How Medicare rules affect HSA eligibility after age 65

Americans age 55 and over hold an estimated $52 billion in their health savings accounts (HSAs), according to HSA investment company Devenir’s most recent research. It’s no surprise that as clients approach Medicare enrollment, they are increasingly interested in continuing to fund their HSAs to provide for current and future health care expenses.

Unfortunately, the guidance on how HSA contribution rules intersect with Medicare enrollment is limited, with many clients receiving conflicting answers from their HSA providers, Medicare and Social Security representatives, and even their own tax professionals. The purpose of this article is to provide clarity on three of the most common questions that JofA readers have been asking in response to a prior article, “Medicare’s Tricky Rules on HSAs After Age 65,” JofA, July 1, 2021.

Q. I’M ENROLLING IN MEDICARE BUT CONTINUING TO WORK AND KEEPING MY EMPLOYER-BASED HEALTH PLAN FOR MY SPOUSE/FAMILY. CAN I STILL CONTRIBUTE TO MY HSA?

A. The short answer is no, but your spouse covered under your health plan may still be able to fund their own HSA once you become ineligible.

Once you enroll in Medicare, you lose your eligibility to contribute to an HSA, but your spouse (and/ or young adult children) covered under your high-deductible health plan (HDHP) could contribute up to the family amount to their own HSA.

Let’s break it down with an example.

Kevin turns 65 on March 18 and, while continuing to work, is enrolling in Medicare, as his employer’s plan is not considered qualifying coverage for purposes of deferring Medicare Part B enrollment. His Medicare enrollment date would be effective March 1, meaning he would now have other health coverage as of that date, rendering him ineligible for HSA contributions after March 1. However, he plans to continue family coverage of his HDHP through his employer so that his spouse, Winnie, who is 62, is covered until she reaches Medicare eligibility.

Based on the eligibility rules, Kevin would only be permitted to make a contribution to his own HSA for two months of the year, or $1,592 ($8,550 is the family limit for 2025, plus $1,000 is the catch-up amount for individuals age 55 and older, so $9,550 × 2/12 = $1,592). But what about Winnie? For the year that Kevin enrolls in Medicare, she can fund her own HSA with the remaining balance of $7,958 and then make a full family-level contribution in the subsequent years until she also enrolls in Medicare.

Why a full family-level contribution? This is often confusing for clients because they assume that if Kevin is no longer eligible to contribute to his HSA, Winnie must use the individual coverage contribution limits. However, the type of HDHP in place (family or individual coverage) dictates the HSA contribution limit. Since Kevin is the covered individual, he must elect family coverage in order to include Winnie, so she would have family-level contribution limits based on the rules.

Another way to think of it is to examine the intent of having different contribution levels for different coverage levels. Practically speaking, since family coverage health care plans have higher deductible and co-insurance limits (typically double that of individual coverage), it would make sense that a person subjected to those higher amounts would be able to make a higher contribution to the HSA intended to assist with the out-of-pocket expenses of the covered family members.

Winnie’s contribution amount is determined by the following facts:

• She is covered by an HDHP and has no other health coverage.
• She is not enrolled in Medicare (even though her spouse is, that coverage doesn’t affect her).
• She can’t be claimed as a dependent on anyone else’s tax return.
• She has family coverage, and the 2025 contribution limit for that coverage level is $8,550.
• She is 62, so she is eligible for the $1,000 catch-up contribution.
• She is married, and she adjusts her contribution for any eligible amount her spouse contributes to their HSA in each tax year.

In short, Kevin and Winnie will still enjoy full HSA contribution limits until Winnie enrolls in Medicare; they will just have to change the contributions from Kevin’s account to Winnie’s, as there is no such thing as a joint HSA. The good news is that spouses may use funds in each other’s accounts without limitation, regardless of age or other coverage.

Source for this answer: The best available official source is IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, which doesn’t address the question directly but says:

To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements.

• You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
• You have no other health coverage except what is permitted under Other health coverage, later.
• You aren’t enrolled in Medicare.
• You can’t be claimed as a dependent on someone else’s [tax return in the year of the contribution].

If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse’s coverage doesn’t cover you.

Additionally, with regard to figuring the amount of the contribution, the IRS publication states:

The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual.

Q. CAN I STILL CONTRIBUTE TO MY HSA IF I CONTINUE TO WORK AND MY SPOUSE ENROLLS IN MEDICARE?

A. This may seem like the same question as above, except in this case the person who is not yet 65 is the one who carries the employerprovided health insurance.

The short answer to this question is yes, you may still contribute to your HSA even if your spouse enrolls in Medicare, as long as you remain an eligible individual for an HSA, but the ultimate question is how much can you contribute? That will depend on the type of coverage you maintain for yourself once your spouse enrolls in Medicare.

In some cases, the policyholder may continue family coverage so that their spouse and/or other eligible family members may continue to enjoy the private insurance coverage, for a variety of reasons. In that case, the 2025 HSA contribution limit is the family amount, or $8,550 (plus $1,000 if age 55 or older), even if other individuals covered on the plan have other coverage. They would be ineligible for HSA contributions, but the policyholder would remain HSA-eligible.

In other cases, the policyholder may opt to change their coverage to individual coverage once their spouse is enrolled in Medicare to lower their premium, in which case the contribution limit would be the individual amount, which is $4,300 for 2025 or $5,300 if 55 or older. If this change happens midyear, the contribution amount could be prorated for the months of family coverage vs. individual coverage.

