HSAs & Medicare
|by Roger D. Garrett, CLU, ChFC, CSS, LUTCF|
Careful planning is essential when you are approaching enrollment in Medicare and participating in funding a Health Savings Account. There are many moving parts to this process, and it is easy to misunderstand and make mistakes in determining eligible HSA contributions. The first concept to grasp is that enrolling in Medicare Part A is the trigger that halts the contribution-eligibility calculation, not turning 65. For that calculation, your contribution eligibility limit becomes $0 during the month you become effective under Medicare Part A. This will generally result in a prorated HSA contribution limit based upon the maximum contribution limits for that tax year and the number of months of HSA funding eligibility. Calculation eligibility examples are below, but warrant attention to maximize funding and avoid excess contributions.
When you turn 65 and are receiving Social Security benefits, you will automatically be enrolled in both Medicare Parts A and B so you must be proactive if you do not want Medicare to become effective on the first of the month of your month of Medicare eligibility when you are drawing Social Security. That brings us to the option of delaying Medicare enrollment for the purpose of HSA funding eligibility. Once an individual has enrolled in Medicare, their Part A effective date will be backdated to the shorter of six months or the first of the month of their 65th birthday. The backdated Part A effective date can be a surprise that may impact excess contributions, and it has the opportunity to involve up to two tax years.
As an example, assume a 67-year-old employee delayed Medicare to maximize HSA funding. He planned to retire April 1 and applied for Medicare to start April 1. His Part A effective date will go back to October 01, 2020, as that would be the shorter of six months or the month of his 65th birthday. The result is nine months of personal funding eligibility for 2020 and zero months for 2021. If he was maximum funding with the expectation of Part A starting April 01, he could have excess contributions in both 2020 and 2021.
Below are some calculation examples of maximum funding as they relate to Part A becoming effective. Keep in mind that individuals’ contribution calculation limits becomes $0 during the month of their Part A effective date.
Example 1: A person with an individual HDHP has a Part A effective date of July 2021. Her maximum contribution for 2021 is $2,300 ($3,600 max for individual plan plus $1,000 catch-up contribution [over age 55] divided by one-half since she was eligible to contribute for six out of 12 months).
Example 2: A person with family HDHP enrolls in Medicare in July 2021. His maximum contribution for 2021 is $4,100 if HDHP coverage ends June 30 for covered dependents ($7,200 max for family plan plus $1,000 catch-up contribution since he is over age 55 [one insured age 55+ assumed] divided by one-half as he was eligible to contribute for six out of the 12 months).
Should covered dependents continue coverage, the additional maximum eligible contribution would vary. Additional prorated remaining contribution eligibility would be based upon one versus two or more eligible insureds and number of full months insured on HDHP for 2021.
Example 3: Both spouses are 55+ (husband 65 or older) so both are eligible for HSA catch-up, and on family HDHP with husband as primary insured. Wife and one or more additional dependents are also on plan.
The husband enrolls in Medicare Part A effective April 01, 2021. His insured status afterwards has no effect on the family (two or more other insureds) HSA calculation. The wife is not on Medicare, and stays on family HDHP with at least one other insured dependent.
Husband: $7,200 / 12 * 3 mos. = $1,800 (his portion of family)
$1,000 / 12 * 3 mos. = $250 (his prorated catch-up)
Husband Total = $2,050 (his total 2021 contribution) Contribution to account in his name.
Wife: $7,200 – $1,800 = $5,400 (her portion of family). Her contribution would need to be in an account in her name.
$1,000 = Full catch-up. Her contribution would need to be in an account in her name.
Wife Total = $6,400 (her total 2021 contribution). $7,200 is family total HSA for 2021. $1,800 was eligible prior to husband’s Medicare effective. Wife and at least one other dependent remain covered by HDHP for 2021. Husband has prorated catch-up of $250 while wife has full catch-up of $1,000.
Total for Both = $2,050 + $6,400 = $8,450 for 2021.
It is the maximum contribution that is impacted by the Part A effective date. The Part A effective date does not affect the date of HSA deposit that may be made in the participant’s name. That is through Tax Day, which is normally April 15 for the previous tax year. It is possible to find references for participants to stop funding their HSA six months prior to starting Medicare. Understand that this reference is a cautious recommendation to avoid excess contributions due to the possibility of a six-month retroactive Part A start date. There are also references to stop funding a HSA when Medicare starts. That is when the maximum-contribution calculation stops, but not the funding. HSA participants have funding eligibility for the months prior to the first of the month that they turn 65 or their Part A effective date. And the eligible deposit may be made up until Tax Day of the following year.
For more information, access IRS Publication 969.