Medicare.
Idaho Medical Savings Account (MSA) to the rescue!
Idaho state tax code allows for an Idaho deductible Medical Savings Account.
You are not restricted by your health insurance coverage. You may be in Medicare AND have a Medical Savings Plan.
Many of the features are similar to an HSA
- You can make tax deductible contributions from Idaho Income
Singles – $10,000
Joint/couples – $20,000
- You can only pay for eligible medical expenses as defined by the Internal Revenue code. Non-qualified distributions are counted as income. If under 59.5, it is also subject to a 10% penalty. (20% at the Federal level for HSA.)
Tip: You can pay your health insurance and long-term care insurance from the MSA. However, you can’t also take the insurance premiums as a deduction on your Idaho tax return. Pay premiums from a Non-MSA account and receive an Idaho tax deduction. AND make deductible MSA contributions.
- You can rollover your MSA from one financial institution to another. You have to complete the transaction within 60 days.
MSAs Features that are varied from an HSA
- Financial institution statement must include the words Medical Savings Account or MSA. And MSA must also appear in the title, description or designation of the account. (It can’t just be a savings account at an Idaho Bank.)
- Funds must be in the MSA before you pay the expense. For example, you have a $400 doctor bill and only $200 in your MSA. You need to contribute more into your MSA to pay the doctor bill. If you pay $400 from a different account, you may only reimburse yourself $200 – the amount you had in the MSA at the time you paid the doctor bill.
Tip: Pay all medical expenses from your MSA to avoid any timing issues.
- Insurance reimbursement of expenses paid from an MSA have 60 days to be redeposited into the MSA to avoid being included as income and subject to penalty. Redeposits DO NOT count as contributions.
Tip: Do not pay anything more than your co-insurance from your MSA until the health
insurance payments have been made.
- You have to track your own contributions, distributions and rollovers. The bank is only required to report interest earned on the account. (HSA this is all reported to IRS.)
Whether an HSA or an MSA you want to name a beneficiary. A spouse may rollover both an HSA or MSA into their own account. A non-spouse beneficiary, the benefit is taxable income. You have one year to pay the tax-free medical expenses for the deceased from either an HSA or MSA.
Tip: Be sure you name a beneficiary when establishing an MSA or HSA.
With the rising costs of medical expenses, it makes sense to use the tax benefits of HSAs and Idaho MSAs.
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