“You may be one of the many people over 65 who are making Health Savings Account (HSA) contributions.
Be sure you are following the rules to the letter.” Donna McElroy.
By Donna McElroy
Most clients know I am a big fan of Health Savings Accounts (HSAs). HSAs can potentially save people THOUSANDS of dollars they’d otherwise give away to the tax collector. It’s no wonder working seniors with high deductible health plans (HDHPs) want to take advantage of this fantastic tax-advantaged vehicle.
Unfortunately, HSA rules state that you cannot contribute to a health savings account if you have other “disqualifying” coverage. Disqualifying means health insurance other than or in addition to a qualified HDHP plan.
Medicare, for example, is disqualifying health insurance coverage.
If you have any of Medicare’s multiple parts, which include Part A, Part B, Part D, and Part C (Medicare Advantage or HMO plans), you are ineligible to put money into an HSA.
You need to understand the terminology.
Government programs are rife with acronyms and arcane terminology that, like or not, you need to know and understand. For example, you are eligible, entitled, or enrolled in Medicare parlance.
For Medicare purposes, “eligible” indicates that you can sign up for benefits but does not presume that you have done so.
Entitled, on the other hand, means you are enrolled in Medicare coverage, and benefits are payable under any coverage part.
You could also be designated as enrolled, which is the same as being entitled.
Confusing as only the government can make it.
Yes, it is, and that’s only the tip of the iceberg when it comes to using HSA accounts when you are over 65.
Further muddying the already-murky water is that Social Security Payments and Medicare Part A are linked.
Many times, enrollment in Medicare Part A happens seamlessly. As is usually the case when government tries to be “helpful,” automatic enrollment creates unintended consequences for people, including those who contribute to HSAs.
Typically, the Social Security Administration goes ahead and enrolls you in Medicare Part A when you turn 65 if you start your Social Security benefits payments at that time.
And, if you start Social Security before age 65, you are automatically put into Medicare Part A when you turn 65. Enrollment in Part A means you lose your ability to make any HSA contributions.
When you choose deferral of Social Security, you also defer Part A until you activate Medicare. By delaying Medicare, you can contribute to your Health Savings Account. If you decide to take Social Security benefits but don’t want Medicare Part A coverage at that time, you can fill out a form to effect disenrollment. You must complete the SS form for such disenrollment to occur. Failure to submit this document means that your HSA distributions will be disqualified, even if you didn’t want Part A or never intended to use it.
Note: You cannot keep your Social Security benefits without having Medicare Part A. You must opt out of both.
When you file the elective opt-out form, however, you retain the ability to put money into your HSA.
Medicare is likely your primary coverage if you work for an employer with fewer than 20 employees. Opting out to keep HSA eligibility would not make sense in this instance, and you’ll lose your HSA eligibility.
Will stopping Medicare help you reclaim HSA eligibility?
What if your Medicare Part A got activated accidentally, or you started it but changed your mind? Well, in that case, the government, as always, has a form you can fill out to remedy the situation. The Social Security Administration issues this request form, and you can find it here:
Caveat: If you haven’t started your SS benefits yet, completing the form will reestablish your HSA eligibility. If you’ve already started getting Social Security benefit payments, declining Part A means you will have to repay all Social Security payments you’ve received and all reimbursements for Medicare claims. You can reactivate Part A benefits after termination of your group health insurance benefits in the future.
Don’t fall down the HSA rabbit hole when you turn 65.
Proration for HSA contributions occurs in the year in which you turn 65. Proration is calculated based on the months you were eligible after you turned 65 and your enrollment in Medicare. Your HSA contribution goes to zero beginning the first month of Medicare enrollment. If you’ve deferred Part A enrollment because you wanted to put more into your HSA, be sure to plan. When you activate Medicare Part A, the effective coverage date could be retroactive as far back as six months. You’ll need to stop your HSA contributions at least six months before your Part A enrollment since HSA contributions are disqualified during the retroactive period.
Beware of “excess” contributions.
In 2022, annual contribution limits for HSAs are $3,650 for individual coverage and $7,300 for families. If you are 55 or older, you may contribute an additional $1,000 per year as a “catch-up.”
If you put money in your health savings account which exceeds the pro-rated monthly amount for someone eligible to make HSA contributions for Part of the entire tax year (ex: If you turn 65 mid-year), you must report them on your tax return.
Excess contributions to HSAs are not deductible. You’ll have to pay a 6% tax if you don’t remove the excess contributions. For instance, say you made $2,000 in excess contributions. You would owe the government $120.00. And that excise tax applies every year you leave excess contributions in your HSA, accruing until you make withdrawals. You could also reduce any future contributions to offset the excess.
You must meet some critical conditions to avoid the 6% excise tax. If you think you have excess contribution issues, get assistance from your health savings account administrator. Most HSAs have protocols for dealing with excess contributions by either the employee or their employer.
Remember, when dealing with excess funding issues:
- Your withdrawal of excess funds must be made in the same tax year. You must withdraw any extra funds within the same year you deposited them.
- Interest must also be withdrawn. Any interest you may earn from excess must also be withdrawn. You will include this interest in the “Other Income” section of the tax return for the year you make contributions and withdrawals.
- You must report all withdrawals as income: You’ll owe income taxes on all contributions and earnings you take out of your HSA.
Bottom line: HSAs are a powerful way to reduce tax liabilities while providing money for unanticipated medical costs. However, these government-sponsored accounts have numerous perils and pitfalls of which you must be aware, especially if you are 65 or older. You must exercise caution to ensure you’ve followed the rules to the letter. Otherwise, you may have to pay a 6% excise tax. HSAs can be confusing, so you should always check with your financial advisor or qualified tax planner to discover how to get the most from your HSA without encountering tax issues.
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