Six-Month Part A Retro Rule: Can Marriage Soften the Impact?

Medicare has an unusual feature that backdates Part A coverage up to six months earlier than the effective date based on enrollment, which can affect Health Savings Account contributions. Can being married soften the blow?

Last week, we took a deep dive into Medicare Part A retroactive coverage. This feature restricts how much you can contribute to your Health Savings Account during your last calendar year of eligibility. But you may be able to retain the lost tax advantage of additional contributions if you're married and your spouse is eligible to fund a Health Savings Account.

Medicare Part A Retroactive Coverage

To summarize last week's discussion, if you're age 65 or older and not collecting Social Security or Railroad retirement benefits, you're not required to enroll in Medicare. In fact, not only are you not required to enroll, but you won't be enrolled unless you actively apply for benefits.

When your Part A coverage becomes effective, it will be applied retroactively, for up to six months. In no case will you be covered retroactively by Part A for months that you weren't Medicare-eligible. In other words, if you enroll in Medicare

• effective the month of your 65tt birthday, your coverage isn't retroactive.
• between the month of your 65th birthday and five months later, your coverage is retroactive to the month of your 65th birthday.
• at age 65 years and six months or later, your coverage is retroactive six months.

Here's the official explanation in Medicare and You 2023, the handbook for Medicare enrollees:

Health Savings Account (HSA) You aren’t eligible to make contributions to an HSA after you have Medicare. To avoid a tax penalty, you should make your last HSA contribution the month before your Part A coverage begins. Premium-free Part A coverage will go back (retroactively) 6 months from when you sign up for Part A or apply for benefits from Social Security or the Railroad Retirement Board, but no earlier than the first month you’re eligible for Medicare. (Source: Medicare and You 2023, P. 20)

Let's consider an example:

Example: Dona enrolls in Medicare effective Nov. 1, 2023, at age 66. Her Part A coverage is backdated six months and thus begins May 1, 2023. She can fund her Health Savings Account for only the months of January, February, March, and April 2023. Her maximum contribution for 2023 is 4/12 of the statutory maximum (4/12 of $3,850 if she has self-only coverage or 4/12 of $7,750 if her plan covers herself and at least one other family member) plus 4/12 of the $1,000 catch-up contribution.

How an HSA-eligible Spouse Affects Contributions

It's not unusual for both spouses to be eligible to fund a Health Savings Account. They're both covered on an HSA-qualified plan. Neither typically qualifies as another taxpayer's tax dependent. The trick is the third requirement to fund a Health Savings Account - namely that they have no disqualifying coverage. Assuming a spouse meets the eligibility requirements, both can fund their respective Health Savings Accounts.

How does this situation play out in our example above?

Example: Dona is enrolled in Medicare, but also maintains family coverage for herself and her husband Danny on her company's HSA-qualified plan. Danny, age 63, meets all eligibility requirements to open and fund a Health Savings Account. He deposits a $1,000 catch-up contribution annually into his account using personal (tax-deductible) funds. But Dona has always contributed up to the family maximum ($7,750 in 2023) plus her own catch-up contribution through payroll deductions because the tax savings are immediate and greater than depositing personal funds.

Let's see how much Dona and Danny can contribute in 2023:

• Dona can contribute up to 4/12 of her catch-up contribution, or up to $333.33.
• Dona can contribute up to 4/12 of the statutory maximum contribution for a family contract, or up to $2,583.33.
• Danny can contribute the full catch-up contribution, or up to $1,000.
• Danny can deposit up to the full $7,750 statutory family maximum contribution, less any amount that Dona contributes to her Health Savings Account. Assuming that she has funded the full $2,583.33 to which she's entitled for her four months of eligibility, Danny can deposit $5,166.66 (the $7,750 statutory limit less Dona's contribution of $2,583.33) into his Health Savings Account as his share of the family contribution.

Voila! The couple have deposited $7,750 total, plus two $1,000 catch-up contributions, into Health Savings Accounts. They've reduced their taxable income by $9,750.

Important note: Danny's contributions are tax-deductible, not pre-tax, because he's not making pre-tax payroll deductions through his employer. All federal and state income taxes (except state taxes in California and New Jersey, the two states that don't allow a deduction for Health Savings Account contributions) are credited against their income tax liability. But the couple can't recapture the federal payroll taxes that Danny paid on that income when he earned it. Those payroll taxes aren't applied to Dona's pre-tax payroll deductions.

When This Strategy Doesn't Work

This approach doesn't always work, however. The couple must be married, and the other spouse can't have any disqualifying coverage like his own enrollment in Medicare. Here are some examples of when the couple can't contribute to the family limit between them:

• The couple are domestic partners, not married. In this case, Dona can contribute up to 4/12 of the family and catch-up contributions into her Health Savings Account. Danny can contribute up to the full family ceiling and the catch-up contribution limit into his account. (Yes, domestic partners apparently receive a benefit due to a quirk in the law.)
• Dona disenrolls from her company plan and Danny exercises his COBRA rights to continue coverage on a self-only plan. In this case, Dona can contribute 4/12 of the family and catch-up contributions. Danny can contribute up to his full catch-up contribution plus up to 4/12 of the family contribution (less any amount that Dona contributed) and up to 8/12 of the self-only contribution (up to 8/12 of $3,850, or up to $2,566.66).
• Danny isn't HSA-eligible, even though he's enrolled in an HSA-qualified plan. If Danny has a disqualifying event or coverage - for example, he receives care at a Department of Veterans Services (VA) facility for a knee replacement or Dona subsequently enrolls in her company's general Health FSA program without realizing that it disqualifies Danny - then he too must prorate his contributions for the calendar year.

The Bottom Line

It's possible for a spouse to assume the opportunity to fund a Health Savings Account when the employee/spouse is no longer eligible to contribute. Health Savings Account rules don't specify that only plan subscribers (employees in group plans) or policy owners (nongroup coverage) can qualify to open and fund a Health Savings Account. So, if you're married and you lose your Health Savings Account eligibility, check to see whether your spouse (or a covered domestic partner, ex-spouse covered by court order, or an adult child covered on your plan but no longer your tax dependent) meets the eligibility requirements. You may have lost the opportunity to fund your account, but other family members may be able to fund theirs.

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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.