Medicare and HD Medical Plan

[misanman]

BIL is planning to retire in January, 2024, and has run into a potential issue involving his current high deductible medical plan and Medicare. He's tried to get information from his HR group, from Boomer Benefits, and from other sources and nothing seems to add up. I'm hoping that someone here has the knowledge to help.

The issue is that he's been told that he must discontinue his HD medical contributions at least six months prior to Medicare or "there could be tax consequences". He's worried that if he discontinues contributions he might end up with a balance that is too low for some unknown medical event that pops up in the next six months. They've had some medical expenses in the last couple of years and their HD balance isn't large.

Is there someone who can shed some light on this? Why would he need to discontinue contributions and what are the consequences if he doesn't.

 

[MichaelB]

Just to clarify, are these HSA contributions?

 

[misanman]

Yes, HSA. Sorry for not being clear on that.

 

[MichaelB]

Yes, HSA. Sorry for not being clear on that.

HSA contribution rules are pretty straightforward. If your BIL retires 1/24 he can contribute to the HSA for the full year 2023, both regular and catch up. If retirement is Jan 31 and Medicare start date is Feb 1 he can also contribute 1/12th of the 2024 regular HSA limit along with 1/12th of the catch-up.

As for dates, he can contribute the entire amount on Dec 31 if he wants. I’ve never heard of a need to stop contributions 6 months before R date.

 

[misanman]

Here's what Google says:

If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty. If you require counseling around HSAs, consult a tax professional.

 

[MichaelB]

Here's what Google says:

If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty. If you require counseling around HSAs, consult a tax professional.

I think that applies to people over age 65 when they first apply for Medicare. If your BIL turns 65 in January ‘24 there is no look back period.

Edit to add: HSA contributions are similar to IRA. You can physically make the contribution in March of ‘24 for the tax year ‘23. The contribution is a function of how many months the individual was covered by an HSA policy. If the person had 12 months coverage he can contribute the full amount.

 

[MBSC]

I’ve never heard of a need to stop contributions 6 months before R date.

It depends on his age at retirement. When a person retires after age 65 years, 0 months, Part A is backdated to age 65 or backdated 6 months, whichever is less. A person cannot contribute to an HSA account once Part A has started.

Part A coverage begins the month the individual turns age 65, provided he or she files an application for Part A (or for Social Security or RRB benefits) within 6 months of the month in which he or she becomes age 65. If the application is filed more than 6 months after turning age 65, Part A coverage will be retroactive for 6 months.

Reference: https://www.cms.gov/medicare/eligibility-and-enrollment/origmedicarepartabeligenrol

If you enroll in Medicare Part A and/or B, you can no longer contribute pre-tax dollars to your HSA. This is because to contribute pre-tax dollars to an HSA you cannot have any health insurance other than an HDHP. The month your Medicare begins, your account overseer should change your contribution to your HSA to zero dollars per month. However, you may continue to withdraw money from your HSA after you enroll in Medicare to help pay for medical expenses, such as deductibles, premiums, copayments, and coinsurances. If you use the account for qualified medical expenses, its funds will continue to be tax-free.

Reference: https://www.medicareinteractive.org...are/health-savings-accounts-hsas-and-medicare

NOTE: If you qualify for premium-free Part A, your coverage will go back (retroactively) up to 6 months from when you sign up. So, you should stop making contributions to your HSA.

Reference: https://www.cms.gov/Outreach-and-Ed...ers-and-Unions/FS3-Enroll-in-Part-A-and-B.pdf

 

[RetiredAndLovingIt]

Here is what Fidelity says about it.

https://www.fidelity.com/learning-center/personal-finance/hsas-and-medicare

 

[MichaelB]

It depends on his age at retirement. When a person retires after age 65 years, 0 months, Part A is backdated to age 65 or backdated 6 months, whichever is less. A person cannot contribute to an HSA account once Part A has started.

Right, that’s clear. In this case, if the BIL is retiring at age 65, which is the norm, there is no “6 month before Medicare” limit.

 

[misanman]

He's 66 so it seems that the lookback would apply. I wonder how the prior six months of Medicare coverage works in practice. Does it pay bills retroactively?