Retiree Ineligible to Contribute to HSA Due to Medicare Entitlement

May 08, 2017

The Internal Revenue Service (IRS) has issued an information letter verifying that individuals are ineligible to contribute to a Health Savings Account (HSA) if they are enrolled in Medicare.

The letter is in response to an individual who retired from his job and enrolled in Medicare Parts A and B. Several months later, the individual returned to work, enrolled in his employer’s health plan, and was provided with an HSA. When the individual learned that his Medicare enrollment disqualified him from eligibility for an HSA, he tried to cancel his Medicare enrollment, but has yet to receive a decision on his request.

IRS confirms ineligibility.

To be eligible for an HSA, an individual must:

  • be covered under a High-Deductible Health Plan (HDHP) on the first day of the month;
  • not be covered by any other health plan that is not an HDHP (with certain limited exceptions);
  • not be entitled to benefits under Medicare; and
  • not be claimed as a dependent on another person’s tax return.

The IRS specified in the information letter that “entitled to benefits under Medicare” means enrolled in Medicare. Therefore, if an individual is enrolled and receiving benefits from any part of Medicare, he or she cannot contribute to an HSA.

The IRS noted that the individual in question “never had a valid HSA because he was never eligible to establish an HSA. Accordingly, he must withdraw the funds from his account and include them in his income. This withdrawal will not be subject to a fine, however.”