Expert Q&A: Medicare's 6-Month Lookback for HSA Contributions
By Stephen Miller, CEBS | Originally posted on shrm.org
Older employees are working longer, as the gap between the age for Medicare eligibility (65) and normal retirement age for Social Security (soon to be 67) is increasing.
That can pose problems for employees over the age of 65 who contribute to a health savings account (HSA) during the six-month period before enrolling in Medicare, or whose employers made HSA contributions for them during this period. These workers can face unexpected tax penalties and the burden of reversing those contributions, explained Kevin Robertson, chief revenue officer at HSA Bank, which provides HSA administrative services.
If employers have not already fielded questions about Medicare and HSA contributions, they should prepare to do so. They should also understand that they may have to issue revised Form W-2 wage statements for older employers who have fallen into the HSA/Medicare trap.
Robertson delved further into these issues in a Q&A with SHRM Online.
What are some of the issues around HSAs and Medicare that employees may not understand?
Kevin Robertson: When it comes down to it, the issue is confusion. The retroactive coverage issue catches a lot of people by surprise.
Medicare coverage is retroactive for the six months preceding Medicare enrollment, but not before an enrollee's 65th birthday. Any time a person over age 65 who has been contributing to an HSA delayed enrollment in Medicare or Social Security—which triggers automatic enrollment in Medicare Part A—this becomes an issue.
The IRS excise tax penalty equals 6 percent of the excess contributions, which is charged for each year the excess contribution remains in the HSA uncorrected at the end of the tax year.
What is the purpose of the six-month lookback period?
KR: Beginning in 1983, the Department of Health and Human Services started backdating Medicare coverage retroactively for six months to ensure that people coming off of employer health coverage would not inadvertently find themselves uninsured while transitioning to Medicare. Under current regulations, individuals who apply for Medicare Part A or Part B after reaching age 65 are automatically given six months of retroactive health coverage, which invalidates their ability to make or receive HSA contributions for any of those months they were deemed to be covered.
Many of those people probably already made HSA contributions and are therefore going to have to back out of those contributions or pay the penalty for overcontributing when, quite honestly, they're caught completely off guard.
The policy is not required by law but is regulatory and overseen by the Centers for Medicare and Medicaid Services [CMS].
Can people choose to forgo the six months of retroactive Medicare coverage to avoid this issue?
KR: Unfortunately, that's not permitted. CMS had tried to fix this, however. It does not necessitate a legislative change and could be done with regulation. Right before the Biden administration took office, the prior CMS team had issued a proposed rule that would have made the mandatory six months of retroactive coverage voluntary. But the rule change has not been taken up by the Biden administration.
What happens when HSA holders over age 65 don't stop making contributions six months before Medicare enrollment?
KR: There's a lot of advice that tells people if they're past age 65 to stop contributing, or to stop their employer from contributing, six months before retirement. A lot of people don't plan that far ahead, however, or they may get laid off unexpectedly.
Fortunately, in many cases they can reverse overcontributions—which is how the IRS views contributions made during the six-month lookback period—by contacting their HSA administrator and avoid tax penalties. However, they're going to have to do this before they file their income taxes for the year in which they make those contributions. Otherwise, they'll have to file an amended return.
Another complication is that if their employer has sent them a Form W-2 at year-end showing HSA contributions—either the employee's contributions or the employer's—then the HSA holder would have to ask their employer to issue an amended Form W-2.