Q. WHAT DO I DO IF I CONTRIBUTED TO MY HSA AFTER MY ELIGIBILITY STOPPED?

A. The most important thing to know here is that HSA contribution limits are figured on a calendartax- year basis, with individuals having until the April tax filing deadline to make additional contributions or through their tax filing deadline (including extensions) to withdraw excess amounts to maximize deductible contributions without going over the limit.

In other words, it’s less important when funds are contributed within the tax year and more important how much in total goes into the account in a year of partial eligibility.

For example, Bob, 68, retires on Dec. 1, 2025. In November, when he applies for his Social Security and Medicare benefits, he learns about the Medicare six-month lookback rule, which deems his enrollment in Medicare Part A to be as of May 1, 2025 (six months prior to the month of his application). Unaware of this rule until his application, he has been making monthly contributions to his HSA via payroll in the amount of $150 and has made 10 monthly contributions ($1,500) when he first becomes aware of his earlier ineligibility.

He immediately contacts the payroll department to stop his contributions for November and December, thinking that he should have stopped at the end of April, when his eligibility ended. This is incorrect, though, because the amount Bob can contribute to his HSA for 2025 is prorated based on the number of months he is eligible, not when his eligibility stopped. Since he had four months of eligibility and the total contribution limit for 2025 would be $5,300 for someone 55 or older, he can technically put up to $1,767 into his HSA ([$5,300 ÷ 12] × 4). Bob can actually put another $267 into his HSA by April 15, 2026, and still be in compliance.

WITHDRAWING EXCESS CONTRIBUTIONS

A taxpayer’s excess contributions to an HSA (the taxpayer’s actual contributions less their deductible contributions to the HSA) are potentially subject to the Sec. 4973 6% excise tax on excess contributions. However, a taxpayer can possibly avoid the excise tax by withdrawing the excess contributions by the due date (plus extensions) of the taxpayer’s return.

For example, assume the same facts as the prior example, except Bob makes pretax contributions through payroll deductions of $400 per month for a total of $4,000. Bob therefore has excess contributions to his HSA of $2,233 ($4,000 actual contributions less $1,767 of deductible contributions).

As long as Bob withdraws the excess contributions and any earnings on the excess contributions prior to the due date (including extensions) of his 2025 tax return, includes the withdrawn contributions in income as “Other income” on his 2025 tax return, and includes the earnings on the withdrawn contributions as “Other income” on his tax return for the year he withdraws the contributions and earnings, the withdrawn contributions will be treated as if they had not been made. Accordingly, they will not be subject to the 6% excise tax on excess contributions.

If instead Bob contributes $4,000 to his HSA in January 2025 through direct deposit, as long as Bob withdraws the excess contributions and any earnings on the excess contributions prior to the due date (including extensions) of his 2025 tax return, and he includes the earnings on the withdrawn contributions in “Other income” on his tax return for the year he withdraws the contributions and earnings, the withdrawn contributions will be treated as if they had not been made and they will not be subject to the 6% excise tax on excess contributions. Bob is not required to include the withdrawn contributions in income in 2025 because he did not receive a tax benefit from their contribution in January 2025.

Interestingly, if Bob has already spent the funds on qualified medical expenses before his tax filing deadline (including extensions), the funds will be treated as withdrawn. The reason is that, as long as the funds are removed from the account prior to the tax filing deadline (including extensions), regardless of whether they are removed by a return of contributions by the HSA provider or by a distribution, the end result is the same. The IRS really only wants to be sure that ineligible funds are not continuing to be held in HSAs going forward and taxpayers are enjoying only the deductions for which they are eligible.

If Bob has already spent the funds, the provider may request proof of transactions before issuing a corrective Form 5498- SA, HSA, Archer MSA, or Medicare Advantage MSA Information, so that the contribution amount shown in box 2 of the form matches his eligible amount for the year.

If Bob does not withdraw the excess contributions until after the due date (including extensions) of his 2025 return, then he will need to report the excess contributions (or his account balance, whichever is lower) on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to calculate a 6% excise tax on the excess contributions.

IT ALWAYS COMES BACK TO THE RULES

When guiding clients on HSA contribution eligibility and amounts, the simplest guidance is to always come back to the rules, remembering that they apply only to the HSA holder/contributor and not to other individuals who may be covered on the same health plan.

This is also why the so-called super HSA allows young adults who are still covered by their parent’s HDHP but no longer tax dependents to fund their own HSA up to family limits, even when the parent with the coverage may also contribute the family amount to their HSA. Because the young adult can’t be claimed as a tax dependent on someone else’s tax return, and assuming they meet all other eligibility requirements, they may open and fund their own HSA up to the family limit.

As HSAs continue to rise in popularity and usage, CPAs will need to be confident in their ability to assist clients with maximizing the tax savings offered by these accounts. One way is by getting clear on the rules for eligibility in order to guide clients to full usage.

About the author

Kelley C. Long, CPA/PFS, CFP, is a personal financial coach and consultant in Arizona. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpacima.com.

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AICPA & CIMA MEMBER RESOURCES

Article

“Medicare’s Tricky Rules on HSAs After Age 65,” JofA, May 16, 2023 

Podcast episode

“How Medicare Enrollment Impacts HSA Contributions,” PFP Section podcast, March 10, 2022 Video

“Health Savings Accounts: Beyond the Basics,” May 21, 2023 (exclusive to PFP Section members)