Coordinating Retroactive Medicare Coverage and Health Savings Accounts (article)
Under the current eligibility rules for contributing to health savings accounts (HSA), an individual becomes ineligible to make an HSA contribution on the first day of the month that he/she becomes covered by Medicare. If the individual is merely eligible for Medicare, but has not yet enrolled in Medicare, then HSA contributions can continue to be made. However, this could become problematic in the event that Medicare coverage is made retroactive.
The Internal Revenue Service addressed this matter in a recent pronouncement (Information Letter 2016-0082). This Letter affirms that when an individual delays applying for Medicare and that Medicare coverage is made retroactive, then the individual must figure out how many months of the year in question he/she is actually HSA-eligible. The HSA contribution for that year must be pro-rated accordingly. If, for example, an individual enrolls in Medicare during October, 2017 and if the Medicare coverage is made retroactive to April 1, 2017, then the individual would only be HSA-eligible for three months of 2017 (January, February and March). In this scenario, the maximum contribution that a single individual could contribute for the 2017 tax year would be $1,099.98, which equates to one quarter of the annual statutory limit of $3,400, plus one quarter of the $1,000 catch-up contribution. If the individual in this scenario ends up contributing too much to the HSA, then he/she could withdraw the excess monies, together with earnings thereon. As long as this is accomplished prior to the individual’s tax filing due date with extensions, then no excise tax would be imposed; however, withholding of employment taxes would be assessed.
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