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Must Employees' HSA Contributions Stop When They're Medicare-Eligible?
Question: Our company offers a high-deductible health plan and allows employees in that plan to make pretax contributions to a Health Savings Account (HSA). Some of our employees are approaching age 65 and will soon become eligible for age-based Medicare Part A. Are they required to stop contributing to an HSA when they reach age 65?
Answer: Not necessarily. Medicare Part A eligibility alone doesn't disqualify someone from contributing to an HSA. However, individuals cannot make HSA contributions for any month in which they're both eligible for and enrolled in Medicare (in other words, 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 — a separate application isn't required. Other individuals must file an application to be entitled to Medicare: for example, working individuals who are eligible for Social Security benefits but haven't applied for them. Thus, Medicare entitlement may be delayed if the receipt of Social Security benefits is delayed.
Employer Due Diligence
IRS guidance regarding HSA eligibility doesn't mandate employers to determine whether their employees are entitled to Medicare and, therefore, ineligible for HSA contributions. Nevertheless, it seems prudent for employers 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's ineligible to make HSA contributions, the HSA will be disregarded for tax purposes and any pretax contributions will be treated as taxable income. (Because the HSA is disregarded, HSA-specific excise taxes won't apply.) But if contributions are made into a pre-existing, valid HSA, correction will be more complicated and excise taxes may be incurred if the contributions aren't 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 this situation, the employee may receive up to six months of retroactive Medicare coverage for the period preceding 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 be ineligible 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.
Preparation Is Key
Offering a high-deductible health plan with an HSA is an increasingly popular delivery vehicle for employer-provided health care benefits. But, as you can see, it brings some challenges when employees reach a certain age. Work with your benefits advisors to handle these complexities.
*Securities offered through 1st Global Capital Corp. Member FINRA, SIPC. Investment advisory services offered through 1st Global Advisors, Inc. We currently have individuals licensed to offer securities in the states of AL, AZ, CA, CO, CT, FL, GA, HI, ID, IL, IN, KY, MI, MS, MO, NV, NJ, NC, OH, RI, TN, TX, WA, WV and WI. This is not an offer to sell securities in any other state or jurisdiction.