This post was originally published by Navia and Flexbank.
If you only read the intro to this memo, here’s the message.
Enrolling in any part of Medicare coverage for any reason will make you ineligible to contribute to a Health Savings Account.
Even Part A, the free one? Yes. If you enroll in Medicare Part A, it’s free, but it still counts as other first dollar coverage. That means once you are enrolled in Medicare, you can no longer contribute to your health savings account (HSA).
Tell me more. You may be able to contribute a prorated amount into your HSA based on the number of months during the year you were enrolled in the high deductible health plan without the first dollar Medicare coverage. And, you generally have through April 15th of the following calendar year to do so.
Here’s an example.
Mark, age 65, has self-only HSA-eligible health insurance coverage.
He enrolls in Medicare effective May 1, 2021.
Therefore, he is HSA-eligible individual for the first four (4) months of 2021.
The 2021 IRS maximum HSA contribution for an individual with self-only HDHP coverage is $3,600.
Mark is also eligible for the $1,000 “catch-up contribution” for those ages 55 and older.
Mark may contribute a maximum of $1,533.32 (4/12 x $4,600) to his HSA in 2021.
He has through April 15, 2022 to contribute up to this maximum amount.
Uh oh. I contributed more than my prorated amount. Now what? If HSA contributions exceed the maximum permitted in a calendar year, you should remedy the situation by asking the custodial bank (bank or credit union) for a distribution of the excess amount plus attributable earnings. While the law permits you to rectify the excess contribution prior to April 15th, the practical need is to do so by December 31 so the HSA custodian can properly code their system accordingly to produce accurate reporting to the IRS. The reporting includes the 5498-SA detailing how much you contributed and the 1099-SA detailing how much you withdrew.
But, I really just need Social Security money, not Medicare coverage because I am covered by my employer’s health plan. Here’s the hiccup. The law says those over age 65 who enroll in Social Security benefits are automatically entitled to Medicare Part A (services like hospital, nursing home care, hospice and home health care). A ruling issued in February 2012 clarified that Americans are not permitted to decline Medicare Part A if they are benefiting from Social Security. So, that won’t work.
Here’s an example.
At age 63, George decides to reduce his number of working hours and begin taking monthly Social Security benefits. George’s employer offers a high deductible health plan and an HSA to which George has contributed to each year. It is his wish to work enough hours to remain eligible for the group medical plan and to continue to contribute to his HSA. Unfortunately, when George turns age 65 he is automatically enrolled in Medicare Part A and thus becomes ineligible to continue contributing to his HSA.
Forget it, I don’t really need either Social Security or Medicare right now. If you decide not to take Social Security benefits, you may decline to enroll in Medicare. However, if you do wait to enroll in Social Security (and Medicare), once you are covered by Medicare, the effective date of coverage is retroactive to the month you attained age 65 or retroactively for six months, whichever is less. You’ll want to confirm all of the details directly with the Social Security Administration.
Distributions. Even after you enroll in Medicare, you are permitted to continue to use your HSA funds to pay for eligible expenses on a tax-free basis. Click here for sample eligible expenses. If you purchase an ineligible expense using HSA funds, and you are age 65 or older, you must pay taxes on the withdrawal.
Contact your Cornerstone representative with any questions.