Category Archives: HSA mechanics

Qualified HSA Funding Distributions – Contribute to your HSA from your IRA

Note: if you are struggling with the Qualified HSA Funding Distribution on Form 8889, please consider using my service EasyForm8889.com. It asks simple questions and will complete Form 8889 for you faster than you can read this article.

Fund your HSA with your IRA

Besides all of the other benefits of HSA’s, the folks at the IRS have included a provision that allows you to fund your Health Savings Account from your traditional IRA or Roth IRA. This is called a Qualified HSA Funding Distribution and it allows you to contribute your yearly HSA contribution limit from your IRA. The IRS limits this activity to occur once in your lifetime but you will see that, in fact, you can make up to two qualified funding distributions in your lifetime. Additionally, there are some restrictions on how you make the transfer and that you maintain coverage after the transfer (called the Testing Period). We will give you the details and help you avoid taxes and penalties when making an HSA contribution from your IRA.

What types of IRA’s are allowed for Qualified Funding Distributions?

First of all, you have to have an individual retirement account (IRA) with some funds in it to contribute to your HSA. The IRS stipulates that your IRA be a traditional IRA or Roth IRA. They do not allow that an “ongoing” IRA be used for Qualified Funding Distributions, so this excludes ongoing SEP IRA’s (generally self employed) or SIMPLE IRA’s (cousin of the 401(k)). The IRS considers “ongoing” IRA’s to be those where an employer has made a contribution within the tax year that the HSA funding distribution would occur. Whether your plan is “ongoing” or “inactive”, and if you can contribute, is beyond the scope of this discussion but may be worth researching.

How much can I contribute to my HSA from my IRA?

The amount that you can contribute from your IRA to your HSA depends on your HSA coverage, your age, and the tax year. The quick rule is you can only contribute up to your maximum HSA contribution limit for the tax year in question. This isn’t a way to get extra money into your HSA, just a way you can fund it from an established source. So for 2017 here are some examples for the maximum contribution from your IRA to Health Savings Account:

Your insurance	HSA Contribution Limit (2017)	Qualified Funding Distribution Limit (2017)
Self Only	$3,400	$3,400
Self Only, 55+	$4,400	$4,400
Family	$6,750	$6,750
Family, 55+	$7,750	$7,750

Note that this amount is determined using 1) the HDHP coverage you have at the beginning of the month that the Qualified HSA Funding Distribution occurs, and 2) the your age at the end of the tax year.

When can I make a Qualified HSA Funding Distribution?

The IRS has ruled that you may transfer from your IRA/Roth IRA to your HSA once during your lifetime. This isn’t once per year, this is one and done. So if you are going to contribute from your individual retirement account, make it count. Use this information to plan and don’t make the mistake of funding too little, because you won’t get another chance.

However, like all good rules, there is one exception. If you make a Qualified HSA Funding Distribution while on Self-Only coverage, you may make an additional Qualified HSA Funding Distribution during the same year if your coverage changes to Family. This allows you to “step up” your contribution amount and in theory rollover a considerably higher amount of money from your IRA. And when you add the 55+ additional catch up contribution, this can be large. If you are over 55, this amount goes from $4,400 to $7,750, a significant increase. However, the IRS is explicit that this must happen in the same year, so it would require a significant event / lack of planning to occur, but hopefully it is useful for someone.

How to actually make the HSA contribution + tax effects

The IRS requires that any qualified funding distribution be made in a trustee to trustee transfer. This means that your IRA trustee (bank) must transfer the money directly to your HSA trustee (bank), without sending you a check. This prevents the money from going “missing” or being spent on non qualified medical expenses. It also prevents any time delays where the money is out of the system. Thus, to actually make the contribution you will have to log in to (or visit) your IRA bank and setup your HSA bank as a related account. You will then need to transfer the money directly to the HSA account, not to yourself. If the option is given, categorize each transaction (both the out and in) as an HSA Qualified Funding Distribution with your bank. This will allow you to remember exactly what happened and potentially avoid IRS warning signs on un-taxed IRA distributions / excessive HSA contributions. Either way, this amount will be indicated as a qualified funding distribution when you file Form 8889 that year.

