Family Contribution Strategies When One Spouse Enrolls in Medicare

What happens when one spouse enrolls in Medicare and the couple remains covered by an HSA-qualified plan?

A long-time industry colleague recently e-mailed me about a personal situation involving a relative, Health Savings Accounts, and Medicare. It's a common question - and among the most confusing Health Saving Account issues. The answer is often elusive because Medicare people, including government customer-service representatives, don't know Health Savings Accounts. And most Health Savings Account professionals don't really understand Medicare.

But knowledge is important, because these two programs often clash. And when they do, Health Savings Accounts usually lose. The solution is to avoid the collision - or to anticipate it and, if appropriate, take action that will preserve someone's opportunity to continue to fund an account.

The Issue

Let's call the couple Liz and Vin to keep them straight. Liz turns age 65 in October. She's collecting Social Security benefits (as are half of all Americans between age 62, the minimum to begin to receive Social Security payments, and age 65). She will face mandatory enrollment in Medicare Part A as of Oct. 1. She plans to remain active at work and covered by her company's HSA-qualified plan, which also covers Vin. Liz funds a Health Savings Account. So, the questions:

1.????? Will she have to stop contributing to her Health Savings Account if she enrolls in Medicare? If so, when?

2.????? If she must stop her contributions, how does Liz determine the maximum that she can deposit into her Health Savings Account for 2024?

3.????? Can her husband Vin contribute to his own Health Savings Account?

These are common questions that a growing number of Americans among the 10,000 that turn age 65 every day and own Health Savings Accounts must ask themselves - and answer correctly. Let's go to it.

Medicare and Health Savings Account Eligibility

It's not disqualifying to be covered by more than one medical plan, as Liz will be when she's enrolled in Medicare and remains on her company's plan. The issue is not the number of plans, but rather whether each is HSA-qualified. And that's the rub. Medicare doesn't offer an HSA-qualified option.

Therefore, Liz will be disqualified from additional Health Savings Account contributions based on her enrollment in Medicare Part A (though she can continue to reimburse qualified expenses tax-free for the rest of her life, whether she remains HSA-eligible).

Partial-Year Eligibility and Prorated Contribution Limits

Thus, Liz will lose her eligibility to fund a Health Savings Account as of Oct.1, when her Part A coverage becomes effective. She won't be able to make additional contributions for any months after September, though she can still make additional deposits, up to her prorated 2024 maximum, until April 15, 2025 (the due date for 2024 personal income tax returns).

What is her prorated contribution ceiling in 2024? The family contribution maximum is $8,300. Plus, she's eligible to make an annual $1,000 catch-up contribution because she's age 55 or older. Liz's total contribution limit for nine months of eligibility in 2024: $775 per month, or $6,975.

[Note that because Liz is enrolling in Part A when she's first eligible, her Part A coverage won't be issued retroactively up to six months. Therefore, she can contribute for all months prior to her month of enrollment.]

Spousal Eligibility and Contributions

What about Vin? He's covered on Liz's employer's HSA-qualified plan and presumably is eligible to open and fund a Health Savings Account. In fact, assuming he's age 55 or older, he should have opened one already. He's eligible to make his own $1,000 catch-up contribution, which by law must be deposited into an account owned by the individual who's eligible to make the contribution.

Vin's eligibility prompts several questions:

• Can Vin contribute to his own HSA when Liz is no longer eligible? Yes. In fact, he's been eligible when he met the eligibility requirements, regardless of Liz's status. Vin could have made his own catch-up contribution every yar, beginning with the year of his 55th birthday, that he's been eligible. Also, Liz and Vin could have split the family contribution between their respective Health Savings Accounts in any proportion they chose, so long as their total didn't exceed the statutory maximum for a family contract. They probably were wise to deposit the entire family contribution into Liz's account, since she could fund it with pre-tax payroll deductions and avoid not only federal and state (except in California and New Jersey) income taxes, but federal payroll taxes as well.
• How much can Vin contribute now that Liz is no longer eligible? Here's the good news: Since they remain covered on a family plan, Vin can still contribute to the family limit (though he and Liz combined can't deposit more than the statutory maximum $8,300 in 2024, plus their respective catch-up contributions - hers prorated, his not). If she contributed the full prorated amount $6,225 for her nine months of eligibility, Vin can deposit the remaining $2,075 of the $8,300 family contribution - plus his own $1,000 catch-up contribution.

The Net Result - and Some Caveats

In this couple’s situation (retaining family coverage), which is common, the family can still benefit from the full $8,300 contribution for a family contract.

The caveats:

• The couple must understand their options and realize that more family members than just the employee/subscriber can meet the eligibility requirements to fund a Health Savings Account.
• The spouse not enrolling in any Part of Medicare must be HSA-eligible. That person can't also be covered by Medicare or by other disqualifying coverage.
• If Liz unsubscribes from the company plan and is covered exclusively by Medicare, the family's options change. Vin can remain covered on Liz's company's plan via COBRA (pr purchase a nongroup plan through a public or private marketplace). If the new plan covers only Vin, he can't contribute more than the self-only contribution ceiling ($4,150 annually, or $345.83 per month and $1,037.50 for the months of October through December). His $1,000 catch-up contribution ceiling isn't affected by whether his coverage is self-only or family.

The Bottom Line

Although Health Savings Accounts are individually owned, contribution strategies are developed at the family level. It's important for account owners to understand that sometimes, when the contribution front door closes on the spouse that carries the HSA-qualified coverage, the back door may swing open for the other spouse.

HSA Monday Mythbusters:

#HSAMondayMythbuster #HSAWednesdayWisdom #HSAQuestionOfTheWeek #HealthSavingsAccount #HSA #TaxPerfect #ICHRAinsights #ICHRA #WilliamGStuart #HSAguru #HealthSavingsAcademy

HSA Monday Mythbuster is published every other week, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.

?