HSA

[Zzz2024]

HSA - My employer and I contributed $1500 after I applied for Medicare Part A.  How do I calculate my tax liability and penalty for nit stopping contributions on time?

[AmeliesUncle]

Let's back up a bit.  There isn't necessarily a problem for contributing after you get Medicare.  The problem is that getting Medicare (or other non-qualifying health insurance) changes the amount you are allowed to contribute for the year.

When exactly did Medicare start?  How much was contributed to the HSA for the year?

[Mike9241]

there is another tricky rule if you applied for Medicare after reaching 65. There is a six-month lookback period (but not before the month of reaching age 65) when enrolling in Medicare after age 65. Note that the month of application is what is used to calculate the six-month lookback, not the month the applicant wishes to begin benefits

[Zzz2024]

So, here's where I went wrong.  My intent was to start receiving SS benefits at age 68 (born Jan 1956).  I started my application in June 2023 (just to learn what I'd need to complete) but did not submit until Oct 2023 hoping to start receiving SS in Jan 2024.  They backdated to Dec 2022 (6 months from start of application, not 6 months from application submission.  It's all my misunderstanding of some illogical rules not shared properly by IRS or Social Security.  So, what will my tax liability and penalty be.  Will the contributions just be taxed as income plus 6% penalty on the amount disupursed for medical bills?

[Zzz2024]

Medicare says my start date is Dec 2022 and my employer and I contributed around $1500 in 2023.  I also used it all on medical expenses in 2023.

[AmeliesUncle]

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@Zzz2024 wrote:

Medicare says my start date is Dec 2022 and my employer and I contributed around $1500 in 2023.  I also used it all on medical expenses in 2023.

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The HSA will be taxable (so if it was subtracted from your W-2 income, it will be added to your tax return).

Are you saying your HSA balance at the end of 2023 is $0?  If so, there won't be any penalty.

TurboTax should correctly handle this situation.  Just answer all of the questions about the HSA and it should handle it all correctly.

[Zzz2024]

My balance is not $0.  However, I spent more than I contributed in 2023 (during the time they show I was covered by Medicare Pary A). I have a substantial HSA balance from previous years of contributions.  Good to hear Turbotax can handle.

[Mike9241]

for 2023 the excess will be income. In addition, there will be a 6% penalty (form 5329)based on the lower of the excess contribution or the fair value of your HSA on 12/31/2023 unless you withdraw the excess and earnings thereon by the due date of your return. The way form 5329 works, only taxable ( non-qualified) 2023 distributions are applied to any 2022 excess, not to any 2023 excess) form 5329 line 44. in 2024 and subsequent years non-qualified distributions will be applied to the 2023 excess not qualified distributions so failure to withdraw that excess in 2024 will result in a 6% penalty every year. Non-qualified distributions are subject to income tax 

[Zzz2024]

Would this be an easier/cleaner option?  Ask my employer to request the HSA contributions be returned and then my employer issues me a 1099 for the returned amount?  And, make sure my HSA tax documents report accordingly (less the amount returned).  This was a suggestion from Social Security.