Which Medicare Premiums Are Qualified for Tax-Free Reimbursement from Your HSA?
By William G. Stuart | Originally posted on LinkedIn for Health Savings Academy
Savvy savers can stretch their retirement savings with advance planning and an understanding of which Medicare premiums are qualified for tax-free reimbursement.
You undoubtedly understand that you can't continue to fund a Health Savings Account once you're enrolled in any Part of Medicare. You can, however, continue to reimburse tax-free the same qualified expenses - plus certain Medicare premiums. But not all premiums that you may pay for medical coverage in retirement. Learn more about which premiums are and aren't qualified for tax-free reimbursement, plus the age requirement that you and your spouse may need to address long before turning age 65.
The Age 65 Requirement
Below we list the various premiums associated with products in the Medicare market and determine whether a premium is qualified for tax-free reimbursement from your Health Savings Account. There's a catch, however. You can't reimburse any Medicare premium tax-free until you, the account owner, turn age 65.
Example: You're age 63 and own a Health Savings Account with a balance of $17,000. Your spouse turns age 65 and enrolls on Part A, Part B, and Part D (these Parts are explained below). You can't reimburse your spouse's qualified premiums tax-free until you turn age 65. At that point, you can reimburse your spouse's future premiums tax-free, but you can't go back at age 65 and retroactively reimburse tax-free your spouse's prior premiums.
This restriction requires some advance planning if the younger spouse is the sole account owner or the older spouse has a small balance. To maximize their tax benefit, the couple must plan if the older spouse is HSA-eligible. Here are two ways to fund the older spouse's Health Savings Account adequately to reimburse tax-free all qualifying Medicare premiums until the younger spouse with the higher balance turns age 65:
Open a Health Savings Account in the older spouse's name when she turns age 55 and deposit a $1,000 catch-up contribution annually. Even without investment returns, this strategy will produce an account balance of $10,000, which is adequate to reimburse about four years of Part B and Part D premiums.
Split a portion of the statutory family contribution ($8,300 in 2024 and $8,550 in 2025) between the two spousal accounts. In other words, rather than depositing the full amount through pre-tax payroll contributions into the account owned by the spouse who's the plan subscriber, reduce those payroll deductions and deposit some tax-deductible funds into the other spouse's Health Savings Account. You won't avoid paying payroll taxes on those funds, but you receive the same federal and state income tax deductions as you do through pre-tax payroll deductions.
Note that this restriction applies to premiums only. A Health Savings Account owner, regardless of age, can reimburse tax-free a spouse's Medicare cost sharing (deductibles, coinsurance, and copays) and the price of qualified services not covered by Medicare. The owner-age restriction applies to withdrawals for premiums only.
Part A Premiums
Part A, or hospital insurance (HI), covers inpatient, skilled-nursing, home-health, and hospice care. If you're admitted to an inpatient facility, you pay a deductible of $1,632 per benefit period (in effect, each hospitalization except for a quick readmission for continuing care for the same diagnosis). Thus, you may pay more than $1,632 annually. You're entitled to 60 days of inpatient care per calendar year. After that, you pay $408 daily coinsurance for days 61-90 of the benefit period. If you remain hospitalized after 90 days, you can draw on 60 lifetime reserve days at $816 daily coinsurance.
Most Americans prepay their Part A premiums through payroll taxes assessed on their own or their qualifying spouse's wages during their working years. These taxes amount to 2.9% of income (paid at 1.45% each by you and your employer).
Not all Americans work the requisite 40 creditable work quarters (10 years total) to receive Part A tax-free. In that case, they pay either $278 (20 to 29 creditable work quarters) or $505 (30 to 39 creditable work quarters).
These Part A premiums are eligible for tax-free reimbursement from a Health Savings Account. So too are deductibles and coinsurance.
Part B Premiums
Part B covers outpatient services, ranging from doctor visits and lab work to advanced imaging and outpatient therapy. Part B imposes a $240 annual deductible in 2024. After you meet that deductible, you pay 20% of the allowable charge for all subsequent services.
Part B enrollees do not prepay premiums through payroll taxes assessed on their wages during their working years. Rather, Part B imposes a monthly premium of at least $174.70 (more if they or their spouse have worked fewer than 40 qualifying quarters or their income exceeds certain thresholds).
These Part B premiums are eligible for tax-free reimbursement from your Health Savings Account. So too are the Part B deductibles and coinsurance.
Part D Premiums
Part D, which was enacted by the same legislation that created Health Savings Accounts in late 2003, is offered by private insurers whose businesses and products are regulated by the Centers for Medicare and Medicaid Services (CMS), the agency in the US Department of Health and Human Services (HHS) that oversees Medicare. Insurers offer different plan designs with different patient financial responsibility and different formularies (list of covered drugs).
Part D premiums vary by plan and insurer. These premiums are eligible for tax-free reimbursement from your Health Savings Account.
Part C Premiums
Part C, also called Medicare Advantage or MA) is a private alternative to Medicare. Insurers design plans - within CMS guidelines - that look like traditional HMO or PPO plans. These plans often offer additional services (like dental care, vision discounts, and reimbursements for fitness-club memberships, among other perks). CMS pays the insurer a certain amount monthly, adjusted for the enrollee's age and medical condition. The insurer, not Medicare, then assumes responsibility for all claims.
Enrollees who choose Part C coverage always pay the Part B premium. The insurer may charge an additional premium. All premiums associated with Part C enrollment are qualified for tax-free reimbursement from a Health Savings Account.
Medicare Supplement
Traditional Medicare (Part A and Part B) imposes steep cost sharing on enrollees with high claims. This is especially true of the 20% Part B coinsurance, which isn't capped (as out-of-pocket responsibility is capped on all commercial, or non-retiree, plans). Thus, if you undergo a $100,000 round of outpatient cancer treatment, you pay 20% coinsurance, or $20,000.
Most Medicare enrollees who choose traditional Medicare purchase a Medicare Supplement (also called MedSupp or Medex) plan, which reimburses much of this out-of-pocket responsibility. These plans can cost $200 or more in monthly premiums.
Medicare Supplement premiums are not qualified for tax-free reimbursement from a Health Savings Account. If you withdraw funds from your account to pay these premiums, you must include that amount in your taxable income.
This tax treatment is no different from paying your Medicare Supplement plan premiums from your tax-deferred retirement account. But here's the big difference: If you pay these premiums with funds other than Health Savings Account balances, you preserve that money to withdraw later to reimburse future qualified expenses. When you do, t hose distributions aren't included in your taxable income.
From a tax perspective, it almost always makes sense to reimburse non-qualified expenses from funds other than Health Savings Account balances, thereby preserving that money for future tax-free reimbursement of qualified services.
Example: You pay your Medicare Supplement premiums (total: $2,400) from your Health Savings Account one year, which exhausts your account balance. You include that $2,400 in your taxable income. The next year, you incur $2,400 of out-of-pocket expenses. Since you've exhausted your Health Savings Account balance, you must reimburse those expenses (plus your $2,400 in annual Medicare Supplement premiums) with taxable distributions from your tax-deferred retirement account. Total increase in taxable income over two years: $7,200 ($4,800 in premiums and $2,400 in qualified expenses).
If you had paid the first year's MedSupp premiums from your tax-deferred account, thereby preserving your Health Savings Account balance to reimburse the $2,400 of qualified expenses in Year Two, your total increase in taxable income over the two years for the same $7,200 of expenses is only $4,800.