Turning 65 Mid-Year? Can You Make a Full Annual Contribution? It Depends.

Turning 65 Mid-Year? Can You Make a Full Annual Contribution? It Depends.

Turning age 65 doesn't disqualify you from funding a Health Savings Account. But another action around that birthday might.

I was having coffee with an industry colleague last week. She told me that she will turn age 65 in September 2023 and wondered whether she would have to prorate her Health Savings Account contribution for that year. It's a good question. But there is no yes or no answer.

Let's examine the issues.

Eligibility to Fund a Health Savings Account

To open or fund a Health Savings Account, you must meet three eligibility requirements:

  1. You must be enrolled in HSA-qualified coverage.
  2. You can't be enrolled in disqualifying coverage.
  3. You can't qualify as another taxpayer's tax dependent.

Note that this list does not set any age requirement (although it's reasonable to assume that children below a certain age will almost certainly qualify as a parent's tax dependent). The mere act of celebrating a 65th birthday has no direct effect on your eligibility to fund a Health Savings Account. But it sets up a potential disqualifying event.

Disqualifying Coverage

The list of disqualifying coverage is long, including certain Health FSA and Health R3eimbursement Arrangement designs (whether the employee's, a spouse's, or a parent's employer sponsors the plan), Medicaid or TRICARE enrollment, certain care delivered through the Veterans Administration or Indian Health Services medical systems, and participation in a direct-primary care arrangement with a medical provider.

And then there's Medicare. Enrollment in any Part of Medicare disqualifies you from opening or making additional contributions to a Health Savings Account.

Enrollment in Medicare

Americans are eligible to enroll in Medicare with an effective date of coverage as of the first day of the month that they turn age 65 (or, if their birthday is on the first day of the month, the first day of the prior month). But you're not automatically enrolled in Medicare unless you turn age 65 and are collecting Social Security or federal Railroad Retirement benefits. Under administrative rules established by regulators (rather than a statute passed by Congress and signed into law by the president), anyone enrolled in either of these retirement programs who is age 65 or older is automatically enrolled in Medicare Part A.

There is no way to sever this relationship. Former US Rep. Dick Armey, who became majority leader when Republicans took control of the House of Representatives for the first time in two generations in 1994, and three other people filed a lawsuit in federal court to decouple collecting Social Security benefits from automatic enrollment in Part A. In Hall. v Sebelius, the federal district court and the circuit court of appeals for the District of Columbia ruled against Armey's position.

Absent receiving Social Security or Railroad Retirement benefits, however, no American is auto-enrolled in Medicare. You're covered by Medicare only if you actively apply at age 65 or older. (Note: There is a disability provision that allows some people under age 65 to receive Medicare coverage.) Thus, you can control when your enrollment in Medicare disqualifies you from further funding your Health Savings Account. Except . . .

The Small-Employer Problem

There is another situation in which you may be forced to enroll in Medicare at age 65, though it's not a government requirement. Under federal law, Medicare is the primary insurer of working seniors (age 65 or older) who work for companies with fewer than 20 employees. In other words, if a worker (or spouse of a worker) is age 65 or older and enrolled in the company's medical plan, Medicare is obligated to pay the claim first. The claim is then sent to the company's insurer to pay any additional amount up to the total benefit of the richer coverage.

Many private insurers require working seniors and covered family members to enroll in Medicare at age 65. This provision makes sense financially for the insurer. After all, if the worker or covered family member has an inpatient stay that costs, say, $40,000, the private insurer would rather have Medicare pay that claim first. Medicare would cover all expenses above $1,600 in 2023. That's a $38,400 savings for the private insurer. If the employer-sponsored plan has a $1,500 deductible, the private insurer would then pay $100 (or more, if the employee had satisfied a portion of the deductible already) so that the patient is responsible for no more than the out-of-pocket cost imposed by the richer plan ($1,500).

Again, note that this is an insurer requirement, not a mandate in statutory or administrative federal law. Not all insurers require enrollment in Medicare Part A and Part B as a condition of remaining covered on the company plan. Even if you don't enroll in Part A and Part B, these insurers may process the claim assuming that you are covered by Medicare. In the case of the example above, you would be responsible for paying out of your own pocket the $38,400 that Medicare would have paid if you'd enrolled. That's a huge financial liability that you probably want to avoid. It's likely that no amount of tax savings for Health Savings Account contributions nor absence of Part B premiums ($164.90 or more, depending on income, in 2023) can compensate for that outlay of personal funds.

Answering the Question in Context

Now that we've created the proper framework, let's answer the original question: Must you prorate your Health Savings Account contribution in the year that you turn age 65? Here's the answer:

  • Yes, if you enroll in any Part of Medicare or trigger another disqualifying event or coverage during the calendar year. This is no different from the pre-65 world, when your disenrolling from an HSA-qualified plan or a spouse's enrolling in a general Health FSA would disqualify you from making additional contributions to your Health Savings Account for the remaining months in that calendar year (and presumably beyond).
  • No, if you celebrate your 65th birthday and don't enroll in any Part of Medicare or experience another disqualifying event.

The Bottom Line

Medicare is a complicated topic, and the intersection of Medicare and Health Savings Accounts is the compliance equivalent of the rotary around the Arc de Triomphe. But you now have a guide to help you navigate this white-knuckle intersection.

#HSAMondayMythbuster #HSAWednesdayWisdom #HSA #HealthSavingsAccount #TaxPerfect



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