I turned 65 in April and am retiring unexpectedly. Are my 2020 HSA contributions considered excessive, since I am still in my initial Medicare eligibility period?

[Opus 17]

You are not eligible to contribute to an HSA for any month that you are covered by any other insurance, including Medicare.  I suppose you do not have to enroll in Medicare when you turn 65, but most people do because there are penalties for enrolling late.  Assuming that you did enroll in Medicare, then your HSA contributions for 2020 are limited.  If you had single coverage, your annual maximum is $3550, plus $1000 catch up provision for being over age 55.  That works out to $379.16 for each month that you were enrolled in an eligible HDHP with no other healthcare coverage.  If you were enrolled in a family HDHP, then your annual maximum contribution is $7100 plus $1000 catch-up contribution, or $675 per month of eligibility.  Eligibility is determined by what kind of insurance coverage you have on the first day of each month.

Also, if you were only enrolled in a qualifying HDHP in 2019 for part of the year, but made maximum contributions using the last month rule, you will owe an additional penalty for excess contributions since you do not meet the test to use the last month rule for 2019 if you enrolled in Medicare during 2020.

[BraveFalcon]

Thank you for the reply! My company is mandating an August 1st retirement date. So, I stopped my HSA contributions immediately upon finding out. They advised me to signup for Medicare now, with an August 1 start date. My HDHP coverage will end on July 31st and they don’t want me to be without insurance. I found one IRS bullet point that states “employees who have delayed their Medicare enrollment beyond their initial Medicare eligibility (age 65), may not make contributions to an HSA in the sic months prior to enrolling in Medicare”. This was what made me wonder, because I am still in my initial Enrollment eligibility right now.....Jan-March, April, May-July. Make sense? Thanks again!

[Opus 17]

It’s talking about backdated enrollment in Medicare.  

Enrolled in Medicare.

Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. This rule applies to periods of retroactive Medicare coverage. So, if you delayed applying for Medicare and later your enrollment is backdated, any contributions to your HSA made during the period of retroactive coverage are considered excess.

I’m not quite old enough (yet) to understand the odd details of Medicare enrollment.  If you enroll effective August 1, then you seem to be eligible to make 7 months worth of contributions.  However, if you enrolled August 1 but your enrollment was backdated to (for example) February 1, then you would only be eligible to make 1 month of contributions.  I don’t know enough about Medicare to know when someone’s enrollment might be considered retroactive.  Hope this helps.  

[BraveFalcon]

Well, I can tell you it is way more complicated than it needs to be. Little nuances like this that carry big consequences are all over the place. My approval only took one week, but my Verification letter is where they would probably get me. It states that my Part A coverage started April 2020. Who knew? Even though I had HDHP coverage from Jan-July, they backdate it in order to stiff you some other way. The only reason I did the HSA was I planned to work until July 2021.  But then the Covid 19 pandemic changed everything. Anyway, thank you so much for responding!!!

[Opus 17]

So you have 3 months of eligibility to contribute to an HSA and the rest is excess.  Contact the HSA bank to remove the excess and any earnings earned by that excess.  This is not a normal withdrawal, and will probably require a specific form.  

[BraveFalcon]

Will do! Appreciate the info again!!! 

[klingram]

Your HSA provider should be able to give you an excess contribution distribution form, and help you determine how much to ask for. I had my contribution, my employer's contribution, and a very small amount of interest. I had stopped my HSA but not soon enough. They advised me to go 6 months back from the date I will start Medicare, and to include both my contribution and my employer's contribution in the amount to ask for. They would adjust as needed to remove the excess interest paid. The HSA account provider will send me the necessary forms to file with my tax return (to pay income tax as usual, since it is the pre-tax amount that I am getting back). However ...  I have also found many indications that it should be 6 months before I apply for Medicare, not before I actually start, so I will back it up another couple of months to ensure I don't get a penalty. 

[dmertz]

It's now far to late to resolve an excess 2020 HSA contribution by obtaining a return of excess contribution before the due date of the 2020 tax return (including extensions).  Any excess that has carried forward from 2020 until now must be corrected by making a regular taxable HSA distribution or simply spending the HSA down to zero on qualified medical expenses.  An HSA distribution is made taxable by not applying it to qualified medical expenses.  (For those under age 65 at the time of the taxable distribution, the distribution is also subject to an additional 20% tax.)