How Does the Six-Month-Retro Rule Affect HSA Funding? Part 1

Medicare has a quirky rule that backdates Part A coverage. How does it affect how much you can contribute during your final year of Health Savings Account eligibility?

Medicare can be confusing, as anyone who has attained age 65 can attest. The program is built on an ancient model of medical care that existed when Medicare was launched in 1965. In that model, inpatient and outpatient care were covered by separate policies (for example, Blue Cross, which covered inpatient care, and Blue Shield, which reimbursed outpatient services, didn't merge until the 1980s). And prescription drugs weren't covered by insurance then.

Today, traditional Medicare includes Part A for inpatient services and Part B for inpatient care. Then there's Part D, with a separate enrollment period and offered by private insurers, for prescription-drug coverage. And half of Medicare enrollees are now covered by Part C, or Medicare Advantage - a series of private plans authorized and regulated by the federal government. It, too, has a separate enrollment period from traditional Medicare

Beyond the structural patchwork, Medicare has some policies that are baffling and confusing. One that particularly affects Health Savings Account owners is the six-month retroactive Part A coverage rule.

What Is the Six-Month Retro Rule?

The discussion is the six-month retro rule is grounded on this important point: Many of us are not required to enroll in Medicare at age 65. If you are age 65 or older and are receiving Social Security or Railroad Retirement benefits, you're automatically enrolled in Medicare Part A. You can't receive these retirement benefits and waive Part A enrollment. But if you're not collecting Social Security or Railroad Retirement benefits, you are not auto-enrolled in any Part of Medicare. You won't be covered by any Part of Medicare until you apply and your application is approved.

If you delay enrollment and then sign up for Part A coverage after your 65th birthday, your coverage automatically starts retroactively, up to six months prior. (Note: Part B, Part D, and Part C coverage is not retroactive.)

Here's how the rule is described in the Medicare handbook:

If I didn’t get Part A and Part B automatically, when can I sign up? If you didn’t automatically get premium-free Part A (for example, because you’re still working and not yet getting Social Security or Railroad Retirement Board (RRB) benefits), you can sign up for it anytime [sic] after you’re first eligible for Medicare. . . In this example, your Part A coverage will go back (retroactively) 6 months from when you sign up for Part A or apply for Social Security or RRB benefits, but no earlier than the first month you’re eligible for Medicare. Depending on how you become eligible for Part A, the retroactive period may be different. (Source: Medicare and You 2023, P. 17)

Here are two practical examples to illustrate how the rule works for Louisa, who turns age 65 Sept. 8, 2023, and thus is eligible to enroll in Medicare as of Sept. 1, 2023 (the first day of the month of her 65th birthday):

Example 1: Louisa continues to work until age 67, waives Medicare when she's first eligible, and remains covered on her company's medical plan. She enrolls in Medicare effective Sept. 1, 2025. Her Part A coverage is retroactive six months, thus beginning March 1, 2025.

Example 2: Louisa continues to work until the end of 2023 and remains covered on her employer-sponsored plan. She enrolls in Medicare effective Jan. 1, 2024. Her Part A coverage is retroactive, but doesn't begin sooner than the date that she becomes eligible for Medicare. Thus, her retroactive coverage extends only to Sept. 1, 2023, or four months total.

Why Does the Six-Month Retro Rule Matter?

For most Americans, the six-month retro rule creates no issues. If they had coverage prior to enrolling in Medicare after their 65th birthday, the retroactive coverage simply means that they were covered by two plans. Millions of Americans are covered by more than one plan. It's not illegal, and sometimes it provides additional coverage for specific claims. Medical providers and insurers follow specific procedures and rules when submitting and processing claims in this situation.

But it does matter for people who are funding a Health Savings Account. Medicare is disqualifying coverage. If a working senior who delayed Medicare when initially eligible continues to fund a Health Savings Account, she can't make contributions attributable to up to the final six months prior to her enrollment in Medicare.

In Example 1 above (when she enrolls in Medicare effective Sept. 1), Louisa can't make contributions attributable to the months of March, April, May, June, July, and August, 2025. Her contribution for 2025 can't exceed 2/12 of the statutory limit that year, plus 2/12 of the catch-up contribution (or $166.66, since the catch-up contribution of $1,000 annually isn't indexed for inflation).

