HSA and Medicare

[ruthc]

I have read a lot on this subject including any prior threads. I want to make sure I understand this area before speaking with my client. The husband has the HSA and is retired. Both turned 65 in Sept/Oct of 2013. Both collects SS and have Medicare A&B out of their SS checks.

In 2013 he contributed $7500 of which $2500 was done in Oct 2013 which was right after they both turned 65. The limit is $6450/yr. His return calculates a penalty on the $1050 excess.

My understanding is that if they are on Medicare they cannot contribute to the HSA, but they can use the amount of money already in that account for medical expenses (prescriptions, dental, LT ins) which they did. There is still a little balance at year end.

Questions:
1. Am I right in stating he should not have contributed anything after he started on Medicare?
2. Am I correct that he no longer can contribute to the account and it should be closed as soon as he uses the balance left in the account?
3. If he has to pay a penalty for contributing after he started Medicare, how is this calculated? Would this penalty then be the same as the penalty calculated for going over the limit seeing it was right after they turned 65?

Any thoughts on this would be appreciated.

[Lion]

I know just enough to be dangerous, because my husband had a family HSA (now single HSA) with his HDHP and I'm older and went on Medicare.
1. Maybe it's the timing, but maybe it's the proration 8/12 of annual amount?
2. No longer can contribute. Can stay open for as long as monies remain. Can spend it on health care. Now that he's retired, can also draw it out for any reason, like an IRA, and pay taxes but no early withdrawal penalties. No time limits.
3. Not at all sure about this, but maybe. It's Form 5329 Part VII.

Charge them for your time.

[ddoshan]

My understanding would be that when filling out form 8889 you would show him qualifying up to the month he reached 65 and qualified for Medicare. The form would then show what his maximum contribution allowed for 2013 would be. As to the other questions not exactly sure as of now.

[ddoshan]

Very quick reading seems to indicate he would have until the filing deadline to remove any excess contributions without any penalty. Any earning attributed to would be taxable.

[ruthc]

Thank you.

Thanks for noting the form to change the number of months he was eligible. I changed it to the proper months to calculate the proper penalty which is ok now. I figured I was missing something in the calculation. I couldn't figure out how the software would be able to calculate the proper penalty, but now I know. I learn something everyday thanks to this forum!!

He would not be able to reverse his contribution at this time because he paid medical bills with most of it. There was just a few dollars left at year end. Good info though!

Thanks to everyone that responded. I got it now!!

[ruthc]

New info - help!

Sorry this is a long thread, but I have since done more research on this client (this is the 1st yr for me doing return). The spouse turned 65 in Sept 2011 not in 2013. And the spouse turned 65 in Nov of 2013. The only HSA is under the husband. He made the max contribution in 2012 and he was on Medicare that whole year. He also made the max contribution in 2013. Both of them had distributions for each of those years which left only a few hundred dollars in the account. So it appears that these contributions should not have been made seeing he has been on Medicare and collecting SS.

Now I wonder how to handle this situation. Not only was he not suppose to make contributions, but what happens to the distributions of these contributions that weren't supposed to be contributed? I don't think I have to do anything further regarding the distributions.

I have entered the distribution info from the 1099-SA statement and filled in (under other info) the total amount on line 3 for the medical expenses paid with the distribution which was the total amount.

I am not sure how to handle the contribtuions on form 8889. I think I did it ok. Under Part I, I entered contribution type as "pre-tax contribution" with the amt. No other option fit.
Line 1........family
Line 2........total amt of contribution
Line 3........check if you were not eligible with the same type of coverage for entire year. I checked the box because he was on Medicare.
Line 3........Enter # of months eligible for self-only coverage AND family coverage. I entered -0- months
Line 3........So contribution limit comes out to -0- which should be ok.
Line 13......Calculated to an excess contribution of the total amount contributed. I believe is correct.

Form 5329 Penalty on this comes out to only $49 because it was calulated on the remaining bal of $816 at 12/31 and not the total 2013 contribution. This maybe ok but I would think it would be on the total?

And, of course, he did not get any health savings deduction.

I think everything looks ok and makes sense. However, what would stop him from not stopping what he is doing? He could still make contributions that aren't deductable and can make distributions from the acct. Or is just plain illegal to do this if you are on Medicare?

Thanks again for any thoughts you can give me before I contact the client.