In order to be eligible to make contributions (or receive contributions) to an HSA, a participant must (1) be enrolled in a HSA qualified high deductible health plan, (2) not be another individual’s tax dependent, (3) not be entitled to Medicare, and (4) not be covered by any disqualifying coverage. Eligibility to make HSA contributions is based on the status of the individual as of the 1st day of the month. If a participant makes (or receives) HSA contributions above what is permitted due to their eligibility, they will be subject to income tax and a 6% excise tax on the excess contribution.

Standard Health Care FSA with Grace Period:

A standard Health Care FSA which offers a grace period provides participants an additional 2 ½ months in which they can incur claims after the end of a plan year. A HCFSA participant who has any funds left in their account on the last day of the plan year will trigger the grace period even if they have submitted claims which have not yet been paid. During this 2 ½ month grace period, the standard HCFSA continues to be disqualifying coverage and participants are not eligible to contribute (or receive contributions) to an HSA, regardless of when their expenses were incurred or when their balance is exhausted. The earliest that a participant can contribute to an HSA is the first of the month following the end of the grace period. A more in depth look can be found in this week’s Compliance Buzz: Health Care FSA Grace Period’s Impact on HSA Eligibility.

Medicare Enrollment’s Impact on HSA Eligibility

Once an individual becomes entitled (entitled means both eligible and enrolled) to Medicare, they are no longer eligible to make (or receive) contributions to an HSA. If a participant makes (or receives) HSA contributions above what is permitted due to their eligibility, they will be subject to income tax and a 6% excise tax on the excess contribution.

If an individual has an HSA with an account balance at the time they become entitled to Medicare, they can continue to use these funds for eligible expenses or save these funds for future use. A more in depth look can be found in this week’s Compliance Buzz: Medicare Enrollment’s Impact on HSA Eligibility.