QUESTION: Our company offers a high-deductible health plan and allows employees in that plan to make pre-tax HSA contributions. Some of our employees are approaching age 65 and will soon become eligible for age-based Medicare Part A. Must they stop making HSA contributions when they attain age 65?
ANSWER: Not necessarily. Medicare Part A eligibility alone does not disqualify an individual from contributing to an HSA. However, individuals cannot make HSA contributions for any month in which they are both eligible for and enrolled in Medicare (i.e., actually “entitled” to Medicare benefits). For those months, their monthly HSA contribution limit drops to zero. Medicare entitlement based on age may occur automatically if an individual begins receiving Social Security benefits (i.e., a separate application is not required). Other individuals must file an application in order to be entitled to Medicare (e.g., working individuals who are eligible for Social Security benefits but have not applied for them). Thus, Medicare entitlement may be delayed if the receipt of Social Security benefits is delayed.
IRS guidance regarding HSA eligibility does not make employers responsible for determining whether their employees are entitled to Medicare and thus ineligible for HSA contributions. Nevertheless, it seems prudent for the employer to ascertain whether an employee is entitled to Medicare as part of the enrollment process for its HSA program. If an HSA is newly created for an employee who is not eligible to make HSA contributions, the HSA will be disregarded for tax purposes, and any pre-tax contributions will be treated as taxable income. (Because the HSA is disregarded, HSA-specific excise taxes will not apply.) But if contributions are made into a preexisting, valid HSA, correction will be more complicated and excise taxes may be incurred if the contributions are not timely distributed. (This situation could occur when rehiring former employees.)
One especially tricky aspect of Medicare’s interaction with HSA eligibility comes into play if an employee delays applying for Social Security, continues working past age 65 (or has a spouse that is still working), and is covered by an employer-provided group health plan. In that situation, the employee may receive up to six months of retroactive Medicare coverage for the period prior to the month in which application for benefits is eventually made. That period of retroactive coverage will be a period of Medicare entitlement that precludes HSA contributions for those months. So, for example, an employee who turned 68 in July and signed up for Medicare at that time would not be eligible to make any HSA contributions for the preceding six months, effectively precluding any HSA contributions for the calendar year. If contributions were already made for that period, they would need to be timely distributed to avoid the excise tax on excess contributions.
For more information, see EBIA’s Consumer-Driven Health Care manual at Section IX.C (“An Individual Who Is Entitled to Medicare Is Not HSA-Eligible”). See also EBIA’s Group Health Plan Mandates manual at Section XXIV.C (“Overview of Medicare”).
Contributing Editors: EBIA Staff.