HSA contributions while on medicare

[Peacheykeen]

My husband went on medicare in 2022.  In 2023 we started a HSA with pretax payroll deductions.  I did not discover until last fall, that you could not make contributions to a HSA if on Medicare.  We had already done a distribution of some of money.  I had the 2024 contributions withdrawn as incorrect contribution and am amending my taxes for that year, to show as income.  There is less than the amount of 2023 left in the HSA due to the distribution we used in 2024 to pay my medicare premium.  Can I just use the balance to pay my husbands medicare premium now and the balance will be zero and would close the HSA. Then how do I amend taxes for 2023?  Do I just put in a form showing the distributions were made from improper contributions and there'd be a form to show it as taxable income? I know there would be a penalty involved, 6% I believe.

[BillM223]

You say that your husband went on Medicare. Who had the HDHP coverage? You? or him?

It is perfectly OK for you to have HDHP coverage and contribute to an HSA - your husband being on Medicare does not affect that.

When you go through TurboTax, enter your HDHP coverage, and conflicting coverage (like Medicare), and your contributions. TurboTax will calculate your "excess contributions, and ask if you want to withdraw it.

NOTE: as soon as TurboTax detects an excess contribution, it will add the amount of the excess to Other Income. YOU SHOULD NOT DO THAT YOURSELF. You would just incorrectly double the amount of income to be added.

So for 2023, when you amend your return, let TurboTax do all the work. Note that you cannot withdraw the 2023 excess any longer because it needed to have been done by April 15, 2024. This excess will therefore be carried over to 2024. You will be charged 6% of the LESSER of the carryover amount or the value of your HSA at the end of the year. This means that you will have to look up the value of your HSA at the end of 2023. This also means that if you do what you said and exhausted the funds in the HSA, from than on, the carryover penalty would be zero.

Also, you can (and should) have your own HSA - you just need to arrange HDHP coverage. Note that if your husband is still working even while on Medicare, you can be covered on that policy, and you could contribute to YOUR HSA even though your husband could not.

[Peacheykeen]

It was my husband's HSA.  He went on Medicare April 2022 and we started the HSA deductions from his check in February 2023, not knowing wasn't allowed.  I started Medicare Fall of 2024 and learned this and we stopped his deductions at work immediately.  So, if I go ahead and use the bal in HSA now, to take down to $0, then when amend 2023, I say on Turbo Tax the amount that was contributed and incorrect, and it will list it as income to be taxed and a penalize the amount at 6% for 2023.  Additional penalty for 2024?

[BillM223]

You will be assessed the 6% penalty for 2023 on the excess amount. This amount will carry over to 2024 as a personal contribution. The excess amount will be added to Other Income on your 2023 return.

The same will happen on your 2024 return.

As I said, the 6% penalty on the carryover of excess HSA contributions is 6% of the LESSER of the carryover amount OR the value of your HSA at the end of the year. For 2024 the value of your HSA will be reported in box 5 of your 5498-SA.

Once you have spent your HSA down to zero, then there will be no penalty. 

The IRS has not addressed the situation of having both spouses on Medicare so they will never be able to contribute to an HSA again, yet they have no cash in the HSA but have a carryover amount to apply to their contributions. It is a situation that you cannot fix.

In theory, you would be required to add form 8889 to your return every year, just to show that you have the carry over but cannot do anything about it. I suspect that most taxpayers will stop reporting the 8889 in this case.