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.

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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.

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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.)

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splooshAuthor

Level 2

@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.

Thanks, I'm glad we got that sorted out. The crucial element, then, is to sign up for Medicare within the six-month window (three months before and three months after my effective date). The six-month lookback is a concern only if I delay signing up. Thus Medicare's statement about the six-month rule, which is what alarmed me, is basically overkill or poorly stated.

I raised my question because Medicare's statement seemed to override the IRS's example and caused me to wonder what the IRS really requires. Some of the confusion in our discussion about it was probably caused by my mixing two different issues: what the IRS requires, and what I plan to do.

As I see it, for purely practical reasons I'd simplify my life if I sign up for Medicare before July 1. My reason for making the HSA contribution soon is likewise merely logistical: get the money into the HSA, exhaust it as the source to pay my medical bills, and then switch to credit cards. Doing things that way is my preference and will satisfy the IRS. It's the K.I.S.S. principle: Keep It Simple and Straightforward.