An IRS Information Letter released December 30, 2016 outlines the outcome of retroactive Medicare coverage for a taxpayer that has already contributed to a health savings account (“HSA”).
HSA and Medicare Rules: An HSA is a trust created or organized in the U.S. as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary. Under Internal Revenue Code (“IRC”) Section 223(b) (7), an individual is no longer eligible to contribute to an HSA when he or she is entitled to and is enrolled in Medicare. Medicare Part A coverage begins the month an individual turns age 65, provided the individual enrolls within six months of turning age 65. If the individual applies for Medicare Part A coverage more than 6 months after turning 65, Medicare Part A coverage will be retroactive to the date that is 6 months prior to the application date. In IRS Information Letter 2016-0082, the IRS holds that individuals who delay applying for Medicare and become covered by Medicare retroactively cannot make contributions to an HSA for the period of retroactive coverage.
Excise Tax: This retroactive Medicare coverage may be an issue for individuals who are retroactively covered by Medicare and have contributed to their HSA during the months they are retroactively covered by Medicare. Retroactive Medicare enrollment makes an individual ineligible to contribute to an HSA for those months. If the individual makes HSA contributions in excess of the annual limitation, the excess contributions will be subject to an excise tax under section 4973 of the IRS Code.
Avoid the Penalty: For individuals that exceed the annual limitation due to retroactive Medicare coverage, there is a way to avoid excise taxation for those excess contributions. Individuals can avoid the assessment of excise tax by withdrawing the excess contributions and net income attributable to the excess contribution from the HSA by the due date for federal tax return that applies for the taxable year in which the excess contributions were made. If the excess contribution is not withdrawn by the due date of the federal tax return, it will be subject to the excise taxes.