Is it correct that the taxpayer pays excise penalty on lower balance in health savings account and not the higher amount of the excess contribution that year?

[mpbTaxLady]

Client signed up for Medicare A and didn't realize he was no longer eligible to contribute.
Also, his current balance is less than the total excess contributions over several years.  
How does he fix this?

[qbteachmt]

"his current balance is less"

Are you trying to Net any one year? All the years?

"excess contributions over several years."

You have to take each year separately. The spending isn't the issue. The deducting of funds as pre-tax when the taxpayer was not qualified for this deduction, is the issue. It also depends on if the HSA funds were invested and earning, each year.

[George4Tacks]

I believe the problem is that do not have 40 quarters paid into Medicare. https://www.hhs.gov/answers/medicare-and-medicaid/who-is-eligible-for-medicare/index.html

They could go back to work for the required income. https://www.ssa.gov/oact/cola/QC.html

The client can buy Medicare A, but it is expensive https://www.medicare.gov/your-medicare-costs/part-a-costs

NOT and income tax question, but it is helpful to learn about SS and Medicare to help our clients. 

[qbteachmt]

Even if you buy Medicare original coverage with the high deductible option, HSA is not allowed. You can keep using the account for costs, including the Medicare premium. You can no longer contribute. You would look into an MSA (Fed) or a State MSA program.

[TaxGuyBill]

Yes, that is correct.

He can withdraw what he can (up to the amount of the 2021 contributions) to reduce the penalty.

Tell him to spend the rest by the end of 2022 to eliminate future penalties.

[BobKamman · Accepted solution]

The problem has nothing to do with qualifying for Social Security.  The problem is that once you have any Medicare coverage -- including Part A, which is free -- that disqualifies you from having an HSA.  There are some major employers who keep their older employees as long as they keep producing income (I'm thinking of a large stockbroker here) and don't remind them that they may have lost eligibility at age 65.  I have seen some continuing to fund an HSA until they're 80.  

[mpbTaxLady]

I am treating each tax year separately.  I was wondering if the HSA balance was less than the total contributions, what effect this has for him.  I believe that his financial institution holding the account will return all funds to him, and he will pay the income tax on the annual ineligible contributions plus the excise tax on the EOY balance each year until 2021 tax return.  

Am I considering everything here?  Should I ask for a waiver of any extra late pay penalties assessed with the return or wait till it is assessed?

thank you for your input!

[qbteachmt]

"I was wondering if the HSA balance was less than the total contributions, what effect this has for him."

This issue relates to trying to get the amount(s) returned, and obviously, over many years and having spending, that isn't likely. There will be taxes and penalty (excise on the excess). This issue doesn't affect how the computations will be done, each year, for amount contributed and deducted, that should not have been contributed and deducted, including any earnings each year are also taxable.