The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 created Health Savings Accounts (HSAs). The purpose of an HSA is to pay for qualified medical expenses of the account owner, his/her spouse, and his/her tax dependents. This article will review how enrollment in Medicare may affect an individual’s ability to make HSA regular contributions.
Regular contribution eligibility
An individual is eligible to make a regular tax year contribution to an HSA if he/she is:
- Covered under a high deductible health plan (HDHP) on the first day of a month
- Not covered by another health plan that is not an HDHP
- Not enrolled and covered under Medicare for some or all months, and
- Not eligible to be claimed as a dependent on another individual’s federal income tax return
The effect of Medicare coverage on regular contribution eligibility and contribution amounts
Being eligible for Medicare does not disqualify an individual from making regular tax year contributions to an HSA, however, actual enrollment in any part of Medicare might. Note that collecting Social Security payments after attainment of age 65 automatically enrolls an individual in Medicare Part A.
Another important point to make is that premium-free Part A coverage begins six months prior to the month an individual applies for Medicare, but no earlier than the first month the individual was eligible for Medicare. If an individual enrolls in Medicare upon attainment of age 65, there is no “six-month look back period”. However, if an individual waits to enroll until a later date, a six-month look back period applies. To avoid making an excess contribution to an HSA, an individual should determine his/her pro-rated reduced contribution amount by taking into consideration this six-month look back period.
Example: Kathy, who is eligible to begin collecting Social Security payments at age 65, does not sign up for Medicare and delays Social Security payments until she attains age 66 in June of 2018. Because Kathy delayed collecting Social Security payments until June of 2018 she is considered covered under Medicare six months prior to June of 2018. Therefore, Kathy is not an eligible individual at any time during 2018 and therefore cannot make a regular contribution to her HSA for 2018. This look-back period would also limit her 2017 maximum contribution amount.
On a related note, when it comes to determining when Medicare coverage starts, there is the potential of an additional “one-month look back period”. Generally, an individual’s Medicare coverage starts the first day of the month in which his/her birthday occurred. However, if an individual enrolls in Medicare Part A and/or Part B during the first three months of his/her initial enrollment period and the individual’s birthday is on the first day of a month, his/her coverage will start the first day of the prior month, thus the additional one-month look back for Medicare coverage. The initial enrollment period is a seven month period that includes the three months before the month an individual attains age 65, the month he/she attains age 65, and the three months after the month he/she attains 65.
Example: Benny enrolls in Medicare three months prior to his 65th birthday on October 1, 2018. Under normal circumstances, Medicare coverage for Benny would begin on October 1, 2018, however, because his birthday falls on the first day of the month his Medicare coverage starts September 1, 2018. As a result, Benny would only be eligible to make regular contributions to his HSA for the months of January through August.
An individual is responsible for determining his/her HSA regular contribution eligibility and contribution limit, not an HSA custodian/trustee. Individuals may need to discuss these specific issues with their employer’s HR department, tax or financial advisor, or insurance carrier. The type and amount of assistance an HSA custodian/trustee provides to HSA owners is based on the policy of the financial organization. The responsibility of an HSA custodian/trustee is to document and report to HSA owners and the IRS any contributions made to HSAs.