Contribution Limits and the One-Spouse-on-Medicare Issue

An older couple is covered on an HSA-qualified plan. One of them enrolls in one or more Parts of Medicare. How does that fact affect their Health Savings Account contributions?

I always appreciate the calls that I receive from the benefits advisors who've attended my continuing-education classes over the years. It helps me not only to clarify an issue with them, but also alerts me to areas where confusion remains even among people who've been trained and sell these products.

Last week, I received a call from a broker who had stopped in traffic at the intersection of Health Savings Accounts and Medicare (by the way, a very treacherous point on any journey). We talked through the issue. A few minutes later, he called again with an insightful follow-up question.

Here were his scenarios:

Scenario 1. Husband and wife covered on the husband's HSA-qualified plan. She enrolled in Medicare Part A. Do they have to revert to the self-only family contribution now that he's the only covered family member who's HSA-eligible?

Scenario 2. Same coverage as above, but the husband - the employee - is enrolled in Part A and his wife isn't. Can they contribute at all to a Health Savings Account?

What do you think? Take a moment to apply your knowledge. Then, we'll unpack the issues and get to the correct answer.

Health Savings Account Eligibility

Determining a family member's eligibility to open and fund a Health Savings Account is a person-by-person exercise. We must look at each family member to determine whether he or she meets the three requirements:

1. Is the family member covered on an HSA-qualified medical plan?
2. Does the family member have any other disqualifying coverage through herself or another family member?
3. Does the family member qualify as a tax dependent of another taxpayer?

The answers to these questions must be yes, no, and no. Note that there is no "best of three" situation here. One wrong answer and the family member isn't HSA-eligible.

The first and third questions are straightforward. The second one - not so much.

What is disqualifying coverage? Here are the most common examples:

• The family member is enrolled in Medicare.
• The family member is enrolled in Medicaid.
• The family member is covered by his or her own, a spouse's, or, in the case of a young adult, a parent's general Health FSA or general Health Reimbursement Arrangement. That's right - a general Health FSA (which reimburses medical expenses before the family meets a deductible) covers the employee, the spouse, and children unless the employer limits it (which is very rare). Thus, an employee who enrolls in an HSA-qualified plan with her employer is disqualified from funding a Health Savings Account if her spouse enrolls in his employer's general Health FSA. The same holds for a young adult under age 26 - that general Health FSA covers him as well, even if he's unaware of it.
• The family member is a veteran who retains TRICARE coverage as a secondary insurance policy.

Contribution Limits

The maximum contribution to a Health Savings Account in 2023 is $3,850 for self-only coverage and $7,750 for a family plan. These figures are indexed for inflation and were $3,650 and $7,300 in 2022. In addition, an HSA-eligible person age 55 or older can deposit an additional $1,000 annually, but only into a Health Savings Account that he or she owns.

Example: Peter covers his wife Kyle and himself on his HSA-qualified plan. They're both in their early 60s and are both HSA-eligible. Peter funds is Health Savings Account through pre-tax payroll deductions. He deposited $8,300 in 2022 - the family maximum plus his $1,000 catch-up contribution. Kyle also contributed $1,000, but she had to open her own account (which she did several years ago) and deposit her $1,000 annual catch-up contribution into her own Health Savings Account.

Eligibility and the Couple in the Example

Let's look first at my broker friend's employee. He's enrolled on an HSA-qualified plan. He's not covered by any disqualifying coverage. And he doesn't qualify as anyone's tax dependent. Thus, he's eligible to fund a Health Savings Account.

Now, let's look at his wife. She's enrolled in his HSA-qualified plan. She's also enrolled in a Part of Medicare. Stop right there. It doesn't matter that she meets the third requirement of not qualifying as another person's tax dependent. Because she's enrolled in a Part of Medicare, she's disqualified from funding a Health Savings Account. Period.

Contribution Limits and the Couple in the Example

So, now that we've determined that the husband/employee is HSA-eligible, how much can he contribute to his Health Savings Account in 2023? He's enrolled on a plan that covers more than one person. Therefore, he has family coverage and can contribute to the family limit ($7,650), plus his $1,000 catch-up contribution (total $8,750).

Key point: The fact that his wife isn't HSA-eligible is irrelevant. The contract covers more than one family member. His wife's disqualifying coverage is Medicare, which issues self-only policies. Thus, he can't receive a reimbursement on a claim through her disqualifying coverage. Her Medicare coverage disqualifies her, but not him, from funding a Health Savings Account.

This concept of only one HSA-eligible person on the contract often confuses people. They assume that the family must now drop down to a self-only contribution limit. But let's change the scenario slightly and picture the same man without a wife but who covers a 12-year-old grandchild on his plan. The child aces the first two requirements above, but she qualifies as her grandfather's tax dependent. She can't open and fund her own Health Savings Account. But her grandfather is still covered on a family plan, so he can contribute to the family maximum.

Next, let's look at my broker friend's follow-up scenario: The couple are covered on his employer's HSA-qualified plan, but the husband enrolls in a Part of Medicare and the wife doesn't.

Now what?

The husband/employee isn't HSA-eligible. But his wife meets the three requirements above, so she is eligible to open and fund a Health Savings Account. (Point of emphasis here: Note that the eligibility requirements do not include being the subscriber - in the case of employer-sponsored coverage, the employee.)

The wife can open her own Health Savings Account (if she hasn't already to make her own catch-up contributions beginning at age 55, which she can deposit into only an account in her name). How much can she contribute? Follow the logic above. She's enrolled on family coverage, so she can contribute up to the $7,750 family maximum. Plus her own $1,000 catch-up contribution.

She (or anyone else on her behalf, including her husband) must make these contributions with personal funds (unless her employer is very unusual and allows her to fund her own Health Savings Account through her employer's Cafeteria Plan when she's not enrolled in her company's employer-sponsored coverage). She can then deduct these contributions - even if she doesn't itemize deductions on her personal income tax return - when she files her taxes. She'll receive a dollar-for-dollar reduction in taxable income on her federal and state income (unless she lives in California or New Jersey, the two states that don't allow a deduction at the state level).

Personal contributions have one drawback versus contribution through an employer's Cafeteria Plan: Both the employer and employee are assessed federal (FICA) payroll taxes on the income when it's earned. Cafeteria Plan contributions effectively product an instant 7.65% return (on income of $160,000 or less) or 1.45% return (on income above that figure). But in this case, the couple is limited to only personal returns and come out far ahead financially with their federal and state income savings.

The Bottom Line

When determining the contribution limit, focus on the contract size. Period. That's the only relevant factor. If the contract covers two or more people, an eligible family member can contribute to the statutory maximum for a family contract. Period. Even if no one else covered on the medical plan meets the eligibility requirements.

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