IRS Addresses Another HSA-Medicare Issue

A few months ago, the Internal Revenue Service (IRS) clarified in Information Letter 2016-0082 how Medicare enrollment and health savings account (HSA) eligibility sometimes collide when an employee retires shortly after turning the age of 65. More recently, the IRS provided guidance on another overlap between Medicare and HSAs—a rehire after Medicare enrollment. In its latest guidance, Information Letter 2017-0003, the IRS analyzed the following situation:

  • The individual retired from his job after turning the age of 65.
  • Then, he enrolled in Medicare Parts A and B.
  • Thereafter, he was hired back by his old employer, enrolled in high deductible health plan (HDHP) coverage and began making HSA contributions.
  • He learned—too late—that he was ineligible for the HSA and tried unsuccessfully to disenroll from Medicare (he made the request to Social Security Administration (SSA), instead of the Centers for Medicare and Medicaid Services (CMS)).

The individual was concerned that he would have to pay a fine. The IRS assured him that a fine was not due. Instead, he had to withdraw all HSA funds and report them as taxable income because he was disqualified from establishing an HSA.

This guidance offers a good reminder of three important points:

  1. Employers should clearly communicate to employees all factors that can make one ineligible for HSA contributions. To the extent that controls and checks can be implemented in the enrollment system, that solution is even better.
  2. All parties should realize that Medicare enrollment is automatic once someone turns age 65 and enrolls in Social Security.
  3. If this person had an existing HSA from his previous tenure at the employer, the additional contributions would be viewed as excess contributions, subject to taxation and an annual 6% excise tax unless a curative distribution is taken no later than the following tax filing deadline.