So with my lack of access to a 401k yet, I was so eager to fund an HSA that I am going to run into trouble in 2019. Started my HSA eligible plan 11/2018 and fully funded it for 2018 and 2019. Did not realize two things – 1. To take advantage of the last month rule, I need to have the HSA for all of the following year and 2. that the amount I can fund this year is pro-rated by the number of months. At this point, I will almost certainly have the HSA plan only for 7 months this year.
I believe I need to take money out to avoid (still possible?) penalties. Or do I have to pay a penalty either way at this point? Upon realizing this, I held off on filing taxes yet so I technically haven’t claimed any deduction for my contributions yet.
My HSA is at Fidelity.
I have thought about seeing if my new employer can just pay my premiums for me to have an HSA plan for the rest of the year (would be cheaper for them than the premiums they will be paying) but I’m not sure this is worth the risk since I already met my deductible with my current plan – though it was for a medical issue that is not really relevant anymore. Unless, they are giving me the difference in the premiums, I’m not sure the deduction is worth the exposure to a whole new high deductible. I suppose it depends on what my penalties may be.
Any assistance would be much appreciated!March 13, 2019 at 7:39 pm MST #198290
You will only be eligible for 9 months of contributions, either at the single or family level depending on your situation. You will have to pay a penalty for violating the last month rule but you’ll avoid the over-contribution penalty if you get the excess out before tax due date. See IRS Pub 969:March 13, 2019 at 8:54 pm MST #198303
In reading the document, it says this:
“You may withdraw some or all of the excess contribu- tions and avoid paying the excise tax on the amount with- drawn if you meet the following conditions.
If you are no longer an eligible individual, you can TIP still receive tax-free distributions to pay or reim-
• 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• You withdraw any income earned on the withdrawn contributions and include the earnings in “Other in- come” on your tax return for the year you withdraw the contributions and earnings.”
To me that seems to say that if I remove my excess contribution 10/12 * $6,900 = $5,750 and then also report 10/12 of the gains from its investment that I should avoid any penalty. Am I reading that correctly?March 13, 2019 at 9:25 pm MST #198314
There are 3 penalties with HSAs – a 10% tax for violating the last month rule, a 6% annual penalty on over-contributions, and a 20% tax on non-qualified withdrawals (provided you’re not disabled or 65+).
You won’t owe the 6% penalty if you get your 2019 payment and it’s earnings out. You will, however, still owe a 10% tax on the 2018 contribution amount that doesn’t qualify if not for the last month rule. You were presumably eligible in 11/18. So you were eligible for 2 months in 2019, plus the presumed 7 months this year, for a total of 9 eligible months. This will all be reconciled on your 2019 taxes. For now just worry about getting that 2019 lump sum and earnings out.
And add this to the memory banks of those advocating for lump summing HSA contributions.March 13, 2019 at 9:37 pm MST #198317
Is this true even if I haven’t yet filed my 2018 taxes?March 13, 2019 at 9:39 pm MST #198318
You’ll claim the 2018 contribution as a deduction on your 2018 taxes. But the issues described above will get reconciled on the 2019 taxes. You’ll have to add to your income the portion that violated the testing period for the last month rule, plus the 10% penalty. The 2019 contribution plus earnings needs to be removed prior to the tax filing deadline, regardless of whether you filed or not.March 13, 2019 at 9:45 pm MST #198319spiritriderParticipantStatus: Small Business OwnerPosts: 1971Joined: 02/01/2016
@ENT Doc is correct. You are “deemed” to have used the last month rule for any amount you contributed in 2018 > your 2018 prorated contribution limit. If you fail the testing period for 2019 you will be subject to ordinary income taxes and the 10% penalty on this amount on your 2019 return, but the amount remains in the account. It essentially becomes an after-tax contribution with likely tax-free distributions, i.e. a Roth-ish contribution with strings
You can NOT remove it as an “excess contribution”, because it is not one. If you were to remove the amount contributed under the last month rule. The amount > unreimbursed qualified medical expenses will be subject to a 20% penalty for non-qualified distributions. You will still be subject to ordinary income taxes and the 10% penalty and not have contribution still in the account. See the caution about this in Pub 969, page 8, first column.
Okay got it.
So I don’t need to do anything with Part III of Form 8889 for my 2018 returns correct? Just need to remove my excess 2019 contributions and then complete part III on Form 8889 for my 2019 returns where I report 10/12 * 6900 = $5,750 as taxable income for 2019 and pay a 10% ($575) penalty in 2019?
I would then get the deduction for the full $6,900 contribution on my 2018 return?spiritriderParticipantStatus: Small Business OwnerPosts: 1971Joined: 02/01/2016
The $6900 will reduce your 2018 AGI.
The amounts contributed by payroll deduction through an employer plan will reduce your W-2 Box 1 wages.
Direct contribution amounts to the HSA custodian can be deducted.March 14, 2019 at 7:11 am MST #198371
I now know that I only had my HSA plan for 8 months this year but already contributed $7,000 for 2019. Therefore I should ask for a return of my excess contribution with the amount of the excess being 4/12 * $7,000 = $2,333.33 correct?
Thank you!!September 4, 2019 at 7:17 am MST #243604