HSA Contribution/Medicare

[sunnyboy2]

My husband and I both work for the same company, he full-time and me part-time.  I am on his HDHP insurance as a dependent.  We are both over 60 and he contributes the maximum amount to his HSA.  In June of 2019, he went on Medicare while both of us stayed on the HDHP for the entire year.  He contributed $3334 to his HSA ($7000+$1000/12x5) for 2019.  I opened a HSA for 2019 but what is the maximum amount I can contribute?  I come up with $2625 ($3500+$1000/12x7) but the Turbo Tax calculator shows more.  Thank You

[VictoriaD75]

Individuals are not allowed to make contributions to HSAs once they attain the age of 65 and qualify for Medicare coverage. Medicare doesn’t offer an HSA-qualified option. You can’t make contributions to your HSA for any months after you enroll in any Part of Medicare, even if you’re also covered on an HSA-qualified plan and meet all other HSA eligibility requirements. However, if you elect not to enroll in Medicare, you are still eligible to contribute to the HSA, as long as you are enrolled in a high deductible health plan.

However, if you are otherwise HSA-eligible, you can maintain an HSA. Individuals don’t have to be the medical plan subscriber to be HSA eligible. You or your spouse can then make tax-deductible contributions into their HSA, up to the family maximum if you remain covered on a family contract (even only if they are HSA-eligible). For some couples, this provision in the law allows them to continue to contribute to an HSA (and build tax-free balances for distribution in retirement) for several years after the older spouse enrolls in Medicare eligibility requirements.

In 2019, the family contribution limit was $7,000 with an additional $1,000 per qualifying spouse for taxpayers age 55-65. As your spouse is no longer HSA-eligible, your total 2019 contribution limit will equal $8,000, which is $7,000 plus an additional $1,000 for one qualifying spouse.

[dmertz · Accepted solution]

Since you were covered by a family HDHP the entire year, your maximum contribution is $1,000 + 7/12 * $7,000 = $5,083.33.

(More precisely, $1,000 + $7,000 -  your husband's 5/12 * $7,000, but the result is the same.)

[sunnyboy2]

Thank You for your detailed message.  Sorry but can you please confirm that my husband can make a maximum 2019 contribution of $3334 to his HSA and I can make a maximum 2019 of $8000 to mine?

[dmertz]

I think you were typing while I was replying with the response to the question you actually asked.  And yes, your husband's maximum contribution is $3,334.

Because your husband's catch-up is limited to 5/12 * $1,000, the total between the two of you is a bit less than the combined $9,000 you both would have been able to contribute if you were both eligible all year.

[Lonestar]

Thanks for your detailed response... but to be perfectly clear, once I went on Medicare in May of 2019 I should stopped HSA contributions? If so, I'm perplexed as to why I wasn't aware of this and seems like my HSA holder should have notified me when I was about to turn 65 (unless I just missed it).

As it is, my over-contribution is $900. Turbo Tax is suggesting I may want to withdraw that amount but it will only save $50 in taxes and I'm wondering how I will justify using it for medical expenses, unless I'm allowed to set it aside and use it in 2020. Can you speak to this issue for me? Thanks!

[dmertz]

Not everyone begins Medicare coverage the month that they reach age 65, so the HSA custodian is not responsible for limiting contributions based on that assumption that you did begin Medicare coverage at that time.

Unless resolved by a return of excess contribution before the due date of your tax return, you'll be subject to a 6% excess contribution penalty for 2019 and again every year thereafter until you receive a taxable (I.e., not used for medical expenses) distribution on the lesser of the $900 excess or the remaining balance in your HSA at year end.  Not only that, you don't get a deduction for the excess contribution (or, if the contribution was through your employer you must add it to your 2019 income), so your taxable distribution to resolve the excess will result in the $900 excess being taxed twice.  You won't be able to apply the excess as a contribution for any year after 2019 because you will never again be eligible to contribute to an HSA.  It would be a substantial financial mistake to fail to obtain a return of the excess contribution before the due date of your 2019 tax return (including extensions).

[Lonestar]

Most excellent response dmertz! Left me no doubt as to what to do. For the sake of anyone else reading this, please confirm what I'm already sure of (I think), that since the over-contribution wasn't allowed, once it's withdrawn it does not have to be used for medical expenses.

Additionally,  since I didn't know I wasn't supposed to be contributing once on Medicare, I have already contributed this year, which I will stop immediately. Will I be facing the same thing next tax season? I'm assuming I may as well go ahead and withdraw those funds?

Thanks again!

[dmertz]

A return of excess contribution by the due date of your tax return can be used for anything you want.. The tax treatment of a return of excess contribution is not affected by what you do with the money.  Of course if the excess contribution was made through your employer you must include the excess contribution in income because your employer excluded it from the amount in box 1 of your W-2 under the assumption that you were permitted to make this contribution.

Yes, the contributions you have already made for 2020 are similarly excess contributions that must be removed by return of excess contribution before the due date of your 2020 tax return separate from the return of the excess contributions you made for 2019.  You can request this as soon as you stop any new additions for 2020.

[Lonestar]

Thanks once again. Your input is priceless. I have already called my HSA, received and processed the Correction paperwork, as there is no option to withdraw using the online app and they have to do it so any tax forms will reflect it. 

[rep54]

I am confused by the comment "However, if you elect not to enroll in Medicare, you are still eligible to contribute to the HSA, as long as you are enrolled in a high deductible health plan."  I elected to delay enrollment until September 2020 because I had a HDHP but Medicare backdated enrollment to July 2019 when I was first eligible.  Since I was covered by a HDHP you are saying I could continue to contribute to my HSA during the backdated enrollment in part A?  I appreciate an insight in to this opaque issue.

[dmertz]

Because your Medicare coverage was backdated to July 2019, you are not eligible to have made any HSA contributions with respect to any month after June 2019.

From IRS Pub 969:

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.