When to cease HSA contributions

[bzorc]

Personal question: I turn age 65 in November, 2023, and am currently deferring amounts to an HSA account to cover the HDHP deductible. I know I have to cease HSA contributions when I turn 65, but the question is when do I have to stop? I currently plan to retire in January, 2024, and keep my health coverage through my employer through the end of 2023, starting Medicare Part B on 1/1/24. I've heard conflicting theories as to when deferrals have to cease, so I'd thought I'd ask the question here.

Thanks for any replies.

[Brian Gilmore]

You don't have to stop HSA contributions upon reaching age 65.  You won't lose HSA eligibility until you enroll in Medicare.  Just keep in mind that Medicare Part A enrollment will be six months retroactive, so you'll have to account for that issue.

Here's an overview

https://www.newfront.com/blog/how-medicare-affects-hsa-eligibility

General Rule: HSA Eligibility

The general rule is that an individual must meet two requirements to be HSA-eligible (i.e., to be eligible to make or receive HSA contributions):

• Be covered by an HDHP; and
• Have no disqualifying coverage (generally any medical coverage that pays pre-deductible, including Medicare).

HSA eligibility also requires that the individual cannot be claimed as a tax dependent by someone else.

Medicare is Disqualifying Coverage

Enrollment in any part of Medicare is disqualifying coverage that causes an individual to lose HSA eligibility.

This means that an individual who is enrolled in Medicare Part A, Part B, Part C, Part D, or any combination thereof is not eligible to make or receive HSA contributions.  Even enrollment in only the (generally premium-free) Medicare Part A hospital coverage blocks HSA eligibility.

Individuals Who Are Age 65+ May Still Be HSA Eligible

Medicare enrollment causes an individual to lose HSA eligibility.  However, many employees age 65 and older delay enrollment in Medicare, and therefore may continue to be HSA-eligible.

In other words, mere eligibility to enroll in Medicare has no effect on the individual’s HSA eligibility if the individual chooses not to enroll in any part of Medicare.

The Medicare Part A Automatic Enrollment Trap: Individuals Receiving Social Security Retirement Benefits

Individuals who are receiving Social Security retirement benefits are automatically enrolled in (premium-free) Medicare Part A hospital coverage with no opt-out permitted.

Accordingly, any individual receiving Social Security retirement benefits is not HSA eligible by virtue of the automatic Medicare Part A enrollment.

The Medicare Part A Retroactive Enrollment Trap: Six Months of Retroactive Coverage

For individuals who delay enrolling in Medicare until after age 65, the Medicare Part A enrollment will be effective retroactively up to six months.  This six-month retroactive enrollment in Medicare Part A will also block HSA eligibility retroactively for six months.

Individuals have two options to address the retroactive Medicare Part A enrollment causing the retroactive loss of HSA eligibility:

1. Plan Ahead: Stop making HSA contributions at least six months before applying for Medicare, and limit HSA contributions during that period to the prorated amount; or
2. Correct Mistake: Work with the HSA custodian to take a corrective distribution of the excess contributions by the due date (including extensions) for filing the individual tax return (generally April 15, without extension).

Example:

• Jose reaches age 65 in August 2018 but does not enroll in Medicare.
• Jose signs up for Social Security benefits on October 1, 2019, which automatically enrolls him in Medicare Part A retroactive to April 1, 2019.

Result:

• Jose retroactively loses HSA eligibility as of April 2019—and therefore he can contribute only 3/12 of the HSA statutory limit for 2019 (plus 3/12 of the catch-up contribution).
• If he already contributed in excess of that limit, Jose will need to make a corrective distribution of the excess contributions by April 15, 2020 (assuming no extensions) to avoid a 6% excise tax.

 

Slide summary:

2023 Newfront Medicare for Employers Guide

[bzorc]

Thank you, very informative!

[Ken_BenefitScape]

Fantastic Summary. Thank you Brian

[EBP]

Brian -

Very helpful summary. Do you happen to know how Medicare coverage obtained at age 61 for ESRD affects HSA eligibility if the person qualifying for Medicare is covered under a spouse's HDHP (family coverage)? I believe the spouse could continue to make maximum HSA contributions under the spouse's plan, correct? Could the person qualifying for Medicare continue to make a $1,000 catchup contribution to his own HSA? Thanks!

