The Six-Month Retro Rule and Its Effect on HSA Contributions

Medicare Part A has a retroactive feature that may reduce your final Health Savings Account contributions.

It's unfortunate that Health Savings Accounts (Treasury) and Medicare (Health and Human Services) are governed by different areas of the executive branch of the federal government. You're disqualified from funding a Health Savings Account for any month that you're enrolled in Medicare. That's bad enough, as this rule prohibits otherwise-eligible working seniors from funding or accepting an employer contribution into their Health Savings Account.

But it gets worse: Many Medicare enrollees discover that part of that coverage is retroactive up to six months. In other words, they lose their Health Savings Account eligibility for up to six months (and, as you'll learn below, often longer) even though they were HSA-eligible as they lived in those months.

This concept of retroactive coverage is confusing. If you're familiar with its effect on Health Savings Accounts, you've probably heard the rule of thumb to "stop contributing to your Health Savings Account six months before you enroll in Part A."

Directionally, that advice is correct. It raises the proper red flag. But it's not precise. Because sometimes the retroactive period is less than six months. Sometimes it's longer. And you can still contribute during the early months that you're disqualified, but not for those months.

Confused? You should be. Let's explore this important issue.

Medicare Part A Retroactive Coverage

How many insurance policies do you buy that automatically cover you retroactively? Probably none - except Medicare Part A, which reimburses inpatient, home-health, and hospice care. That's right, when you apply for Part A, you may receive free retroactive coverage. Or not.

The retroactive period depends on the month that you apply for Part A (rather than the month that Part A is effective) and your birth date. The retroactive period of coverage extends back up to six months from the month that you submit your Part A application, not from the month that you're covered by Part A.

Example 1: Poliane is retiring in December 2024 when she turns age 68. She'll apply for Medicare Part and Part B in September 2024 for a Dec. 1 effective date. When her Medicare coverage becomes effective Dec. 1, 2024, her Part A coverage will be backdated six months from the month that she submits her Medicare application (September). Thus, she won't be eligible to fund her Health Savings Account for any months after February (as her retroactive period will stretch from September back to March 1).

There's another variable. Whether the retroactive coverage applies depends on your age. The retroactive period extends back up to six months from the month that you submit your application, but in no case does it extend back prior to age 65.

Here's how it works:

• If your Part A coverage begins on the first day of the month that you turn age 65, you have no retroactive coverage. You can fund your Health Savings Account for all months prior to the month of your 65th birthday. About half of all Americans begin to collect Social Security before or as of the month of their 65th birthday, which automatically enrolls them in Part A. Thus, they never experience retroactive coverage.

Example 2: Ronnie begins to collect Social Security benefits at age 63 to supplement his meager earned income. He remains active at work, is enrolled in his company's HSA-qualified plan, and funds his Health Savings Account. He's automatically enrolled in Medicare Part A and Part B (he can waive Part B) effective the first day of the month of his 65th birthday (May 2024). He can contribute 4/12 of the $4,150 statutory maximum ($1,383.33), plus 4/12 of the $1,000 catch-up contribution ($333.33), for a total of $1,716.66. He can deposit this amount any time up to April 15, 2025, the due date of his 2024 federal income tax return.

• If you submit your Part A application up to six months after the month of your 65th birthday, your Part A coverage is retroactive to the month of your 65th birthday (a retroactive-coverage span less than six months).

Example 3: Ricardo applies for Part A in April 2024, three months after his 65th birthday in January. His Part A coverage is retroactive to Jan. 1, 2024. He can't contribute to his Health Savings Account for any month in 2024. But if he hasn't reached his maximum contribution for 2023, he can deposit up to that amount on or before April 15, 2024.

• If you delay submitting your Part A application for more than six months after the month of your 65th birthday, your coverage extends six months retroactively. This concept is described in Example 1 (Poliane) above.

Got it?

