Will the Six-Month Retro Rule Affect Your Income Tax Return?

Will the Six-Month Retro Rule Affect Your Income Tax Return?

A Medicare rule may deny you six months of Health Savings Account contributions. When does it happen? Can you avoid it?

Imagine enrolling in insurance coverage for the first time and being told that you'll receive coverage for the prior six months at no charge. This would be a gift if you waited to purchase homeowners' insurance until your house burned to the ground or auto insurance after your vehicle was stolen or damaged in an accident. Alas, insurance generally doesn't work that way. You enroll, are approved, pay your premium, and then begin to receive coverage. The effective date of coverage varies with the type of insurance, but coverage is never backdated by a standard span.

Yet one form of medical coverage does offer this feature. For most people, it's not a big deal. This coverage usually doesn't provide a financial benefit, but neither does it create any issues or disqualify most people from enjoying any other financial or tax benefits.

In one case, however, the retroactive coverage is punitive. It disqualifies otherwise HSA-eligible individuals from contributing to their Health Savings Accounts earlier than anticipated. And rarely do those who lose the opportunity to build additional medical equity and reduce their taxable income enjoy any offsetting financial benefit from the additional coverage.

The Six-Month Retro Rule

When you enroll in Medicare after age 65, your Part A coverage (inpatient, home-health, and hospice care) is effective up to six months before the date that you sign up.

Example 1: Sam, age 57, enrolls in Medicare effective Aug. 1, 2023. Her Part A coverage is retroactive six months, so her coverage begins Feb.1, 2023.

Example 2: Grant retires March 12, 2023, two months after his 65th birthday. His Part A coverage is retroactive to the first day of the month that he turned age 65, or Jan. 1, 2023.

The normal retroactive period is six months, as in Example 1. But it never extends prior to your 65th birthday, when you're first eligible to enroll in Medicare. Thus, if you enroll in Part A between age 65 and 65 years and five months, your retroactive period will be shorter than six months, as in Example 2.

Why does Medicare offer this feature on Part A coverage? I haven't heard a definitive explanation. But the why doesn't matter, any more than you need to know how gravity works. If you understand gravity, you still fall downward when you lose your grip on a high tree branch.

Can you waive this retroactive coverage? No. It's a feature of the coverage that you can't avoid, even if it robs you of months that you were HSA-eligible and funding your Health Savings Account to the statutory limit.

Can you manage this feature? If you know you'll enroll in Part A at least six months before your actual enrollment, you can take action to minimize the disruption that this rule creates. Many Americans can't forecast their Medicare enrollment date with precision more than half a year before the event, however.

Proactive Step to Avoid Overfunding Your Health Savings Account

If you know prospectively when you will enroll in Medicare, you can adjust your Health Savings Account contributions appropriately to avoid overcontributing.

Example: Kyle unwrapped her 2023 calendar this past Christmas and immediately circled Tues., Oct. 31. That's the day she plans to retire from the corporate world to pursue her passions. She'll be age 68. She'll enroll in Medicare effective Nov. 1. Her Part A coverage will be retroactive to May 1, so she can contribute only 4/12 of her $3,850 statutory maximum contribution ($1,283.33) and 4/12 of her catch-up contribution ($333.33), for a total of $1,616.33. She adjusts her payroll deductions to make sure that the combination of her employer contribution and her deposits don't exceed that figure (or withdraws any excess contributions and earnings on that amount).

This solution works for those who have a plan and end up executing it. It's not unusual, however, for working seniors not to have their retirement date planned as carefully. They may experience an injury or illness that makes it difficult at best to continue to work full-time. They may have to slide into a caregiver role. An unexpected layoff may be the impetus to leave the full-time work force. They may experience an unexpected change at work - a new boss, the sudden end of a fulfilling project, a restructuring resulting in a change in roles - that leaves the prospect of remaining less attractive than entering their next life phase.

In each of these situations, the transition from employer-sponsored coverage to Medicare isn't planned. Thus, they may overcontribute to their Health Savings Account after their Medicare Part A coverage is effective six month retrospectively.

Timing Is Everything

The timing of these unplanned transitions to Medicare matters. Also, whether you're a prompt income tax-return filer or someone who waits until the last date may alter the work necessary to bring yourself back in to compliance. Let's look at two examples to observe a simple and a complicate fix, depending on whether the retroactive period of coverage leaks into the prior calendar year.

Example 1: Anderson, age 66, contributes to his Health Savings Account until his position is eliminated Sept. 28, 2023. He sees the layoff as a gift and retires so that he and his wife Sonja, also age 66, can pursue their goal of hopping into their RV and exploring the country without a set time to return home. He enrolls in Medicare for coverage effective Oct. 1, 2023. His Part A coverage is retroactive six months to April 1, 2023. When he files his 2023 personal income tax return, Anderson must back out any contributions (from is employer and himself) above 3/12 of his statutory maximum annual contribution for family coverage (no more than $1,937.50) and 3/12 of his catch-up contribution ($250), for a maximum contribution of $2,187.50. (If Sonja is HSA-eligible and making a catch-up contribution to her own account, she's capped at 3/12 of the $1,000 limit, or $250, if she enrolls in Medicare at the same time.) They can withdraw excess funds and any interest on the amount of their excess contributions before they file their 2023 personal income tax return by April 2024.

That's simple and straight-forward. Sometimes, however, the six-month retroactive Part A coverage spans calendar years. When that happens, the correction can be more difficult.

Example 2: Michele, age 69, files her 2023 individual tax return, which reflected HSA contributions to the 2023 limits, in early March 2024. Later that month, her company eliminates her position. She decides to retire and enroll in Medicare effective April 1, 2024. Her six-month retroactive Part A coverage starts Oct. 1, 2023. She must refile her 2023 tax return to reflect the fact that she was eligible to contribute only 9/12 of the statutory maximum contribution ($2,887.50) and 9/12 of her catch-up contribution ($750), or $3,637.50. She must file an amended 2023 tax return to include an additional $1,212.50 (the maximum $4,850 that she contributed less her prorated $3,637.50) in her taxable income.

As you can see, when the unanticipated retroactive Part A effective date spans calendar years, it can be problematic for the taxpayer. Had Michele's enrollment in Medicare been effective before she filed her income tax return (say, her position was eliminated in January 2023 and she enrolled in Medicare effective Feb. 1) and she understood the six-month Part A retro rule, she could have made the appropriate adjustments before filing her tax return.

The Bottom Line

If you know about the Part A six-month retro rule and have scheduled your enrollment in Medicare, you can recalibrate your contributions so that you don't overfund your Health Savings Account when the retroactive coverage is applied. But most active Health Savings Account contributors don't understand Part A's retroactive coverage. And even among those who do, the best thought-out timetables for enrollment in Medicare often miss the mark as life events accelerate or delay the effective date of Medicare coverage.

Unfortunately, there is no way to avoid Part A retroactive coverage. The best you can do is anticipate and manage it - and know how to correct excess contributions of your best-laid plans don't come to fruition.

#HSAMondayMythbuster #HSAWednesdayWisdom #HSA #HealthSavingsAccount #TaxPerfect #Medicare #PartA #PartARetro

Danielle Ker, PHR

National Account Executive at HSA Bank, a division of Webster Bank, N.A.

1y

Thank you for providing easy to follow examples and explaining this in such a relatable way.

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Thomas Wright

Social Security & Medicare Learning Programs for Employees + Training for HR Professionals.

1y

Excellent summary. Thanks, Bill!

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