Beware Medicare Part A Retro Coverage across Calendar Years

You may have to withdraw funds from your Health Savings Account or even file an amended 2023 tax return if you apply for Medicare Part A between now and June 30.

Note: HSA Monday Mythbuster will be published biweekly, rather than weekly, in 2024. On alternate weeks, we'll introduce a new feature, HSA Question of the Week. The intent is to deliver more total content and introduce a more flexible format to address more Health Savings Account-related issues.

Most insurance coverage starts with an effective date tied to the date that you pay your first premium, or a specific date set by your employer. But not Medicare Part A. When you apply for this coverage and are ultimately enrolled, your coverage may stretch back a full six months before you applied. This retroactive coverage has no practical effect on any seniors - except Americans age 65 or older who fund a Health Savings Account immediately before enrolling in Medicare.

How Part A Retroactive Coverage Works

Medicare is a government-sponsored medical plan that covers most Americans age 65 and older. It's composed of several parts. Our focus is on Part A, which covers inpatient, hospice, and home-health services. Most enrollees prepay their premiums through federal payroll (FICA) taxes during their working years, so they pay no premium for Paret A coverage (unlike other Parts of Medicare).

Enrollment in Part A is not automatic for many Americans at age 65. But if you begin collecting Social Security benefits on or before your 65th birthday (as more than half of all beneficiaries do), you're automatically enrolled in Part A as of the first day of the month of your 65th birthday.

If you enroll after the month of your 65th birthday - either because you begin to draw Social Security benefits or apply for Part A coverage - your Part A coverage will include a retroactive feature, as follows:

• You apply for Part A coverage after age 65 years and five months. Your Part A coverage will be retroactive six months. Example: You're age 67 and plan to retire and enroll in Medicare effective Nov. 1, 2024. You apply for Medicare in August 2024. Your Part A coverage will become effective retroactively to six months before the month that you submitted your application (August), or Feb. 1, 2024.

• You apply for Part A coverage between the month of your 65th birthday and up to five months later. Your Part A coverage will be retroactive to the first day of the month that you turn age 65. You turn age 65 Feb. 19, 2024. You continue to work and are covered on your company's medical plan. You experience a life event and abruptly retire in May. You immediately apply for Medicare coverage, which starts July 1, 2024. Your Part A coverage is retroactive up to six months from your application date in May, but in no case will the retroactive coverage period extend before the month of your 65th birthday. Therefore, your Part A coverage will begin Feb. 1, 2024 - a retroactive period of five months.

Medicare and Health Savings Account Eligibility

Why is Part A's retroactive coverage provision important? It isn't for most people. But if you're actively funding a Health Savings Account, you can't contribute to your account for any month that you're not HSA-eligible. And Medicare is disqualifying coverage. Thus, any retroactive Part A coverage will reduce the number of months that you are eligible to fund your account.

This retroactive coverage may or may not affect you, depending on your level of Health Savings Account contributions.

Example 1: Your Part A retroactive coverage extends back to Sept. 1, 2023. You funded your account to the self-only limit ($3,850) and catch-up contribution ceiling ($1,000) for a total of $4,850 in 2023. But now, with retroactive Part A coverage, you were eligible only eight months (January through August) in 2023. Your maximum contribution is $3,233.33 (8/12 of $4,850). You must withdraw $1,616.66 (your $4,850 contribution, the statutory maximum, less the $3,233.33 prorated maximum to which you were entitled after losing four months of eligibility) from your Health Savings Account and include it in your taxable income for 2023.

Example 2: Same retroactive coverage as in Example 1, but you contributed only $125 per semimonthly pay period ($250 per month, or $3,000 for 12 months) in 2023. Your $3,000 total contribution is less than the prorated ceiling that factors in the loss of eligibility Sept. 1, so you don't withdraw any funds from your Health Savings Account.

Messy Timing

The remedy, as illustrated in the examples above, is simple. If your total contributions for 2023 exceed your prorated limit with Part A retroactive coverage, you simply withdraw any amount above the prorated limit (plus any earnings on that money) and include it in your 2023 taxable income before you file your 2023 personal income tax return. You work with your Health Savings Account administrator to execute the withdrawal.

But in some cases, the process might be messier. If you're age 65 or older and file your 2023 personal income tax return promptly and then unexpectedly apply for Medicare Part A coverage, you may have to file an amended 2023 tax return.

Example: You're age 66, remain active at work in early 2024, and continue to fund your Health Savings Account. You file your 2023 federal personal income tax return in March 2024. In April 2024, you're unexpectedly laid off and apply for Medicare. Your Part A coverage will be effective retroactive to Nov. 1, 2024. If your 2023 Health Savings Account contribution exceeded 10/12 of $4,850 (or $4,041.66), you must withdraw the amount above that figure (and earnings associated with it) and include that amount as income in an amended 2023 tax filing. You must withdraw any contributions applied to 2024 and earnings on that amount, then include that total when you file your 2024 federal tax return in early 2025.

The Bottom Line

If you understand the Medicare Part A retroactive coverage rules, plan your transition to Medicare well, and follow your plan without a sudden life event that send you off course, you won't have to withdraw funds or, in extreme cases, file revised tax returns. But life doesn't always follow our best-laid plans. If you find yourself unexpectedly enrolling in Part A, be sure you adjust your contributions or understand how much to withdraw from your Health Savings Account and how to report that amount as taxable income to remain in compliance with federal tax law.

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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. HSA Monday Mythbuster is published every other Monday, alternating with HSA Question of the Week.