HSA Experience with SSA "backdating" Medicare A coverage?

[Pops25]

My wife and I are both over 65. We contributed to a HSA under my wife's employment (high deductible health insurance plan) until the last month she worked. We understand you can do this as long as we didn't apply for any SSA monthly benefits or any Medicare coverage (we didn't).

However, when we applied for Medicare to start the next month after she retired, Medicare enrolled us in Medicare B that month ( ), but then 'backdated' our enrollment in Medicare A by six months ( ). Now, if the IRS audits our tax return and compares it to SSA records, it may claim we were contributing to the HSA for six months while covered by Medicare A, which is a tax regulation violation. But we weren't covered by Medicare A while we were contributing, not at least until the SSA used some sort of time warp logic to go back in time six months and change what really happened the first time through???

Has anyone had this experience (caught by surprise by the 'backdating' policy)?

Is there a potential tax issue, or does the IRS accept HSA contributions being made under these circumstances?

Any comments on experiences or advice appreciated. I do know we cannot now opt out of the back-dated coverage unless we return all our benefits to date, which we don't plan to do, so that is not an option.

Actually, it strikes me that this situation would set up some very interesting arguments in a courtroom, competing timelines, that sort of sci fi logic. I'm thinking I would just as well bypass this excitement however, interesting as it might play out ( ).

Thanks in advance.


Pops25

[ThePrune]

I felt bad that no one had answered your question. So I spent some time this morning digging through the Medicare website until I discovered the section containing their online operations manuals.

According to the Medicare General Information, Eligibility and Entitlement Manual, Chapter 2. Hospital Insurance and Supplementary Medical Insurance (Medicare part A = Hospital Insurance, HI):

Premium-free HI for the aged begins with the month in which the individual attains age 65, provided he or she files an application for HI or for cash benefits and HI within 6 months of the month in which he or she attains age 65. If the application is filed later than that, HI entitlement can be retroactive for only 6 months.

So here is what appears to have happened to you. By law you were eligible for Medicare Part A once you reached age 65. But you didn't apply at that age (and apparently weren't automatically enrolled because you weren't collecting Social Security either). Since the government wants to give you what legally is yours at age 65, they backdated your enrollment. But they are restricted by regulations to backdating by no more than 6 months.

Why would the government be so interested in backdating your Medicare Part A? Because it has monetary value: approx. $5,300 per year! If you had had a major hospitalization within that 6 month period, you would have been VERY motivated to get the backdating and the Medicare Part A financial coverage!

Anyway none of this helps your situation, which is unfortunate. But thanks for bringing it to the attention of the Forum, so that others who might be in your situation can benefit from this information.

[Pops25]

Response to The Prune - Thanks for your research and insights on Medicare policy and probable motivation. It's good that this policy exists for those in the situation you describe, no argument there! However, this may be a case of unintended consequences. For those in our situation who get no benefit from the backdating, but a possible (?) unplanned tax liability instead, it would be nice if either a) the SSA provides an 'opt out' option to allow us to clarify our HSA contributions were eligible, or b) the IRS provides a statement or ruling that states contributions made in good faith during this backdating period are deemed eligible (no tax issue).

I believe a class action lawsuit has been filed to try to force the SSA to allow people to 'opt out' of Medicare A coverage even after applying for/starting Medicare B or monthly retirement payments, but the courts have rejected this suit. So the SSA can continue to enforce taking Medicare A once you have started receiving either of the other benefits. But our situation is related to the backdating policy (i.e., forced to take Medicare A prior to applying for/starting either of the other two benefits), so I don't think the court ruling addresses our situation directly. I am not aware of any IRS statement or previous ruling on any previous experience like our current situation, so that's why I'm curious if anyone else has already run into this.

My sense is we may be somewhat unusual due to the combination of working past 65 and not applying for any benefits while still working, continuing to participate in the HSA contribution option, and the fact that HSAs have only been around for a few years so far anyway. Maybe we are some of the first ones to stumble into this situation, so that's why there are no others with similar experiences from previous tax years?

Bottom line ... we will be filing our federal income tax for the 2012 calendar year later this month (March 2013), and we'll see what happens. If the IRS doesn't flag the issue, or lets it ride anyway, then we hear nothing and our question is answered. If the IRS challenges us, we'll start with the 'good faith' argument and see how it goes. Hopefully, this concern is much ado about nothing. If the IRS makes it an issue, I'd be inclined to post a new thread when any 'formally reviewed' resolution is made.

[john94549]

My wife applied for spousal benefits a few months back and was (involuntarily) enrolled in Part A, even though still working and covered by health insurance. She waived Part B. She continues to contribute to a FSA, primarily for deductibles. Now, is she impacted?

Her Part A coverage (according to a letter received from the SSA) kicks in three months after her spousal benefits commence, at age 66.

[ThePrune]

My wife applied for spousal benefits a few months back and was (involuntarily) enrolled in Part A, even though still working and covered by health insurance. She waived Part B. She continues to contribute to a FSA, primarily for deductibles. Now, is she impacted?

No, her ability to contribute to an FSA is not impacted by involuntary enrollment in Medicare part A. You can check this out yourself by referring to the IRS Publication 969 (2012) Health Savings Accounts and Other Tax-Favored Health Plans.. The section on Flexible Spending Arrangements (FSAs) starting on page 16 lists the requirements for contributing to the FSA sponsored by your wife's employer. There is nothing there to suggest that enrollment in Medicare will prohibit contributions.

This is in marked contrast to the rules for Health Savings Accounts (HSAs) presented in the same publication. On page 3 of the same publication it is expressly stated that someone is not qulified to contribute to an HSA if they are enrolled in Medicare.

[john94549]

Thanks, Prune. Appreciate the reply.

[Alan S.]

For those who have excess HSA contributions due to Medicare back dating or any other reason, after determining what your allowed pro rated contribution is, you should request that the excess be distributed to you as a corrective distribution. This works the same way as an IRA corrective distribution. Earnings allocated to the excess portion will be taxable in the year you made the excess contributions.