[Brian Gilmore]

HSA eligibility is purely an individual issue.  So the fact that the spouse is enrolled in Medicare doesn't affect the employee's HSA eligibility.  That's simply disqualifying coverage for the spouse that blocks the spouse from contributing to an HSA in the spouse's name.

The employee can contribute up to the family limit if at least one other person is covered by the HDHP--regardless of whether that other person has disqualifying coverage.  So an employee covering a Medicare-enrolled spouse in the HDHP can contribute to the family limit even though the spouse is not HSA-eligible.

The spouse enrolled in Medicare is not HSA-eligible and therefore cannot make the catch-up contribution.  Only the HSA-eligible employee could make the catch-up contribution in that situation.

Here's an overview:

https://www.newfront.com/blog/hsas-and-family-members

The Family HSA Contribution Limit: Family Members’ Other Non-HDHP Coverage Irrelevant

HSA-eligible employees can contribute to the family limit if they enroll in any HDHP tier other than employee-only coverage.

The HSA rules define family HDHP coverage as any coverage other than self-only coverage.  This means that employees who are HSA-eligible and cover at least one other individual under the HDHP can contribute up to the family HSA limit.

The family HSA contribution limit is available regardless of:

• Whether the other covered family members are HSA-eligible (e.g., the family members may also be enrolled in non-HDHP coverage or Medicare); or
• Whether the other covered family members are eligible for tax-free coverage under the plan (e.g., non-tax dependent domestic partners).

Example:

• Ben enrolls in HDHP coverage for himself and his domestic partner Julianna for all of 2021 (and has no disqualifying coverage).
• Ben’s (non-tax dependent) domestic partner Julianna also has employee-only coverage under a non-HDHP HMO plan with her employer.

Result:

• Ben is eligible to make the full $7,200 family HSA contribution limit for 2021.
• The fact that Julianna is a non-tax dependent domestic partner and has other disqualifying coverage is irrelevant for purposes of Ben’s ability to contribute to the family HSA limit.
• Note that Julianna cannot make or receive HSA contributions to an HSA in her name because she is not HSA-eligible.

 

https://www.newfront.com/blog/hsa-catch-up-contributions

Catch-Up Contributions: Married Individuals

Both spouses may make the additional $1,000 catch-up contribution if they are both HSA-eligible and are both age 55+ by the end of the calendar year.

Although the special HSA contribution rules for married individuals permit one spouse to contribute up the standard statutory family contribution limit in his or her HSA, the catch-up contribution rules are designed differently.  The catch-up contribution rules require each spouse to make the catch-up contribution to his or her own HSA to take advantage of the double catch-up contribution.

In other words, each spouse would have to contribute $1,000 to their own HSA to take advantage of the catch-up contribution for both HSA-eligible and catch-up-eligible spouses.  One spouse cannot contribute a $2,000 catch-up amount (or any more than $1,000) to his or her own HSA for this purpose.

Therefore, in a married relationship where only one spouse has established an HSA—which is common due to the special HSA contribution rules for married individuals—the other spouse would need to establish an HSA just to fund the $1,000 catch-up contribution.  That is the only way to take advantage of the catch-up contribution available to both spouses.

Example 2:

• Anthony and his spouse Chelsea are both age 55+.
• Both Anthony and Chelsea are covered by a family HDHP through Anthony’s employer, and both are HSA-eligible for all of 2020.
• The couple wants to take advantage of the maximum standard statutory and catch-up HSA contribution amounts available for 2020. 

Result 2:

• Anthony may contribute up to $8,100 to his HSA ($7,100 family contribution limit + $1,000 catch-up contribution).
• To take advantage of her catch-up contribution, Chelsea must establish her own HSA and contribute the $1,000 catch-up contribution to her HSA.
• The catch-up contribution available to Chelsea cannot be made to Anthony’s HSA (i.e., Anthony cannot make a $2,000 catch-up contribution to his HSA).

Slide summary:

2023 Newfront Go All the Way with HSA Guide

[EBP]

Thanks so much, Brian! That's very helpful!