Does Spouse's Disqualification End the Other Spouse's Catch-Up Opportunity?

Your spouse is no longer HSA-eligible. Can you make catch-up contributions to your own Health Savings Account?

An industry colleague recently lamented that her 65th birthday is next September. She said it may make sense for her to enroll in Medicare at age 65, even though she plans to continue working. But she hesitates to commit to Medicare because she appreciates the value of funding her Health Savings Account. And she's concerned that her husband, who's about seven years younger than she, will lose his opportunity to continue to make $1,000 annual catch-up contributions to his Health Savings Account.

Let's examine her dilemma in more detail.

Eligibility to Fund a Health Savings Account

To open and contribute to a Health Savings Account, you must meet three requirements:

1. Be enrolled in an HSA-qualified medical plan.
2. Not be enrolled in disqualifying coverage.
3. Not qualify as another taxpayer's tax dependent.

The requirement that's most often disqualifying is No. 2. Coverage that eliminates your opportunity to fund a Health Savings Account includes (but isn't limited to) your enrollment in Medicare or your own, your spouse's or your parent's participation in an employer's general Health FSA program. [Note: A general Health FSA reimburses qualified medical, prescription-drug, dental, and vision expenses, plus over-the-counter drugs, medicine, equipment, and supplies.] Other less-common examples of disqualifying coverage and activity include coverage through a general Health Reimbursement Arrangement and receiving certain care through the Department of Veterans Affairs medical system (VA) or Indian Health Services (IHS).

Medicare

Medicare is the most confusing of these disqualifying events. And it's not possible in a single article to provide comprehensive guidance on enrollment in Medicare. But the following elements are central to answering our question:

1. Medicare issues only self-only (or individual) coverage. In other words, unlike commercial plans, Medicare policies cover only one person. If both you and a spouse are enrolled in Medicare, each of you has a separate plan.
2. If you're not collecting federal Social Security or Railroad Retirement benefits at age 65 or older, you're not required to enroll in Medicare. In fact, you won't be enrolled in Medicare unless you apply. But if you receive benefits from either program, you're automatically enrolled in Medicare Part A. And you can't disenroll and still receive federal retirement benefits.
3. Health Savings Account eligibility is determined person-by-person.

Scenario 1: Employee Remains Covered on Group Plan

Scenario: My industry colleague delays enrolling in Medicare at age 65. She continues to cover herself and her husband on her company's HSA-qualified coverage.

Result: Both can fund their respective Health Savings Accounts if they remain HSA-eligible. Each can contribute up to $1,000 in catch-up contributions. They can split the $7,750 family maximum contribution between the two accounts as they wish. They'll most likely continue to make the family contribution and her catch-up through her employer's Cafeteria Plan, since they enjoy the tax savings up front (rather than deducting contributions when they file their personal income tax return) and avoid federal payroll taxes. He makes his catch-up contribution with personal funds and deducts the $1,000 on their tax return.

This, by the way, is the most likely scenario. She understands the value of her Health Savings Account as a retirement medical account.

Scenario 2: Employee Enrolls in Medicare

Scenario: She enrolls in Medicare at age 65 and disenrolls from her employer's coverage.

Result: She is no longer eligible to contribute. Her Medicare enrollment begins the first day of the month that she turns 65, which is September. She can contribute no more than 8/12 of the family deposit limit ($5,166.66 of $7,750) and no more than 8/12 of her catch-up amount ($666.66 of $1,000) to her Health Savings Account in 2023.

What about him? Well, it depends. He'll have the option to continue coverage on her employer's plan for 18 months by exercising his COBRA rights. If he enrolls in COBRA with self-only coverage, he can contribute his full $1,000 catch-up contribution, plus up to 4/12 of the self-only limit ($1,283.33 of $3,850), for 2023. If he remains covered through COBRA throughout 2024, he can deposit the full self-only amount (to be determined) and the full $1,000 catch-up contribution into his Health Savings Account. They'll have to fund his account with personal funds and receive the tax deduction when they file their joint tax return.

Scenario 3: Employee Remains on Group Plan and Enrolls in Medicare

Scenario: She enrolls in a Part of Medicare (perhaps Part A because she begins to collect Social Security benefits) and maintains her company's HSA-qualified plan coverage to cover herself and her husband.

Her enrollment in Medicare disqualifies her from contributions for months after August, so her 2023 contribution are limited to the figures in Scenario 2 above.

He, on the other hand, can contribute more into his Health Savings Account. He can still deposit the full $1,000 catch-up contribution, since he remains HSA-eligible all 12 months, as he does in the previous two scenarios. But his statutory contribution for the last four months of 2023 changes. Now, unlike Scenario 2, he's enrolled in family (not self-only) coverage. [Note: The fact that he's covered through COBRA in Scenario 2 and on the active group plan in Scenario 3 isn't relevant to his eligibility or contribution limits.]

She is limited to contributing no more than 8/12 of the statutory limit (or ($5,166.66 of $7,750) into her Health Savings Account (plus up to 8/12 of her catch-up amount, or $666.66 of $1,000). His statutory contribution limit is $7,750 less her contribution. In all likelihood, she will contribute $5,166.66 through her company's Cafeteria Plan to gain the additional tax benefits. He can then deposit up to the balance of the $7,750 statutory limit (up to $2,583.33) plus his full catch-up contribution to his Health Savings Account through tax-deductible personal funds.

This scenario is different from Scenario 2 because the coverage remains at the family tier. Important principle: The statutory contribution limit is based on the size of the contract. Even though he's the only one who's HSA-eligible beginning in September, the contract covers two or more family members. Thus, the family contribution limit applies. She can contribute no more than 8/12 of that limit (less deposits that he makes that count toward the $7,750 annual limit). He can contribute up to that limit less her contributions to the $7,750 statutory limit.

Scenario 4: Spouse Enrolls in His Company's Medical Coverage

Scenario: She enrolls in Medicare effective Sept. 1 and disenrolls from the company medical plan. He uses this qualifying event - loss of coverage - to enroll in his company's medical plan.

Result: Her limits are the same as Scenario 2 and Scenario 3: She can contribute no more than 8/12 of the $7,750 statutory limit (less what he contributes toward that limit) and 8/12 of her $1,000 catch-up contribution.

The effect on his contribution limit can't be determined without knowing his new coverage. If his new coverage through is employer is an HSA-qualified plan, his contribution limit is the same as Scenario 3 (when he continues coverage by exercising his COBRA rights to remain covered on her company's HSA-qualified plan. He can contribute up to 4/12 of the $3,850 statutory limit plus any of her pro-rated maximum that she didn't contribute. He can also fund the remaining four months of his $1,000 catch-up contribution.

If his new coverage isn't HSA-qualified, he can't make contributions for months after August. He can still contribute 8/12 of his $1,000 catch-up contribution plus any portion of the prorated family contribution that she didn't deposit into her Health Savings Account. But as of Sept. 1, neither remains HSA-eligible, so neither can make contributions for any months after August.

The Bottom Line

These are real scenarios that real people face. You may, too. The common thread in these scenarios is to follow who is HSA-eligible each month and whether the coverage is self-only or family. It's not easy. But if you understand the options, as outlined in the four scenarios above, you can make an intelligent decision that balances your coverage, your care, and your finances.

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