Health Savings Account (HSA) Contributions for Medicare-Eligible Employees
Many organizations offer High Deductible Health Plans (HDHP) in conjunction with an HSA (Health Savings Account) as a part of their employee benefit programs, and at some point for employers the issue will arise of employees approaching age 65 that are Medicare-eligible, and if they can still make pre-tax contributions to their HSA. As with many areas of insurance, the answer isnâ€™t a straight-forward â€śyesâ€ť or â€śnoâ€ť.
Medicare Part A eligibility alone does not disqualify an individual from contributing to an HSA upon attaining age 65. However, if an individual is both eligible and enrolled in Medicare (actually entitled to Medicare benefits), that individual cannot make HSA contributions for those months during that eligibility/enrolled period.Â Their monthly HSA contribution becomes zero.Â If an individual begins receiving Social Security benefits based on their age, Medicare entitlement may occur automatically since there is not a separate application.Â For individuals who are working at age 65, eligible for Social Security benefits, but have yet to apply â€“ they must file an application in order to be entitled to Medicare.Â Therefore, their Medicare entitlement could be delayed if their receipt of Social Security benefits is delayed.
It is important to keep in mind, employers are not responsible for determining whether or not their employees are entitled to Medicare, and ineligible for HSA contributions according to the IRS guidance on HSA eligibility. However, it is still wise for employers to determine if an employee is entitled to Medicare as part of the enrollment process for its HSA program.Â As an example â€“ if employee â€śJDâ€ťÂ aged 65 and not eligible to contribute to an HSA, newly creates an HSA, it (the HSA) will be disregarded for tax purposes, and any pre-tax contributions will be treated as taxable income.Â Since the HSA is disregarded, those specific excise taxes will not apply.Â However, corrections will be more complicated for any contributions made toward a preexisting, valid HSA.Â Without timely distribution of those contributions, excise taxed may be incurred.Â This could happen, for example, if an organization is rehiring former employees.
As we continue down this path of â€śitâ€™s not yes or noâ€ť, there is another tricky facet to the Medicare/HSA interaction â€“ when an employee delays applying for Social Security, continues working past age 65 (or has a spouse that is working), and is covered by an employer-provided group health plan. Â In this example, employee â€śLPâ€ť turned 68 in July, and signed up for Medicare.Â â€śLPâ€ť will not be eligible to make any HSA contributions for the preceding six (6) months, effectively precluding any HSA contributions for the calendar year.Â With this situation, the employee may receive six (6) months of retroactive Medicare coverage for the period prior to the month in which the application for benefits is made.Â That retroactive period of coverage will be a period of Medicare entitlement that precludes HSA contributions for these months.Â If contributions were already made for that period, they would need to be distributed in a timely manner to avoid the excise tax on excess contributions.
Again, employers do not bear the brunt of responsibility for determining whether or not their employees are entitled to Medicare, and ineligible for HSA contributions according to IRS guidance on HSA eligibility. However,Â if you as the employer determine who is entitle to Medicare in an upcoming year, there can be less complicated corrections to be made, if any.
For more information regarding Employee Benefits and Health Savings Accounts for your organization, or to speak with one of our advisors, email Billy MacNair, Vice President at Brown & Brown Benefit Advisors at firstname.lastname@example.org.