HSA for Medicare as "self-employed health insurance"

Submitted by Jeffry White on Wed, 2024-02-14 13:15

When Medicare premiums qualify as “self-employed health insurance” for an LLC owner (having made an S-Corp election), can the owner utilize HSA funds to cover eligible premiums? If so, what is the tidiest and best way to accomplish that?

I’m assuming it is best for the LLC to pay the premiums in the first instance so they may be deducted by the corporation, so I’m struggling with how the HSA funds – if they can be utilized – should be properly transferred to cover the cost.

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Permalink Submitted by David Mertz on Wed, 2024-02-14 14:22

I don’t see how Medicare paid with HSA funds would be permitted to be claimed as a self-employed health deduction. That would be taking a deduction against nontaxable income, double-dipping. It’s the similar to the situation where someone itemizes deductions. One is not permitted to claim a medical expense on Schedule A that was paid from the HSA. The S-corp can still reimburse the owner for the cost and include the amount in box 1 of the W-2, but that amount can’t be deducted on the owner’s individual tax return if a distribution from the HSA is applied.
The solution is to not pay the Medicare premiums using HSA funds, then take the self-employed retirement deduction for the premium cost included in box 1 of the individual’s W-2. It might be a bit of a stretch, but the owner might be able to make to the HSA a return of mistaken distribution, then take the self-employed health insurance deduction.

Permalink Submitted by Jeffry White on Wed, 2024-02-14 14:59

Thank you for your thoughts. Is it really a “double dip,” though? The HSA was funded prior to Medicare entitlement. So, the deduction of those contributions was not in the same year as the Medicare year(s) where premium could be paid by the corporation and deducted. Seems there’s an argument, then, that the “dips” are not “double.”

Permalink Submitted by David Mertz on Wed, 2024-02-14 17:45

By that I mean that the money paid for Medicare would be excluded from income twice, once by being excluded from income when contributed to the HSA (or gained from investments within the HSA) and subsequently paid out nontaxably, and a second time as a self-employed retirement deduction. You don’t get to exclude the same money (the money paid for Medicare in this case) from income twice.
Simply stated, deducting an expense makes that expense ineligible to be paid with a distribution from an HSA.

Permalink Submitted by William Tuttle on Wed, 2024-02-14 21:10

Double-dip is not possible, because enrolling in Medicare makes an individual ineligible to make HSA contributions.
In fact, if Medicare enrollment occurs > age 65. The enrollment is retroactive up to six (6) months, but not before age 65. This will make the individual up to six (6) months retroactively HSA ineligible.
However, Medicare Part B & D premiums including IRMAA, but not Medicare supplement premiums are HSA qualified medical expenses if the account owner is >= age 65.
If the individual is collecting Social Security (SS), Medicare premiums are deducted from SS benefits. However, they can reimburse themselves from the HSA.
If individual is delaying SS benefits, they can either pay Medicare premiums directly from the HSA or pay from another source (such as a rewards credit card) and be reimbursed.

Permalink Submitted by David Mertz on Wed, 2024-02-14 23:29

A qualified medical expense that can be paid with a distribution from an HSA is one that would otherwise be eligible to be included on line 1 of Schedule A. Medicare premiums for which a self-employed health insurance deduction is claimed are not permitted to be included on Schedule A.

Permalink Submitted by William Tuttle on Thu, 2024-02-15 04:57

HSA qualified medical expenses include, but are not limited to those medical and dental expense tax deductions enumerated in IRS Publication 502.
While 26 U.S. Code 213 is incorporated into U.S. Code 223 Health savings accounts. Additional HSA qualified medical expenses are defined in U.S. Code 223. They are further clarified by IRS guidance in IRS Notices 2004-2, 2004-50 and 2008-59.
IRS Notice 2004-2
Q-27. Are health insurance premiums qualified medical expenses?
A-27. Generally, health insurance premiums are not qualified medical expenses except for the following: qualified long-term care insurance, COBRA health care continuation coverage, and health care coverage while an individual is receiving unemployment compensation. In addition, for individuals over age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance can be paid from an HSA. Premiums for Medigap policies are not qualified medical expenses.
IRS Notice 2004-50
Q-2. May an otherwise eligible individual who is eligible for Medicare, but not enrolled in Medicare Part A or Part B, contribute to an HSA?
A-2. Yes. Section 223(b)(7) states that an individual ceases to be an eligible individual starting with the month he or she is entitled to benefits under Medicare. Under this provision, mere eligibility for Medicare does not make an individual ineligible to contribute to an HSA. Rather, the term “entitled to benefits under” Medicare means both eligibility and enrollment in Medicare. Thus, an otherwise eligible individual under section 223(c)(1) who is not actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that individual is enrolled in Medicare.
Q-28. How are distributions from an HSA taxed after the account beneficiary is no longer an eligible individual?
A-28. If the account beneficiary is no longer an eligible individual (e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has an (HDHP), distributions used exclusively to pay for qualified medical expenses continue to be excludable from the account beneficiary’s gross income.
Q-45. If a retiree who is enrolled in Medicare receives a distribution from an HSA to reimburse the retiree’s Medicare premiums, is the reimbursement a qualified medical expense under section 223(d)(2)?
A-45. Yes. Where premiums for Medicare are deducted from Social Security benefit payments, an HSA distribution to reimburse the Medicare beneficiary equal to the Medicare premium deduction is a qualified medical expense.
IRS Notice 2008-59
Q-29. If the account beneficiary has attained age 65, are Medicare Part D premiums qualified medical expenses?
A-29. Yes. If an account beneficiary has attained age 65, premiums for Medicare Part D for the account beneficiary, the account beneficiary’s spouse, or the account beneficiary’s dependents are qualified medical expenses. See also Notice 2004-2, Q&A-27, and Notice 2004-50, Q&A-4 and 45, regarding Medicare Parts A and B. See Q&A-6 of this Notice regarding eligibility of Medicare enrollees to contribute to an HSA.

Permalink Submitted by David Mertz on Thu, 2024-02-15 13:12

All of that just describes the types of expenses that are payable from the HSA. None of that says that you can pay such an expense from the HSA and also deduct that same expense elsewhere on the tax return. 26 U.S. Code § 223(d)(2) allows to be paid from the HSA only those medical expenses that are not otherwise compensated. Money paid by the S-corp to the S-corp owner for which the owner takes a self-employed health insurance deduction is an expense that is compensated by the S-corp.

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HSA for Medicare as “self-employed health insurance”

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