The IRS recently released an information letter addressing the question of whether an employee who establishes and funds an HSA while enrolled in Medicare must pay a fine to the IRS. The letter confirmed that Medicare enrollees are ineligible to contribute to HSAs. In the year that an individual becomes enrolled in Medicare, they must prorate their contributions for that final year based on the number of months they are eligible. While individuals must typically pay income tax plus a 6% excise tax on money they contribute to an HSA during a period of ineligibility, because the employee in this case was on Medicare when he established and funded the HSA, the IRS said in the letter that it would not require him to pay a fine. The letter directed the individual to simply withdraw the funds from his HSA and include them in income.
It is important to note that the employee in this case received employer contributions to his HSA. Thus, this letter serves as a reminder to employers to be cognizant of the rules governing HSAs and to exercise caution when designing benefit plans that could include employer HSA contributions to employees who may be enrolled in Medicare.