HSA and Medicare
Frequently Asked Questions Regarding Medicare and Health Savings Accounts
You cannot make contributions to a Health Savings Account if you are enrolled in Medicare Part A
Can I disenroll from Medicare Part A?
It is prudent to NOT enroll in Medicare Part A as long as you are still actively working and covered under a large group (over 20 employees) HSA health insurance plan. However, if you accidentally enrolled in Part A, you may be able to dis-enroll if you act quickly.
You Cannot collect Social Security income and withdraw/unenroll in Part A
Deferring Part A with an HSA – 1:54min
- If you withdraw/dis-enroll after turning 65, you are required to pay back all of the money received from Social Security as well as any Medicare benefits paid.
- You cannot dis-enroll from PREMIUM FREE ($0) Medicare Part A. If you accidentally enrolled in Medicare Part A and don’t want it, you have a short window of opportunity to withdraw your application for Medicare Part A. We cannot guarantee that you will be approved to withdraw from Part A unless you request withdraw prior to the effective date of coverage. You MAY have up to 12 months after your effective date to withdraw, but we have found that it really depends on who you work with at your local Social Security office.
- To withdraw your application for Part A, use Form SSA 521. Please complete and take to your local Social Security office to meet with a rep. You do not need an appointment, but we do recommend that you show up early in the morning (prior to open at 9am), so you can be one of the first people in line once the doors open.
CMS Reference: For additional information, please scroll down to “Termination of Enrollment”
Warning for when you retire – 6 month backdating rule
- Even if you deferred your Medicare at age 65, when you enroll in Medicare later (after age 65), your enrollment in Part A will be backdated by six months (but no earlier than the 1st of the month of your 65th birthday). Under IRS rules, that leaves you liable to pay six months’ of tax penalties if you over-funded your HSA for that tax year. To avoid the penalties, you cannot contribute more than the prorated maximum into your HSA for the tax year in which you apply for Medicare Part A (see below).
Backdating of Part A (impacts on HSA) – 1:22min
How is my contribution limit impacted if I lose my eligibility during the year?
- You lose your eligibility to make an HSA contribution as of the first day of the month you enroll in Medicare. You can make a pro-rated contribution for the year to your HSA for the months before you became ineligible due to your enrollment in Medicare. This contribution can be made until the HSA contribution deadline, which is generally April 15, of the following year. You must pro-rate your contribution based on the number of months during which you were HSA-eligible on the first day of the month.
Mid Year Part A Effective Dates and Maximum HSA Contributions
Here is some additional details on the HSA Deposits and tax year…
You lose your eligibility to make an HSA contribution as of the first day of the month you are enrolled in Medicare Part A. You can make a pro-rated contribution for the year to your HSA for the months before you became ineligible due to your enrollment in Medicare. This contribution can be made until the HSA contribution deadline, which is generally April 15, of the following year.
Partial Year Eligibility Details
The contribution limits imposed by the Internal Revenue Service (IRS) are tracked on the calendar year. The limits are:
- Self-only coverage: $3,850 in 2023 / $4,150 in 2024
- Family coverage: $7,750 in 2023 / $8,300 in 2024
- Catch-up: $1,000 additional annually if age 55 or older
How is my contribution limit impacted if I lose my eligibility during the year?
You must pro-rate your contribution based on the number of months during which you were HSA-eligible on the first day of the month.
- Example:
- You enrolled in Medicare for August 1st and they likely backdated your Medicare Part A (a disqualifying event) 6 months to February 1.
- You were covered on a family contract during the first 1 months of the year.
- Total maximum prorated contribution allowed for year: $772 for 2024.
- Your maximum contribution is 1/12 of $8,300, or $689.
- In addition, since you are age 55 or older, you can contribute 1/12 of $1,000 catch up, or $83.
- You will have until 4/15/2024 to deposit your maximum amount for tax year 2024.
HSA Prorating Example 2:22min
If my spouse is on Medicare, can I still contribute to my HSA Account (assuming the spouse is the dependent on the plan)?
- Yes. The IRS rule affects only employees age 65 or older who have HSAs through their employment, because they are the ones who contribute out of their respective income.
What can I use my HSA funds for once I am on Medicare?
