Contributing to an HSA before going on Medicare

Forum|Forum|4 years ago
February 7, 2022
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Hi, I'm trying to understand what seems to be contradictory instructions about contributions to an HSA before going on Medicare. The IRS (Pub. 969) gives this example:

"You turned age 65 in July 2020 and enrolled in Medicare. You had an HDHP with self-only coverage and are eligible for an additional contribution of $1,000. Your contribution limit is $2,275 ($4,550 × 6 ÷ 12)."

Sensible enough. And it's literally my situation: I'll be enrolled in Medicare in July 2022. In fact, I'm not eligible to even apply until April. However, this is what someone in Medicare.gov wrote in a chat (pardon the long quote):

"If you had a health savings account, also known as an HSA, before you enrolled in Medicare, you can keep it. After you enroll in Medicare, neither you nor your employer can contribute to your HSA, but you can continue using the money in your HSA to pay for medical expenses. [...] To avoid a tax penalty, all contributions to your HSA should stop at least 6 months before you enroll in Medicare."

That last sentence is the kicker. Most of the discussions I've seen concern people who apply for Medicare late (without clarification whether they contributed before or after official enrollment). Some discussions even say you must stop contributing six months before going on Medicare. But if I contribute the maximum to my HSA before I become eligible for Medicare, and for that matter before I can even apply, why would I be penalized? The IRS publication says nothing about this. Or is the Medicare.gov statement just overly cautious? (I tried asking the IRS but apparently right now they don't have anyone at all who's covering these questions)

The issue is concerning because I made a contribution in January and planned to bring myself up to the max (this year, $2325) this month -- and I've already spent a good portion of my January contribution, so withdrawing it could be a serious mess.

Best answer by Opus 17

As I turn 65 this July, I come under Medicare coverage this July 1, which I take to mean July 1 is my effective date. Is that incorrect? I'm not eligible to apply, i.e. register into their system, until April 1, and I plan to apply that month -- but as I understand it, that will not be the effective date, July 1 is, and I won't be covered by Medicare until July 1 whether I apply on April 1 or June 30. I intend to make my last allowed contribution to the HSA this month (I have plenty of medical bills to pay right now), which is before I can even apply for Medicare, regardless of the Medicare effective date. If the IRS is likely to impose a penalty because I contributed to my HSA four months before my Medicare coverage starts and over a month before I can apply, but within Medicare's six-month lookback, please explain, because it's exactly the question I raised. Otherwise, I understood you as saying earlier that the lookback won't come into force if I apply before July 1, and as it happens I'll have already contributed my maximum before that.

@sploosh

I was confused, because I first thought you were talking about turning 65 in becoming eligible for the first time, and then you mentioned the six month look back rule. The six month look back rule only extends your Medicare enrollment backwards six months if you delay from your first eligibility.

If you turn 65 during the month of July 2022, your Medicare coverage will start July 1, 2022. That means you would have six months of eligibility during 2022 to contribute to an HSA, so your contribution limit is 6/12 of $3650 +6/12 of the $1000 catch-up contribution amount for a total of $2325. It doesn’t matter when during the calendar year 2022 you actually make the contribution. It’s the dollar amount that counts, not the exact date of the contribution, as long as the contribution occurs during the 2022 tax year.

Opus 17

Level 15

The problem is that most people don't understand their Medicare effective date. I just helped someone a couple days ago who went on Medicare in May due to disability, but the effective date was 2/1/21, so they became ineligible for an HSA earlier than they expected and had an excess contribution.

If you understand the Medicare rules are are confident that your effective date will be 7/1/22, then you can contribute 6 months worth (6/12ths) of the annual maximum (depending on if you have a single or family HDHP).

Also be aware that in many cases, your spouse may be able to contribute to their own HSA if they are covered by your policy, even if they are not the named insured, and even after you are ineligible. HSAs can be opened at many banks and brokers, they don't have to be sponsored by an employer.

splooshAuthor

Level 2

Thanks. So, since I'll be making all my HSA contributions before July and won't contribute more than what the IRS allows, Medicare won't penalize it based on the 6-month lookback. (I'm single, so spousal rules aren't involved.)

Opus 17

Level 15

@sploosh wrote:

Thanks. So, since I'll be making all my HSA contributions before July and won't contribute more than what the IRS allows, Medicare won't penalize it based on the 6-month lookback. (I'm single, so spousal rules aren't involved.)

Thats not what I said. Medicare won't penalize your HSA contributions but the IRS might. The question is when is your Medicare effective date? If you take Medicare 3 months before up to 3 months after your 65th birthday, Medicare will be effective on the first day of the month of your birth. If you delay taking Medicare, then Medicare will have a 6 month lookback.

Now, you said "In fact, I'm not eligible to even apply until April." If you turn 65 in April, then your effective date will be April 1, even if you wait until July to sign up. That means you are only HSA eligible for 3 months (Jan-March). Or, maybe you turn 65 in July, which means you can contact Medicare to start enrollment in April. In that case your start date will be July 1. But then, your reference to a 6 month lookback is confusing, because the lookback only applies to people who delay taking Medicare.

If you are are older than 65, and you did not sign up for Medicare when you turned 65, then Medicare will apply a 6 month lookback whenever you enroll. If you apply in July 2022, your Medicare effective date will be January 1 (or maybe Feb 1) and you won't be HSA eligible.

What I said was, "if you know what your effective date will be", but maybe you need more clarification on that first.

Also (and slightly unrelated), if you are eligible to make HSA contributions in 2022, it doesn't matter when you make them, as long as you don't go over your limit. You could wait until you get your Medicare card, see what your coverage start date is, and then make any HSA contributions if allowed, up to your limit.