In Example 2 above (when she enrolls in Medicare effective Jan. 1, 2024), Louisa can't fund her Health Savings Account for the months of September, October, November, and December 2023 - the four months during which her retroactive Part A coverage applies. Her maximum contribution is 8/12 of her statutory maximum ($2,566.66 if she has self-only coverage or $5,683.33 if she has a family plan), plus 8/12 of her catch-up contribution, or $666.66.

Must You "Stop Contributions Early?"

Medicare and You, the manual for prospective and active Medicare enrollees, provides a table to help Health Savings Account owners determine when they should stop funding their accounts to accommodate the six-month retro rule. Unfortunately, the advice is misleading because it makes the unstated assumption that owners fund their accounts to the statutory maximum each year. Only about 4% of owners do so.

This distinction is important. You can't make contributions attributable to those months that Medicare coverage is retroactive, but you can contribute during those months (and up to the date that you file your income tax return that year) as long as you don't exceed your statutory maximum deposit.

What does this mean in practical terms? Let's go back to Louisa.

In Example 2, above (she enrolls in Medicare effective Jan. 1, 2024), Louisa has self-only coverage (thus a $3,850 statutory maximum contribution in 2023, plus a $1,000 catch-up contribution) and funds her account with $250 monthly contributions ($3,000 annually). Let's imagine she didn't understand the six-month retro rule or hadn't planned to retire at the end of the year, so she didn't stop her payroll deductions after August. The most she can contribute is $3,233.33 (her prorated self-only limit of $2,566.66 plus her prorated catch-up contribution of $666.66). Her total payroll deductions for 2023 are $3,000, which is below her prorated contribution ceiling. She can deposit an additional $233.33 from personal funds for 2023 and deduct that amount from her taxable income when she files her tax return.

The key point: When you're subject to the six-month retro rule, you can't make contributions for those months that the rule makes you ineligible, but you can still make contributions during those months, as long as your total contributions don't exceed your prorated maximum for the calendar year.

What Is the Recourse?

But what if you are funding your account to the maximum and the six-month retro rule unexpectedly lowers your contribution ceiling during your final calendar year of Health Savings Account eligibility? What do you do then?

Back to Example 2: Louisa contributed $4,750 in 2023, then enrolled in Medicare effective Jan. 1, 2024. The six-month retro rule extended her Medicare coverage retroactive to Sept. 1, 2023. Her prorated maximum was only $3,233.33, leaving her with an excess contribution of $1,616.66. Louisa's best approach to maintaining compliance with federal tax law is to remove $1,616.66, plus any earnings on that amount, from her account before she files her 2023 income tax return and include the figure in her taxable income to avoid penalties.

This solution is simple. But it requires understanding (or having a financial advisor or tax preparer who understands) the six-month-retro rule and how it affects Health Savings Account contributions.

Sometimes, the recourse affects two years of tax returns.

Example 3: Bernardo, age 67, retires April 30, 2024, and enrolls in Medicare effective May 1. His Part A coverage is backdated six months, thus becoming effective Nov. 1, 2023. He fully funded his Health Savings Account for 2023. To comply with federal tax law, he must withdraw $808.33 (2/12 of his maximum contribution of $4,750) and any earnings associated with it, for 2023, then refile his 2023 income tax return to reflect the higher taxable income. He then must withdraw all his 2024 contributions and associated earnings and include that amount in his 2024 taxable income.

The Bottom Line

In summary, here's what you need to know:

• Enrollment in any Part of Medicare disqualifies you from further Health Savings Account contributions.
• If you enroll in Part A coverage after age 65, it will be retroactive up to six months.
• You can continue to fund your Health Savings Account for that year, even during months that you're no longer HSA-eligible, up to your prorated maximum (which is based on the number of months that you're HSA-eligible).
• You must withdraw any contributions beyond your prorated limit.

If you understand how retroactive Part A coverage will affect your Health Savings Account funding before it's applied, you can proactively adjust your contributions. If you find out later and have overfunded your account, you can make adjustments without penalties if you correct the excess contribution before you file your tax return for that year.

Coming in next week's HSA Monday Mythbuster: If you're married, how can you manage the six-month retro rule? A brief discussion.

#HSAMondayMythbuster #HSAWednesdayWisdom #HSA #TaxPerfect #HealthSavingsAccount Coming soon: #ICHRAinsights

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.