Health Insurance Timeline:
– Spouse started new job with HDHP in November 2018, but still had non-HDHP from former employer through Nov. 30th 2018.
– New employer contributed $2000 seed fund to HSA for 2018 in December 2018.
– Employer contributed $2000 to HSA for 2019 in January 2019.
– Employee pro-rated contributions made January and (will be made) February 2019 ($7000 – $2000 = $5000 / 26 pay periods = $192.31 per paycheck)
– Spouse leaving job, and starting another new job Feb. 25. Newest employer has no HDHP option.
How is this going to shake out tax-wise?
– Understanding the Testing Period is out, will the 2018 $2000 employer contribution need to be partially recognized as taxable income?
– If non-HDHP insurance begins on Feb.25 2019, will Feb. 2019 HSA contributions become ineligible? Should non-HDHP insurance start date be pushed to March 1st?
– Will 2019 HSA contributions also need to be partially recognized as taxable income?
ThanksFebruary 8, 2019 at 12:09 pm MST #189314jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 7117Joined: 01/09/2016How is this going to shake out tax-wise? – Understanding the Testing Period is out, will the 2018 $2000 employer contribution need to be partially recognized as taxable income? – If non-HDHP insurance begins on Feb.25 2019, will Feb. 2019 HSA contributions become ineligible? Should non-HDHP insurance start date be pushed to March 1st? – Will 2019 HSA contributions also need to be partially recognized as taxable income?Click to expand…
- Yes, the 2018 employer contribution will be partially taxed as you were over the allowable contribution limit for 2018 using the last-month rule
- Same for 2019 employer contribution, same reason as above
- Sounds as if you calculated the employee allowable contributions correctly
- You are not allowed to have any plan other than an HDHP while you are participating in an HSA plan. Recommend you push it back to March 1.
Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
Can any of these overpayments be withdrawn prior to tax filing to avoid tax/penalty?February 8, 2019 at 1:35 pm MST #189334jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 7117Joined: 01/09/2016
Can any of these overpayments be withdrawn prior to tax filing to avoid tax/penalty?Click to expand…
Yes, and I was wrong not to mention that! Too focused on rules and not solutions?
Tom Kazansky can either remove in the tax year, as follows:
- withdraw the excess contributions by the due date, including extensions, of his tax return for the year the contributions were made.
- withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on his tax return for the year he withdraws the contributions and earnings.
- use an excess contribution as his HSA contribution for/in a future year. Leave the excess contribution in the account and then apply it later; however, there w/b a 6% penalty per year.
Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
https://fox-cpas.com/for-doctors-only/February 8, 2019 at 1:44 pm MST #189335
Actually, this one of those HSA gotcha moments. Any overpayments while eligible for the last month rule are “deemed” to be electing the last month rule.
If you remove excess contributions on the amount that exceeds your prorated eligibility. That amount will be treated a non-qualified distribution subject to the 20% excise tax penalty.
That amount would “still” be subject to a 10% penalty for the “testing” failure.February 8, 2019 at 4:03 pm MST #189364February 8, 2019 at 5:02 pm MST #189374
Yes, here is the Caution in Publication 969, page 7, right column.
“If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income isn’t an excess contribution. If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later.”
Note: Like in the case of the 6% excise tax, you leave the contributions in the account. However, unlike that case this amount is not an excess contribution, does not have to be removed and is a one-time only 10% penalty.
Thank you, everyone, for the helpful feedback.
spiritrider – I’ve been studying the areas you highlighted in Pub. 969 – thank you.
This appears to be the most relevant section for the 2018 portion:
“If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax.”
Am I thinking through this correctly?
Eligible only for $575 for one month (Dec. 2018).
$2000 – $575 = $1425 must be reported as taxable income for 2019
10% additional tax applied to $1425 = $142.50
For 2019 excess contributions, relevant sections:
“You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.
-You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
– You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.”
“If you don’t use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it your Form 1040 or Form 1040NR. You may have to pay an additional 20% tax on your taxable distribution.”
So, for 2019, withdraw excess contributions (plus earnings), add to taxable income for 2019, then pay additional 20% tax on amount withdrawn.
Does that sound right? Is there an additional 10% tax for failing testing period?
Eligible for $1166.66 (Jan. and Feb.)
$2576.93 contributed (employer plus employee)
$2576.93 – $1166.66 = $1410.27 should be withdrawn (plus earnings) and reported as taxable income for 2019
20% additional tax applied to $1410.27 (plus earnings) = roughly $282.05
Additonal 10% tax?February 9, 2019 at 2:52 pm MST #189542
Correct for 2018.
For 2019, the last month rule did not apply and excess contributions and earnings removed by the due date are not subject to the 6% penalty You are only subject to ordinary income tax on the excess contribution and earnings.
The only time you would be subject to both the 20% and 10% penalties is if you mistakenly removed the amount subject to a testing failure and did not have unreimbursed qualified medical expenses to apply against that amount.
spiritrider – thank you for helping me untangle this.
To clarify my general understanding for the 2019 portion:
– As long as excess contributions are removed by the tax deadline for that year (April 2020 in this case), they can be removed penalty free.
– 6% tax on excess contributions each year they are not removed
– 20% tax on distribution if removed after tax deadline (April 2020 in this case)February 10, 2019 at 11:34 am MST #189686
HSA contributions must be made by the tax filing deadline, but you have until the tax filing deadline (~4/15) including extensions (~10/15) to remove excess contributions and earnings without penalty. There is a 6% excise tax on any excess contribution balance that remains.
There is no provision in Section 223 like there is in Section 408(d)(5) that allows IRA excess contributions to be withdrawn after the due date of the return.
However, you are correct that taxable HSA distributions on Form 8889 line 16 are subject to the 20% penalty and also deducted on Form 5329 Line 44 reducing any excess contribution balance.February 10, 2019 at 1:05 pm MST #189709