Medicare back dated to Nov 2022 - do I simply amend my returns to correct HSA contributions

[archjet]

Hello - I retire at the end of June and just applied for Medicare.  It was approved and Part A was backdated to Nov 2022 which means, I believe, that two months of HSA contributions will now need to be taxed.  Do I simply do amended returns for 2022 and indicate I was covered by Medicare for Nov and Dec 2022.  Just want to get this right.  Thanks!

[NCperson]

@archjet - this change from HSA to Medicare is tricky,

You were to stop HSA SIX months prior to beginning Medicare, so if you began Part A in November, you would have had to stop the HSA contributions on May 1, but not prior to the month you turned 65.  

Assuming you had to go all the way back to May, that means you could have only contributed 4/12 * ($4650) in 2022.  (note I assumed you have a Single HDHP and you could contribute the extra $1000).

If you turned 65 in November, then your contribution limit for 2022 was 10/12*$4650.  As long as you contributed less than $3875 for the year, it doesn't matter than you contributed in November and December.

So based on that, did you over contribute? 

[dmertz]

I'm not sure what NCPerson is thinking.  If the backdating results in your Medicare coverage beginning on November 1, 2022, you are eligible to have contributed for the first 10 months of 2022 and your HSA contribution for 2022 is be limited to 10/12 of the annual limit.  Medicare coverage beginning on November 1, 2022 has no effect on your HSA-contribution eligibility for months prior to November.

If you filed your 2022 tax return or requested a filing extension by April 18, 2023, you have until October 16, 2023 to obtain a return of the resulting excess contribution made for 2022.  You'll then amend your 2022 tax return to show only the remaining contribution.  The amount of the excess contribution will be added to your taxable income, generally resulting in a balance due with the amendment. The amendment must include the statement that it is "Filed pursuant to section 301.9100-2."

If you fail to obtain the return of excess contribution before the extended due date of your 2022 tax return, you'll need to amend your 2022 tax return to include both the excess in taxable income and pay a 6% excess contribution penalty.  You'll then need to take a taxable distribution equal to the amount of the excess before the end of 2023 to avoid another 6% penalty for 2023.  I imagine that you are over age 65, so you won't owe the 20% early-distribution penalty that would otherwise be due on this distribution.  Because the excess contribution was not excludible from income on your 2022 tax return and will be taxed again when distributed, this means that the excess amount is double-taxed, so you really want to obtain the return of excess contribution before October 16, 2023.

[NCperson]

See link: 

https://www.medicareinteractive.org/get-answers/coordinating-medicare-with-other-types-of-insurance/...

"Finally, if you decide to delay enrolling in Medicare, make sure to stop contributing to your HSA at least six months before you do plan to enroll in Medicare. This is because when you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty."

OP never stated when his initial month of eligibility was....  iwas Nov, 2022 the first month of eligibility (i.e. turned 65 that month?

[archjet]

Thanks for the information - I did not apply at 65 and delayed Medicare due to continued employment health coverage - I just enrolled and they stated my first month of eligibility is Nov 2022.  I had not stopped HSA sooner as retirement timing was not set back then - I applied once retirement dates were clear and did not expect coverage to go back quite that far.  I believe I understand what I need to do to account for excess contributions and I greatly appreciate the inputs.  I apologize for any confusion.

[Opus 17]

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@NCperson wrote:

See link: 

https://www.medicareinteractive.org/get-answers/coordinating-medicare-with-other-types-of-insurance/...

"Finally, if you decide to delay enrolling in Medicare, make sure to stop contributing to your HSA at least six months before you do plan to enroll in Medicare. This is because when you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty."

OP never stated when his initial month of eligibility was....  iwas Nov, 2022 the first month of eligibility (i.e. turned 65 that month?

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You are wrong in this case because the taxpayer did indicate when their eligibility started.  There is no reason to doubt their own statement that they applied just now (May 2023) and their enrollment is backdated to November 2022.  There is no scenario in which a taxpayer applying in May 2023 would be backdated farther than 6 months.  

[Opus 17]

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@archjet wrote:

Thanks for the information - I did not apply at 65 and delayed Medicare due to continued employment health coverage - I just enrolled and they stated my first month of eligibility is Nov 2022.  I had not stopped HSA sooner as retirement timing was not set back then - I applied once retirement dates were clear and did not expect coverage to go back quite that far.  I believe I understand what I need to do to account for excess contributions and I greatly appreciate the inputs.  I apologize for any confusion.

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So first, you need to know your eligibility for 2022.  If your Medicare enrollment date is Nov 1, 2022, then your eligibility for 2022 was $3041 + $833 = $3874 if you were enrolled in a single HDHP, and $6083 + $833 = $6916 if you were covered by a family HDHP. These figures take into account your pro-rated standard limit plus your pro-rated $1000 catch-up.

If you contributed less, you need to take no action.  Even if some money was contributed after you were ineligible, what counts is the total amount for the year, not the dates it was contributed.

If you contributed more, you have three choices.

1. Leave the account alone and file an amended return to report the change in eligibility.  The excess amount will be added back to your taxable income and you will be charged a 6% penalty on the excess amount.  That 6% penalty will recur every future year until the account balance is spent down to zero.

2. Contact the HSA bank to remove the excess. This is a special procedure, not a regular withdrawal.  File an amended return to report the change in eligibility and that you did withdraw the excess.  The excess will be added back to your taxable income but there will be no penalty.  You must file the amended return by mail and write “Filed pursuant to section 301.9100-2” on the top of the first page, and include a brief written explanation of the situation.  This type of amended return can't be e-filed.

3. Leave the account alone and file an amended 2022 return and pay the 6% penalty as described in #1 above.  Then, make a regular withdrawal of the excess amount not for medical purposes.  When you file your 2023 return, report the withdrawal amount, answer that it was not all used for qualified expenses, and indicate the amount not used for qualified expenses.  That amount will be subject to income tax (so it is now taxed twice, once in 2022 and again in 2023) and it will be subtracted from the excess amount, which will zero out the excess on the books.  But there is no additional 20% penalty for using the money for non-qualified expenses because you are over age 65.