HSA Contribution Limits On Retroactive Medicare Coverage

You likely know the HSA contribution limits for 2017 are $3,400 for individual and $6,750 for family coverage.  You probably even know about the $1,000 catch up contribution.  But do you know what happens to your HSA limits when you involve Medicare? Let us explain.

When an individual applies for Medicare, they are covered retroactively to the month they attain age 65 or for six months (whichever is less).  This means that right off the bat, their HSA contribution is likely affected. While the retroactive coverage is generally viewed as a positive feature of Medicare, it creates questions surrounding HSA contribution limits.  However, the good news is an individual who over contributes due to retroactive coverage has the opportunity to resolve the issue.  The fix is quite simple.  As long as the individual withdraws the excess contributions by the federal tax return filing deadline, they should avoid penalty altogether.  This workaround is made even more simple since HSA holders age 65 or older can withdraw funds for non-medical purposes at any time without incurring additional tax.  If the individual does not withdraw the excess funds (and any income associated with those funds)  by the federal tax filing deadline, an excise tax will be imposed.  The most important piece to remember is the individual must treat those distributions as income for federal tax purposes (unless they were treated previously as such) or else be subject to the excise tax.

Bottom line: Medicare participants needn’t be scared of penalties associated with HSA contributions.  This situation is easily handled as long as the participant is organized and cognizant of what funds are  going in and out of their account.

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