- Many out-of-pocket expenses qualify for tax-free HSA withdrawals even after you’re on Medicare. You can use the money to pay premiums for Medicare Part B, Part D prescription-drug coverage or all-in-one private Medicare Advantage plans (but not for Medigap/Medicare supplement premiums). You can also use the money for co-payments and deductibles you pay for medical expenses, out-of-pocket costs for prescription drugs, vision and dental
What is the penalty if I contribute to my HSA after electing Medicare:
- Your contributions after you’re enrolled in Medicare might be considered “excess” by the IRS. Excess contributions will be taxed an additional 6 percent when you withdraw them. You’ll pay back taxes plus an additional 10 percent tax if you enroll in Medicare during your HSA testing period.
- When you surpass the maximum contribution limits, the penalty you pay depends on the amount of the excess contribution. Currently, the IRS penalty equals 6 percent of your excess contributions. For example, if you have a $100 excess contribution, your fine would be $6.00; if you contributed $1,000 over, it would be $60.
- This penalty is called an “excise tax,” and applies to each tax year the excess contribution remains in your account. This means you will incur the 6 percent excise tax every year until you remove it from the account or apply it to a future year.
What Causes HSA Excess Contributions?
Most people contribute the same amount to their HSA on a weekly or monthly basis, or with each paycheck. Simply divide the contribution limit by the number of contributions to figure out how much you can put in. However, there are some circumstances that could put you over the limit:
- Multiple contributors. Anyone can contribute to your HSA account, including a friend, a relative or your employer. Since the annual limit applies to the total sum, you have to also keep track of contributions made by others or risk going over the limit. This is especially important if your employer makes contributions.
- Incorrect calculations. Even with digital calculators, people can make mistakes. If you miscalculate the size of your regular contributions, you can end up going over the limit. It pays to double-check your calculations each pay period to make sure you’re still on target. You can always adjust your contributions at any time for any reason throughout the year.
- Irregular contributions. HSA contributions don’t have to be on a regular basis. You can contribute any time you want, which some people prefer over having the contribution taken out of their paycheck. Others may vary the size of their contributions based on their cash flow at any given time. If you take one of these approaches, be sure to track your contributions closely.
- Eligibility issues. Most people automatically calculate their regular contributions based on the assumption of a year’s eligibility. But if you’re new to your company, you may have an introductory period before you become eligible to open an HSA account. Or, perhaps you contributed a large part of the maximum limit early in the year (called front-loading) and then lost your HSA eligibility before the end of the year. Either situation makes you eligible for less than the full year, which can cause an HSA excess contribution. Contribution limits can also change depending on an updated coverage status, due to marriage, divorce, new child, etc.
How to Correct HSA Excess Contributions
As mentioned, the IRS provides two ways of correcting over-contributions. The first involves removing the excess from the account in the tax year that it occurred. This means you have until your tax due date to make the correction. You must also remove any earnings on your excess contributions. The second method involves applying your HSA excess contributions to the following year.
Removing Excess Contributions
For most people, the removal method will be the preferred option. It is relatively simple to do, and it takes care of the problem once and for all. It allows you to avoid paying a penalty as long as three criteria are met. You must:
- Withdraw the excess contributions no later than the due date of your tax return for the year the contributions were made. These withdrawals will be considered taxable income.
- Take out any income earned on the withdrawn contributions during the year they were made. This will also be taxable income.
- Include the earnings in “Other Income” on the tax return for the year you withdraw the contributions and earnings.
You can withdraw some or all of the excess contributions, but you will have to pay the excise tax on any that you leave in the account.
When removing excess contributions from your account, you must inform your HSA trustee; otherwise they won’t know to do it. The excess funds that were withdrawn will be listed on Form 1099-SA as a distribution, in Box 1, for the tax year in which the distribution was taken. Earnings on excess contributions withdrawn will be in Box 2 and included in Box 1. Form 5498-SA will report the market value of your HSA at the end of the calendar year, the total contributions made within the calendar year, and the total contributions for the tax year through the tax filing deadline, typically April 15. The account owner should retain Form 5498-SA for record keeping purposes, but is not required to submit it to the IRS.
Future Year Option
The second way to avoid the HSA excess contributions penalty is through the “future year method.” It involves deducting some or all of your HSA excess contributions and applying them to a future year. The IRS does not allow you to apply more than you have in excess. It’s also important to keep in mind that moving the excess to the following year counts towards the future year’s annual contribution limit.
The future year method is more complicated than the removal method, especially if you have earnings from any of the excess contributions. If you opt to roll forward some, but not all, of the excess contributions, you will owe the 6 percent tax on any that are not applied to a future year. Both methods must be completed before your tax filing deadline or you will be charged the excise tax. Consider filing an extension on your taxes to give you more time.