Medicare enrollment of an employee has several consequences – including some retroactive consequences – for the employee’s right to make contributions to a health savings account (HSA).
But many employees are unaware that Medicare coverage of the employee’s spouse does not necessarily have any effect on the employee’s right to make HSA contributions, or the amount of those contributions.
To understand why, let’s review some HSA fundamentals, starting with eligibility to make HSA contributions.
Who is eligible to contribute to an HSA?
The general rule is, to be an HSA-eligible individual (that is, an individual eligible to make HSA contributions), a person must meet the following requirements:
- Be covered under a high deductible health plan (HDHP) on the first day of a month (generally, individuals accrue the right to make an HSA contribution for a month if they’re covered under an HDHP on the first day of the month, provided they also meet the other requirements listed below).
- Have no other health coverage except coverage called “permitted coverage.”
- Not be enrolled in Medicare. This means, in general, the individual must not be enrolled in Medicare Part A. Part A is typically provided free to the recipient. Parts B & D typically require an additional premium. Note that mere Medicare eligibility, without Medicare coverage, is inconsequential
- Not be claimed as a dependent on someone else’s tax return.
HSAs and the Medicare maze: The employee’s Medicare enrollment
As noted above, HSA rules stipulate that when individuals become enrolled in Medicare they no longer accrue the right to make HSA contributions. Often overlooked are rules regarding retroactive Medicare coverage, and thus retroactive disqualification of the right to make HSA contributions.
For example, typical Medicare enrollment is often effective retroactively, for up to six months, depending on when the employee enrolls in Medicare. That means an employee who accrued the right to make HSA contributions for several months prior to his Medicare coverage might retroactively forfeit that right for some or all of those months, depending on the extent to which his Medicare coverage is retroactive.
Lockton comment: Equally misunderstood are the rules governing when and how an individual gains coverage under Medicare. For example, contrary to popular belief, people who turn 65 are not automatically enrolled in Medicare unless they also are receiving Social Security benefits. If they have not yet begun to receive Social Security, which they can elect as early as 62, they must opt in to Medicare at age 65; enrollment will not be automatic, and a Medicare card will not suddenly appear in their mailbox.
This is an important point because indefinite Medicare late enrollment penalties apply if an individual fails to elect Medicare when first eligible. The exceptions to this is if the individual is covered by his own or a spouse’s employer plan due his own or the spouse’s “current employment status,” and leaps to Medicare later, shortly after coverage under that employer plan ceases due to his or the spouse’s current employment status.
HSAs and the Medicare maze: The spouse’s Medicare enrollment
Employers aware of the rule making Medicare enrollees ineligible to contribute to their HSAs may reasonably expect an employee to reduce her HSA contributions when the employee or her spouse enrolls in Medicare. However, that is not always the case when it’s the spouse who enrolls in Medicare.
The spouse’s Medicare enrollment has no consequence on the employee’s right to make HSA contributions. After all, it’s not the employee who is now covered by Medicare, which is disqualifying coverage for HSA purposes, but rather the spouse.
If the employee continues to maintain family coverage (for example, covering herself and her spouse, who is now enrolled in Medicare, or herself and eligible children, or the entire family), the employee can continue to accrue the right to make HSA contributions up to the full family amount ($6,900 in 2018, plus $1,000 for those age 55 or older). The spouse’s Medicare coverage doesn’t affect the employee’s eligibility to make HSA contributions.
Example: Jane has HSA-qualifying HDHP family medical coverage through her employer, Acme. Her family includes her spouse, John. John turned 65 on June 1 and enrolled in Medicare Part A. Jane is not enrolled in any disqualifying, low-deductible medical coverage. Jane can continue to fund her HSA at the family level as long as she maintains family coverage, even though John is also enrolled in Medicare. It doesn’t matter that John might also be enrolled on Acme’s plan, as Jane’s dependent spouse.
Note that this rule applies for any other non-HDHP coverage the spouse might be enrolled in (i.e., not just Medicare), even if the non-HDHP coverage would cause the spouse to be ineligible to contribute to an HSA on his or her own behalf. For example, if John were enrolled in self-only coverage under a non-HDHP medical plan through his employer rather than under Medicare, Jane could still fund her HSA at the family level. That’s because Jane herself is not covered by disqualifying, non-HDHP coverage.
Lockton comment: By “family coverage” we mean any coverage tier above self-only. For example, in the HSA world, “family coverage” means employee-plus-spouse, employee-plus-children, or employee-plus-family.
Remember, this rule provides additional opportunity to fund the HSA
The fact that an employee with family HDHP coverage may be able to continue to fund her HSA up to the family level even after the spouse enrolls in Medicare is an interesting rule and obtains a happier result for the employee than might be the case were the spouse not yet enrolled in Medicare and the spouse also maintained an HSA.
For instance, if both spouses are HSA-eligible and both have HSAs, they are required to split the available HSA contribution between them, based on any allocation they choose, as long as in the aggregate they do not exceed the maximum contribution.
Presumably, many employees will elect to drop down from family to individual coverage as soon as possible when a spouse enrolls in Medicare, and in that event, will be able to fund their HSAs going forward at the self-only level. But for employees who continue family coverage, they can continue to accrue the right to make HSA contributions up to the full family limit, even if the spouse is no longer an ineligible individual based on Medicare coverage.
Depending on the circumstances, continuing at the family level and making the full family contribution to the HSA might be financially beneficial to employees.