Author Archives: Evan

Correct HSA Excess Contribution from Prior Year

This question was submitted by HSA Edge reader Sue. Feel free to send in your question today to evan@hsaedge.com.

I made a contribution on 12/29/16 of $3,000, however, I was not HSA eligible in 2016. How can that be corrected to reflect the correct tax year of 2017? The trustee could not correct it. Should my CPA refile 2016 taxes to report the correction?

Excess Contributions

HSA excess contributions occur when an amount greater than the account owner’s contribution limit is contributed to the HSA. It sounds like you made an excess contribution in 2016 as you were not HSA eligible. While you would like to move that contribution for 2017, it is currently September of 2018, so that tax year is likely closed.

Generally, the remedy for excess contributions is for the account owner to remove the excess contribution from the account before taxes are filed taxes for that year. This can be done on Form 8889, see “Correcting HSA Excess Contribution on Form 8889“. I don’t believe the custodian can fix it for you. That would involve them saying, “This contribution wasn’t for 2016 it was for 2017”. I don’t believe they can roll a contribution forward like that. The only time they can do that is to reclassify a contribution as a prior year contribution, as in, “This 2018 contribution was made before my tax deadline (contribution cut off) and I want it to reclassify it as a 2017 prior year contribution”.

To avoid headaches, remove Excess Contributions in the year they occur.

In your case, since that excess contribution removal did not happen, you may have misstated your 2016 tax returns if you did not pay taxes on that HSA contribution. Said another way, you likely took the HSA deduction on $3,000 when your contribution limit was $0 as you were not HSA eligible. This means you underpaid taxes on that $3,000 of income in 2016.

Leaving Excess Contributions in your HSA

The IRS imposes a penalty for leaving excess contributions in your HSA. This is called the excise penalty and amounts to 6% of the excess contribution per year it remains in the account. Per Form 969:

Generally, you must pay a 6% excise tax on excess contributions (see Form 5329). The excise tax applies to each tax year the excess contribution remains in the account.

So besides having tax deduction headaches, the IRS throws in a yearly penalty on the amount of the excess contribution.

Correcting Prior Year Excess Contributions

Correcting prior year HSA excess contributions involves moving the contribution from when it was excessive to when it was allowed. However, this tricky because it affects tax forms and involves both 1) correcting tax deduction (i.e. paying taxes) and 2) paying the 6% excise penalty in prior years. The procedure is to go back to the source, pay any taxes on the excess contribution, pay any penalties up until contribution is allowed, and then take the contribution in the allowable year. You will receive the HSA deduction when you remake the contribution, so that at least offsets paying the taxes in the prior year.

Correcting prior year HSA excess contributions involves moving the contribution from when it was excessive to when it was allowed.

In summary, I believe the way to correct your situation is to:

Restate 2016 income tax form to remove HSA deduction
Pay 6% excise tax on excess amount in HSA in 2016
Pay 6% excise tax on excess amount in HSA in 2017
Take deduction for contribution in 2018 for amount already in HSA, assuming you still have HSA coverage.

[Note that if you filed an extension for 2017 you may still be able to make the HSA contribution for that year and avoid #3 above.]

Deduct Excess Contribution in a later year

Form 969 also allows you to deduct the excess contribution in a later year. This means that you made an excess contribution in a prior year, did not take the tax deduction then, left it in your account, and later use that amount as a valid contribution in a later year. You thus receive the tax deduction for that year. This option is utilized in step #4 of the solution above. Form 969 states:

You may be able to deduct excess contribution for previous years that are still in your HSA. The excess contribution amount you can deduct for the current year is the lessor of 1) Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year and 2) the total excess contributions in your HSA at the beginning of the year.

Note: if you need help excess contributions this year, please consider using my service EasyForm8889.com to help complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

HSA Additional 55+ Contribution When Turning 55

This question was submitted by HSA Edge reader Steve. Feel free to send in your question today to evan@hsaedge.com.

I will be age 55 on 12/4/18 and have single-person HSA coverage. Must I wait until I am actually 55 in December to make the $1,000 extra contribution, or can I begin making monthly contributions now and throughout the rest of 2018 that total an extra $1,000? My employer won’t allow extra contributions until I am actually 55 on 12/4/18.

Making an HSA 55+ Catch Up Contribution

Health Savings Accounts have a great feature for those 55 and older that allows you to contribute an additional amount each year, currently set at $1,000. This extra amount is added to your self-only or family contribution limit, which allows you to contribute your self only or family amount, plus the additional $1,000 each year. We like this because it lets you contribute more money to your HSA. Now, this assumes that you did not end coverage during the year, in which case the self-only and catch up contribution are pro-rated for the months you had coverage. Either way, it is a great way to get some extra funds into your HSA.

