How does Medicare enrollment affect HSA eligibility?
Individuals who enroll in any part of Medicare lose HSA eligibility, which means they cannot make or receive HSA contributions.
General Rule: HSA Eligibility
The general rule is that an individual must meet two requirements to be HSA-eligible (i.e., to be eligible to make or receive HSA contributions):
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Be covered by an HDHP; and
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Have no disqualifying coverage (generally any medical coverage that pays pre-deductible, including Medicare).
HSA eligibility also requires that the individual cannot be claimed as a tax dependent by someone else.
Medicare is Disqualifying Coverage
Enrollment in any part of Medicare is disqualifying coverage that causes an individual to lose HSA eligibility – per IRS regulations.
This means that an individual who is enrolled in Medicare Part A, Part B, Part C, Part D, or any combination thereof is not eligible to make or receive HSA contributions. Even enrollment in only the (generally premium-free) Medicare Part A hospital coverage blocks HSA eligibility.
Individuals Who Are Age 65+ May Still Be HSA Eligible
Medicare enrollment causes an individual to lose HSA eligibility. However, many employees age 65 and older delay enrollment in Medicare, and therefore may continue to be HSA-eligible.
In other words, mere eligibility to enroll in Medicare has no effect on the individual’s HSA eligibility if the individual chooses not to enroll in any part of Medicare.
The Medicare Part A Automatic Enrollment Trap: Individuals Receiving Social Security Retirement Benefits
Individuals who are receiving Social Security retirement benefits are automatically enrolled in (premium-free) Medicare Part A hospital coverage with no opt-out permitted.
Accordingly, any individual receiving Social Security retirement benefits is not HSA eligible by virtue of the automatic Medicare Part A enrollment.
The Medicare Part A Retroactive Enrollment Trap: Six Months of Retroactive Coverage
For individuals who delay enrolling in Medicare until after age 65, the Medicare Part A enrollment will be effective retroactively up to six months. This six-month retroactive enrollment in Medicare Part A will also block HSA eligibility retroactively for six months.
Individuals have two options to address the retroactive Medicare Part A enrollment causing the retroactive loss of HSA eligibility:
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Plan Ahead: Stop making HSA contributions at least six months before applying for Medicare, and limit HSA contributions during that period to the prorated amount (our team at Steinlage Insurance creates your HSA timeline during the initial phone call/Medicare consultation; or
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Correct Mistake: Work with the HSA custodian to take a corrective distribution of the excess contributions by the due date (including extensions) for filing the individual tax return (generally April 15, without extension).
Good News Reminder: HSA Can Be Used for Medicare Premiums
Although the general rule is that individuals cannot take tax-free medical distributions for premium expenses, one exception is for Medicare premiums once the individual reaches age 65.
So even though individuals are no longer eligible to contribute to an HSA upon enrollment in Medicare, individuals with a remaining HSA balance can use those funds to pay for their Medicare premium costs tax-free.
Keep in mind that individuals cannot take a tax-free medical distribution for Medicare supplement premiums, such as Medigap.
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