Can You Contribute to an HSA if You Are on Medicaid?

Medicaid and Health Savings Accounts (HSAs) are two different healthcare programs that serve different purposes. However, their eligibility requirements overlap in a way that affects whether someone on Medicaid can contribute to an HSA.

What is Medicaid?

Medicaid is a public healthcare program that provides health coverage to low-income individuals and families. It is jointly funded by state and federal governments and administered by the states. Medicaid eligibility is based on income, household size, disability status, and other factors. Benefits vary by state but generally include:

  • Doctor visits
  • Hospital care
  • Prenatal care
  • Prescription drugs
  • Nursing home care
  • Preventive services

Medicaid covers nearly 75 million Americans, including low-income adults, children, pregnant women, seniors, and people with disabilities. It plays a critical role in providing health coverage to vulnerable populations.

What is an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses. To be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP) and meet other requirements.

Some key features of HSAs:

  • Contributions are tax-deductible or made pre-tax through payroll deduction
  • Funds grow tax-free
  • Withdrawals for qualified medical expenses are tax-free
  • Balances roll over year to year and are fully portable
  • Contribution limits in 2023 are $3,850 for individual coverage and $7,750 for family coverage

HSAs incentivize saving for healthcare expenses and give people more control over their healthcare spending. They are a popular choice amongst those looking to save money on health insurance premiums.

Can You Contribute to an HSA if You Are on Medicaid?

According to IRS regulations, you cannot contribute to an HSA if you are enrolled in Medicaid. This disqualification applies whether Medicaid is your primary coverage or secondary. Even if you have an HDHP, being on Medicaid makes you ineligible to fund an HSA.

There are two key reasons the IRS prohibits HSA contributions for Medicaid enrollees:

1. Medicaid provides comprehensive health benefits

To contribute to an HSA, regulations state that you must have a health plan with a deductible of at least $1,500 for individual coverage or $3,000 for family coverage. These minimum deductibles are intended to make people more judicious healthcare consumers since they have “skin in the game”.

However, Medicaid provides first-dollar coverage for most services. There is little to no cost-sharing. Enrollees can access free or low-cost care without needing to pay towards a deductible. Allowing them to also contribute to HSAs could provide double tax-advantages for healthcare expenses.

2. HSAs are designed for private health coverage

HSAs were created in 2003 alongside HDHPs to provide tax incentives for people with private, high-deductible insurance plans. The accounts are intended to be paired with commercial insurance, not public programs like Medicaid.

In fact, other public health plans like Medicare and TRICARE also disqualify someone from contributing to an HSA. The IRS seeks to maintain this distinction.

What Happens if You Contribute to an HSA While on Medicaid?

Contributing to an HSA while enrolled in Medicaid has consequences:

  • For individuals: Any contributions made during periods of Medicaid eligibility are considered “excess contributions”. They are subject to a 6% excise tax unless withdrawn before filing your tax return.

  • For employers: Employer contributions made to an employee’s HSA while they are on Medicaid are ineligible. They may be considered taxable income to the employee.

To avoid penalties, HSA eligibility should be reviewed any time there is a change in health coverage, such as enrolling in or disenrolling from Medicaid.

Can You Use Existing HSA Funds While on Medicaid?

If you already have an HSA with a balance, you can continue to use those funds even after enrolling in Medicaid. The key is that you can no longer make new contributions to the account.

Existing HSA dollars can be used tax-free to pay for qualified medical expenses such as:

  • Dental care
  • Vision care
  • Over-the-counter medications
  • Healthcare equipment and supplies

So you do not lose access to HSA funds you accumulated and saved prior to Medicaid coverage. The restriction is only on making new contributions after enrolling.

Options for Using Your HSA

If you can no longer contribute to your HSA due to enrolling in Medicaid, you have a few options:

  • Spend down your balance on qualified medical purchases
  • Hold the funds for future healthcare expenses
  • After age 65, withdraw funds for any purpose (subject to income tax only)

Many opt to keep their HSA open as a retirement healthcare savings account. Be sure to invest the money so it continues growing. HSAs can be a great long-term savings vehicle alongside Medicaid benefits.

Key Takeaways

  • Medicaid enrollees cannot contribute new funds to an HSA.
  • Those already with HSAs can keep using account balances for medical expenses.
  • Contributing to an HSA while on Medicaid leads to tax penalties.
  • Eligibility should be reviewed when transitioning on or off Medicaid.
  • With proper planning, an HSA and Medicaid can complement each other.

HSAs and Medicaid cannot be used together for healthcare coverage in the present. But with a clear understanding of the rules, you can strategically utilize both programs for more comprehensive financial protection.

Can You Contribute to an HSA in Retirement?


What disqualifies you from contributing to an HSA?

You can’t contribute to an HSA if you have Medicare coverage, or a plan that pays its share of a covered service without you having to pay deductibles or copayments first (called “first dollar coverage”).

Can you still contribute to an HSA if you are on Medicare?

Can I enroll in an HSA if I am enrolled in Medicare? No. Once you enroll in Medicare Part A and/or B, you can no longer setup or contribute pre-tax dollars to an existing HSA. This is because to contribute pre-tax dollars to an HSA you cannot have any health insurance other than a HDHP.

Can I put money in an HSA if I don’t have health insurance?

While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have an HSA-eligible plan (sometimes called a High Deductible Health Plan (HDHP)) — generally a health plan (including a Marketplace plan) that only covers preventive services before the …

Can I contribute to an HSA outside of my payroll deductions?

An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual’s return whether or not the individual itemizes deductions.

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