The question at hand is one of timing. Can you make the 55+ contribution any time during the year you turn 55? Or, if you are not yet 55, do you need to wait until your 55th birthday to actually make the 55+ contribution? If the latter was the case, that leaves Steve with only 2 weeks before the end of the year to make that contribution. Moreover, his employer is telling him he needs to wait until this time to make the contribution. How do they track and enforce that? For example, if I am contributing 1/12 of my limit per year, including the $1000, I am “under” contributed for about the first 10 months of the year.

55+ Contribution Can Be Made Anytime During Year

Luckily, the IRS opines on this matter indirectly in Form 969 and it is favoriable to the consumer:

HSA-55+-additional-catch-up-contribution-timing

Here, the IRS states that the eligible individual who is 55 or older by the end of the tax year has their contribution limit increased. Remember that HSA contribution limits are per year, so you only have 1 contribution limit for a given year. Generally, you can determine that limit on January 1st (barring any change in coverage). Contrary to what Steve’s employer states, the IRS does not say that the catch up contribution limit is only increased pro rata by age, or only applies once the person actually turns 55, or can only be contributed to once the person is 55. It simply states that if you will be 55 during the calendar year, your contribution limit is increased. Thus, the reality is you can make that contribution whenever you see fit.

In Steve’s case, he will be 55 in December at the end of 2018. Thus, his 2018 contribution limit is increased for the entire year. That means that he can begin contributing his 55+ contribution as early as January 1st, 2018. He does not need to wait until he is actually 55 to make that catch up contribution.

I advised Steve to take this up with his employer and HSA custodian. While an employer can create any rules they wish, this is likely a simple oversight of how HSA plans function. Hopefully they can change this to align with how HSA’s work and make it easy on people like Steve who have late birthdays. It also allows people to gain the benefits of front loading their HSA contributions early in the year.

Note: if you need help accounting for your 55+ contributions on your HSA taxes, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

HSA Contributions from Others on Form 8889

This question was submitted by HSA Edge reader James. Feel free to send in your question today to evan@hsaedge.com.

I read your article on “Contributing to HSA’s with a Cafeteria Plan” and have a question. I am a federal employee with the Aetna High Deductible Health Plan. The government automatically deducts my premiums from each paycheck pretax through premium conversion. Aetna contributes $1,500 to my HSA each year. Where do I report Aetna’s $1,500 contribution on Form 8889?

One of the benefits of Health Savings Accounts is that literally anyone willing can make a contribution to your HSA on your behalf. This means that if you have a parent, grandparent, rich uncle, friendly employer, or random organization that wants to give you money for your medical care, you can accept it in your HSA.

HSA Contributions from Others are Tax Deductible

As if receiving free money wasn’t enough, the IRS gives you another special bonus for HSA contributions from others on your behalf. Incredibly, these contributions from others are deductible on your return. Yes, you read that right: if you receive HSA contributions from another person, you receive a tax deduction for this money. Per Form 969:

HSA-contributions-from-others-on-your-behalf-tax-free

In the above, “eligible individual” is the term for the HSA account holder. The result of this amazing tax treatment is that it trues up these other funds going into your HSA, and in effect gives them the same tax preferred status as your regular HSA contributions. In other words, if you receive a an HSA contribution from another on your behalf, you get the contribution as well as the deduction equal to the contribution amount times your marginal tax rate. Score!

Reporting Other HSA Contributions on Form 8889

Come tax time, reporting these contributions on Form 8889 can be a complication. Two lines on that form are used to report regular contributions to the HSA. Line 2 is used to report pre-tax contributions that you made during the year. Amounts on this line will reduce your taxable income. Line 9, on the other hand, is called Employer Contributions and amounts here do not reduce your taxable income. The “contributions from others” do not fall neatly into these categories, and are sort of in an “in between” zone.

Luckily, the Form 8889 instructions provide guidance on this situation. Comparing the two tax form lines, you can see that this situation is explicitly handled:

HSA-Form-8889-Line-2-tax-deductible-contributions
HSA-Form-8889-Line-9-employer-contribution-info

Per your question, it is not entirely clear if Aetna is contributing as your employer or as another entity. Since they are an insurance company, my guess is as another entity i.e. as another on your behalf. In this case, it is the best possible scenario, as you get the free money and get to deduct the contribution.

Note: if you need help recording your contribution on your HSA taxes this year, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.