As individuals stay in the workforce longer and can find themselves enrolled in both their employer’s group health plan and enrolled in Medicare, it is important to understand how Medicare enrollment can impact when they can use tax free dollars for their medical expenses. When an individual has a Health Savings Account (HSA) qualified high deductible health plan and is entitled (enrolled in) to Medicare, it will have an impact on their HSA eligibility.
In order to be eligible to make contributions (or receive contributions) to an HSA, a participant must (1) be enrolled in a HSA qualified HDHP, (2) not be another individual’s tax dependent, (3) not be entitled to Medicare, and (4) not be covered by any disqualifying coverage. In addition, eligibility to make HSA contributions is based on the status of the individual as of the 1st day of the month.
The term “entitled” to Medicare means that an individual is both eligible and enrolled in Medicare. This can be any part of Medicare, including only Part A. The Medicare entitlement can be for any of the three reasons an individual would be eligible for Medicare: age, disability, end-stage renal disease (ESRD). Enrollment in Part A can be automatic upon reaching age 65 if an individual is already receiving Social Security or Railroad Retirement Act benefits. For other individuals, you must apply when eligible. Individuals who are eligible for Medicare, but whom do not enroll remain eligible to make and/or receive HSA contributions.
Individuals who wish to remain HSA eligible beyond age 65 can do so, but only if they delay the receipt of Social Security Benefits and delay enrollment in Medicare. We will discuss this situation in more detail below under the heading “Delayed Medicare”.
Impact of Medicare Entitlement:
Once an individual becomes entitled to Medicare, they are no longer eligible to make (or receive) contributions to an HSA. If a participant makes (or receives) HSA contributions above what is permitted due to their eligibility, they will be subject to income tax and a 6% excise tax on the excess contribution.
If an individual has an HSA with an account balance at the time they become entitled to Medicare, they can continue to use these funds for eligible expenses or save these funds for future use.
So how much can someone contribute in the year they become entitled to Medicare?
The total contribution amount that an individual can make in the year they become entitled to Medicare is prorated by the number of months during the year in which they were HSA eligible (prior to Medicare entitlement). The prorated annual limit would also include a prorated amount of the catch-up contributions.
Example: Tony is enrolled in single HDHP coverage and is eligible to contribute to an HSA in 2020 up to the annual limit of $3,550 plus an additional $1,000 catch-up contribution. Tony is turning 65 in May 2020 and his Medicare coverage will be effective May 1, 2020. His Medicare coverage is disqualifying coverage, therefore the most Tony can contribute to the HSA in 2020 is $1,516.66. This is calculated by taking the $4,550 maximum, and multiplying by 4/12ths as he is eligible for the HSA for 4 out of 12 months during 2020.
Tony is able to contribute up to the full $1,516.66 between January and April, or he could spread out the contributions the entire calendar year (plus in 2021 prior to filing his taxes), so long as the total annual contributions do not exceed the $1,516.66. This amount would include any contributions that his employer or any other sources would make to his account.
Impact of Medicare Entitlement of Spouse:
If the employee is enrolled in family HSA compatible HDHP and their spouse is in enrolled in Medicare, the employee is still eligible to contribute up to the HSA family limit for the year, provided the contributions are made to an HSA in the employee’s name. Upon Medicare enrollment, the spouse is no longer eligible to contribute any contributions, including catch contributions, to their own HSA (a separate HSA in the spouse’s name) and the amount they can contribute in that year is prorated based upon the number of months they were not enrolled Medicare. The employee can continue to use their HSA dollars tax free for their qualified medical expenses and those associated with the spouse even after the spouse is enrolled in Medicare. Let’s look at an example:
Sara is 58 and is enrolled in family HDHP coverage and is eligible to contribute to an HSA in 2020 up to the annual limit of $7,100 plus an additional $1,000 catch-up contribution. Sara’s husband Paul is turning 65 in February 2020.
Sara is able to contribute up to the full $7,100 plus the $1,000 catch up contribution for her enrollment in the family HDHP coverage in 2020. Paul is able to contribute 2/12 of $1,000 ($166.68) catch up contribution in his HSA for 2020. Sara can use her HSA dollars for both her qualified medical expenses and Paul’s tax free.
An individual who attains age 65, who has delayed the receipt of their Social Security benefits, who continues to work past age 65 (or has a working spouse) and is covered by a group health plan based on employment may apply for Medicare as early as three months prior to age 65 (initial enrollment period) or as late as when employment (or the employment based health coverage) ends. At that time, individuals have an eight-month special enrollment period. Once enrolled, the Medicare Part A coverage will be retroactive to six months prior to the application (but no earlier than the 1st of the month in which they turned 65). Because this coverage is then retroactive, individuals must take extra care when making HSA contributions. Let’s look at another example.
Steve is enrolled in single HDHP coverage and is eligible to contribute to an HSA in 2020 up to the annual limit of $3,550 plus an additional $1,000 catch-up contribution. Steve is turning 65 in February 2020, but has delayed his Social Security and Medicare benefits. Steve plans to retire in December of 2020. On December 1st, Steve applies for Medicare. Once his Medicare enrollment is processed, it becomes effective June 1st (6 months prior to the application). His Medicare coverage is disqualifying coverage AS OF JUNE 1st, therefore the most Steve can contribute to the HSA in 2020 is $1,895.83. This is calculated by taking the $4,550 maximum, and multiplying by 5/12ths as he is eligible for the HSA for 5 out of 12 months during 2020.
Steve is able to contribute up to the full $1,895.83 between January and May, or he could spread out the contributions the entire calendar year (plus in 2021 prior to filing his taxes), so long as the total annual contributions do not exceed the $1,895.83. This amount would include any contributions that his employer or any other sources would make to his account.
Where Can Individuals Learn More About the Interactions of HSAs and Medicare?
Individuals can learn more about the interaction of HSA and Medicare through either the Centers for Medicare and Medicaid Services website at www.cms.gov. A guide for deciding whether or not to enroll in Medicare is available at https://www.cms.gov/Outreach-and-Education/Find-Your-Provider-Type/Employers-and-Unions/FS3-Enroll-in-Part-A-and-B.pdf.
Individuals can learn more about HSAs through IRS Publication 969 at https://www.irs.gov/publications/p969.
Please review our other recent articles on other benefits that have an impact on HSA eligibility.
Your Spouse's Health Care FSA's Impact on HSA Eligibility
Health Care FSA Grace Period's Impact on HSA Eligibility
Health Care FSA Rollover's Impact on HSA Eligibility