Part A retroactive coverage was never an issue prior to the introduction of Health Savings Accounts. It provided additional coverage that a senior may or may not have needed. And most Americans receive Part A without paying a premium, provided that they (or their spouse) earned a small threshold amount in at least 40 calendar quarters (10 years). If they didn't reimburse any claims incurred during the retroactive period, they were no worse off. But then came Health Savings Accounts. Now, that retroactive period is disqualifying, whether or not you received any reimbursement through the retroactive coverage. Thus, you lose your opportunity to reduce your taxable income and increase your spending power because you can't fund (or receive an employer contribution to) your Health Savings Account for any month after the beginning of your retroactive coverage period.

Loss of Eligibility and Timing of Contributions

It's important to distinguish between losing eligibility to fund a Health Savings Account and not being able to make additional contributions. The two concepts are different and often confusing.

Losing eligibility to contribute means that an individual can't make a deposit for that month. But Health Savings Account owners can fund their accounts for the months that they were eligible up to the due date of federal income taxes in the year that they lose eligibility.

Example 4: Back to Poliane (Example 1). She's eligible to contribute only two months in 2024 (January and February) before her Part A retroactive coverage will disqualify her. Thus, she can't contribute more than 2/12 of the $4,150 self-only contribution ($691.66) plus 2/12 of the $1,000 catch-up contribution ($166.66), or a total of $858.33. She can deposit up to that amount at any time on or before April 15, 2025.

Spoiler alert. Example 2 and Example 3 above already address this topic. Regardless of when and why you lose your eligibility to fund your Health Savings Account during the calendar year, you can always deposit up to your prorated maximum as late as the due date of your federal income tax return. That date is generally April 15 of the following year, but it may be later if April 15 falls on a holiday or the Internal Revenue Service grants a delay to your county, state, or region due to a natural disaster or other event that may delay your completing your return.

Correcting Excess Contribution

Sometimes, enrollment in Part A is well planned (as with Poliane in Example 1). She knew a year in advance when she would enroll in Medicare. She was able to limit her contributions to her prorated limit if she understood the retroactive-coverage provision. She could simply stop her deposits once she reached her prorated amount.

But you may not have the advantage of foresight. Your enrollment in Part A may be more sudden. For example, you may lose your job unexpectedly and choose to retire. Or your group plan's premium or out-of-pocket responsibility may change dramatically, and you find that enrolling in Medicare is a better deal financially. Or your company may switch from a group plan to an Individual-Coverage Health Reimbursement Arrangement (or ICHRA, a tax-free stipend funded by an employer that benefits-eligible employees can spend on coverage in the nongroup market) and you realize that you can apply your ICHRA funds to Medicare premiums.

In these cases, you may have overfunded your Health Savings Account before your retroactive Part A coverage reduced your prorated maximum contribution. In this case, you can withdraw the excess contribution (and any earnings on that money) and include that amount in your taxable income.

Example 5: Georg, age 66, receives a large bonus in March 2024 and fully funds his Health Savings Account for that year ($4,150 plus the $1,000 catch-up contribution, or $5,150 total). He's unexpectedly laid off in November 2024 and takes it as a sign to retire. He applies for Medicare Part A and Part B in November 2024. His Part A coverage will extend back to May 1, leaving him with only four months of eligibility to fund his Health Savings Account. His prorated maximum is $1,716.66. He must withdraw $3,433.33 of contributions. He also calculates that he earned an additional $125 on that excess contribution. He must withdraw a total of $3,583.33 and include that amount in his 2024 taxable income.

One other complication: If the retroactive Part A coverage spills into the prior year, you may have to refile that year's tax return.

Example 6: Sylvia contributes $5,150 to her Health Savings Account for 2024. She applies for Medicare in April 2025 for an effective date of coverage of June 1, 2025. Her six-month retroactive Part A coverage is effective Oct. 1, 2024. She's already filed her 2024 tax return, reflecting the $5,150 contribution. She must withdraw $1,287.50 (3/12 of $5,150) from her Health Savings Account (plus any earnings on that amount), and add that total to a revised 2024 income tax return as earned income.

The Bottom Line

Some rules that apply to your eligibility to fund a Health Savings Account can easily give you an ice-cream headache without the satisfaction (and yes, the calories). Of these, the interplay of Health Savings Account eligibility and Medicare Part A retroactive coverage may win the prize as the most complex. You may never be affected by this rule. But you need to understand that it exists to recognize when you may need to act to avoid overfunding your account.

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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.