The IRS recently issued an information letter detailing the interaction between an individual’s retroactive enrollment in Medicare Part A and eligibility for HSA contributions. Information letters are not official guidance, but they do provide insight into how the IRS views certain issues.
As background, individuals are only eligible for HSA contributions for a month if they have qualified HDHP coverage on the first day of that month and no impermissible coverage (i.e., non-HDHP coverage). An individual who enrolls in any part of Medicare becomes ineligible for HSA contributions on the first day of the month in which Medicare is effective.
Individuals aged 65 or older are eligible to enroll in Medicare. If they enroll during the three-month period before their birthday, Medicare is effective on the first day of their birthday month. As the letter explains, if an individual enrolls after that, Medicare Part A is effective retroactively to the first day of the birthday month or 6 months, whichever is less. Please note that this retroactive coverage rule only applies to those who receive free Medicare Part A. Those who have to pay a premium for Medicare Part A are restricted in when they may enroll and receive Part A.
Thus, an individual enrolling in free Medicare Part A after his/her 65th birthday could be enrolled in Medicare up to 6 months retroactively. If the individual contributed to an HSA during any month in which Medicare was in effect, the funds are considered excess contributions. The excess contributions will need to be withdrawn from the account by April 15 of the following year (or later if the individual files an income tax extension). The amount will need to be reported as taxable income. If the excess contributions are not withdrawn in a timely manner, they will be subject to a six percent excise tax in addition to income tax.
Although this information letter is not presenting new information, we thought it important to highlight the IRS’ view of this issue so that employers can keep this in mind when administering their HSAs.
IRS Information Letter »