Can You Pay Medicare Penalties and Surcharges with Tax-free HSA Withdrawals?

By William G. Stuart | Originally posted on LinkedIn for MaxHSA

Yes, Medicare imposes premium surcharges. Can you pay them with tax-free withdrawals from your Health Savings Account?

Medical expenses can take a toll on retirement budgets, as the annual Fidelity survey estimates that the average person retiring in 2025 at age 65 will spend about $172,500 on medical coverage and care through end of life.

One of the benefits of a Health Savings Account is that owners can build balances through contributions and investments to reimburse qualified expenses in retirement. When they are enrolled on Medicare and no longer eligible to contribute, they can withdraw funds tax-free to pay their Medicare premiums, Medicare cost sharing (deductibles, coinsurance, and copays), and services not covered by Medicare (like dental, vision, and hearing).

What about Medicare penalties? Yes, Medicare has penalties that may be imposed on people who do not enroll around their 65th birthday. Note the stress on the word may. These penalties exist. An individual who does not enroll at age 65 may or may not be subject to them. Read on to learn more about when these penalties are and are not imposed, and whether they can be reimbursed tax-free from a Health Savings Account.

Part A Premiums

Medicare Part A covers inpatient, home health care, and hospice services. Workers who have logged 40 quarters of employment and their spouses are generally eligible for premium-free Part A benefits in retirement because they prepay their lifetime premiums through payroll taxes during their working years. About 99% of beneficiaries qualify.

Others must pay a monthly premium of either $311 (worked between 30 and 39 quarters) or $565 (worked between 20 and 29 quarters) to receive care through Part A. These enrollees are subject to late-enrollment premium surcharges if they do not enroll on Part A when they are first eligible or transition directly from a qualified employer-sponsored plan. The penalty is equal to the monthly premium for a period double the coverage gap.

Example: Dinah was not covered on a group plan when she turned age 65 in June 2024. She delays enrolling on Part A because she is healthy and faces a $565 monthly premium when she does enroll. She enrolls for an effective date of June 1, 2026. She had a gap of 24 months. She pays a premium of $1,140 monthly for the rest of 2026, double the monthly premium in 2027, 2028, and 2029, and double the monthly premium through May 2030. Her penalty is at least $27,000 (the current $565 premium for 40 months).

Part A enrollees who must pay premiums can reimburse both the premiums and the penalties with tax-free Health Savings Account withdrawals.

Enrollees entitled to premium-free Part A who delay enrollment with a coverage gap do not face a monetary penalty because they incur no premium on which to apply a surcharge.

Part B Premiums

Part B covers outpatient services like physician visits, counseling, imaging, lab tests, and outpatient therapy. The standard premium is $202.90 monthly, which represents about 25% of the cost of care (the remaining 75% is paid from the federal treasury, a concept that comes into play below).

If you do not enroll when you are first eligible around your 65th birthday, or are not covered by qualifying group coverage (your own or a spouse's) until you enroll on Part B, you may be subject to lifetime premium surcharges of 10% for every 12-month coverage gap.

Example: Paolo did not have qualifying employer-sponsored coverage when he turned age 65 in September 2024. He delayed enrolling on Part B for 18 months. Because his coverage gap was greater than 12 but less than 24 months, he pays a 10% premium surcharge, or an additional $20.29 (total premium: $223.19) each month during the rest of 2026. In future years, the dollar amount of his 10% penalty grows as the annual premium increases.

Part B enrollees can pay their Part B premiums, including penalties, with tax-free distributions from their Health Savings Account. If you collect Social Security benefits, your Part B premium is usually deducted from your monthly payment. You can reimburse yourself by transferring that amount from your Health Savings Account to your personal checking or savings account.