Spouse May Be Eligible When Worker Enrolls in Medicare

This column is an excerpt (Question 24) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: I enrolled in Medicare Part A when I turned age 65. I am still working and cover my wife and myself on my employer’s HSA-qualified plan. Can I continue to contribute to my Health Savings Account?

Answer: No, but read on. Your family may have another avenue to reduce taxable income and build a Health Savings Account balance.

Once you enroll in any Part of Medicare, you are no longer eligible to contribute to your Health Savings Account. Medicare is disqualifying coverage because the program doesn’t offer an HSA-qualified option.

Medicare offers only individual coverage. You’re enrolled in Part A (which covers inpatient services, home health care, and hospice care), but only you are covered by your Part A enrollment. Your wife isn’t. You must determine whether your wife is eligible to open and fund her own Health Savings Account. You may have done so already if she’s age 55 or older, since at that age she can begin to make $1,000 catch-up contributions annually to her Health Savings Account if she’s HSA-eligible.

If your wife is HSA-eligible, she can fund her own account. She can deposit up to the statutory maximum annual contribution for a family contract. Regardless of how many people covered on the plan are HSA-eligible themselves (in this case, only one), she can contribute up to the family maximum because you’re enrolled in family coverage. And since anyone can fund her Health Savings Account, you’re not disqualified from directing contributions to her account. You can’t make pre-tax payroll deductions to your wife’s account through your employer, since the contributions aren’t deposited into your Health Savings Account.

But you and your wife don’t forfeit most of your tax benefits. You and your wife can deposit personal funds (from your checking account), or you can have your employer deposit a portion of your after-tax pay to her Health Savings Account via direct deposit, just as you direct a portion of your paycheck into your checking and savings accounts. You can then deduct these personal contributions on your joint personal income tax return to recoup the federal and state (except in California and New Jersey) income taxes paid. You can’t recover the federal payroll taxes paid on the funds when earned.

If your employer contributes to employees’ Health Savings Accounts, you most likely don’t receive that contribution any longer and therefore can’t divert it to your wife’s account. Companies can, but rarely do, offer a contribution to employees who are enrolled in a spouse’s medical plan. See Question 162 and Question 163 for discussion from an employer perspective on employer contributions to a spouse’s Health Savings Account.

Note: If your wife isn’t HSA-eligible, this strategy doesn’t work. Neither of you can fund a Health Savings Account if neither of you is HSA-eligible.

 Tips

 If the only plan that your company offers is an HSA-qualified plan, see whether the employer will integrate a Health Reimbursement Arrangement with the plan for employees who aren’t HSA-eligible. Some employers do so out of a sense of fairness. The rationale: If it makes sense to give employees, say, a $1,500 contribution to a Health Savings Account to offset deductible expenses, it’s only fair to provide the same level of support to all workers. An HRA doesn’t allow employees to save funds for future years’ qualified expenses (employers can allow a carryover of unused funds, though), but at least those employees who aren’t HSA-eligible receive a level of support from their employer to offset current qualified expenses.

 IRS Notice 2004-2:

 Q-2. Who is eligible to establish an HSA?

A-2. An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not enrolled in Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person’s tax return.

See Internal Revenue Code Section 223 (b)(7).

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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 Question of the Week is published every week, alternating every other Wednesday with HSA Wednesday Wisdom and every other Monday with HSA Monday Mythbuster.