If done properly, a qualified funding distribution is not included in your income, not tax deductible, and reduces the amount you can contribute to your HSA. This makes sense since because, in order, 1) you don’t need to pay taxes on this money, 2) you already took the tax deduction so you can’t double dip, and 3) it is an HSA contribution so you are prevented from contributing excess.

All in all these are pretty reasonable requirements and provide great flexibility to move money from an IRA to your HSA. However…

The Testing Period

HSA Funding Distributions have a Testing Period that requires that you maintain coverage after making the contributions. For those of you familiar with the Last Month Rule and its Testing Period, the concept is similar. If you make a Qualified Funding Distribution to your HSA you must maintain HSA eligible insurance for just over 1 year after the distribution is made. The IRS defines the Testing Period in Publication 969 (PDF) as:

The testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month.

So the Testing Period lasts for twelve months but through the end of that 12th month of the following year. As an example, if you make a qualified HSA funding distribution on April 1st of 2017, you must maintain HSA eligible coverage through April 30th, 2018. If you make more than one Qualified Funding Distribution by means of different coverage (self-only vs family), each distribution has its own Testing Period.

Failing the Testing Period

Unfortunately, the IRS levies hefty taxes and penalties if you fail the aforementioned Testing Period during the subsequent 12 calendar months. If for any reason you are no longer an eligible individual during that time, your previous Qualified Funding Distribution is:

Included in income (taxed)
Assessed a 10% penalty

So very stiff taxes and penalties for failing the Testing Period. Your previously tax free IRA contribution becomes taxed and, to top it off, a 10% penalty is levied. Again, per IRS Publication 969, the penalty for violating the Qualified Funding Distribution Testing Period is:

If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA funding distribution. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax.

This is a bit onerous of a restriction and one that is not to be taken lightly, as it carries quite a significant penalty. The key metric for determining failure is failure to remain an eligible individual. This means that you:

1) You must be covered under a high deductible health plan (HDHP) on the first day of the month
2) You have no other health coverage (see exceptions), you are not enrolled in Medicare, you cannot be claimed as a dependent

Thus, if you are thinking about changing insurance, thinking about a job change, or have a reasonable chance of losing your current health insurance, you will want to carefully consider taking the risk of making the Funding Distribution. In the following section you will see how to report this amount on HSA Form 8889 as well as how to account for taxes and penalties owed from

How to contribute to an HSA from a 401(k)

Notice that there has not been much talk about funding your HSA from your 401(k). This is because a 401(k) is an employer controlled plan and considered “ongoing” by the IRS. Thus, you cannot contribute directly to your HSA from a 401(k). But, there is an easy way to get around this, which is first converting your 401(k) into an IRA. Once that occurs, the account is out of your employer’s control and you are free to make the Qualified HSA Funding Distribution. You will want to be careful to do this by the book and avoid any taxes, but this should be easy enough to do to get funds from your 401(k) into your Health Savings Account.

Qualified HSA Funding Distributions on Form 8889

You will see the words “Qualified HSA Funding Distribution” in two places on HSA tax Form 8889. The first occurs on line 10 and records current year funding distributions made from your IRA. This is the most frequently used line and will reduce the amount you can contribute to your HSA for the year:

easyform8889-com_qualified_hsa_funding_distribution

The second instance of “Qualified HSA Funding Distribution” occurs on Line 19. For most people, this will be $0. However, for those that previously contributed to their HSA from their IRA and failed the Testing Period, they will need to make an entry here that is equal to the entire amount of their HSA Funding Distribution. This amount will be flow through to Line 20 where it is taxed and Line 21 where it is penalized:

easyform8889-com_qualified_hsa_funding_distribution_penalty

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Note: if you have an HSA, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

How to Open an HSA if your Employer Doesn’t Offer One

This was a reader question submitted by HSA Edge reader Alice. If you have a question get in touch and we’ll try to help. Email us at evan@hsaedge.com.

Our health insurance is through my husband’s work. We have a HDHP and an HSA account. Our oldest child is now 22 and out of college, employed full time, and we will not be declaring him a dependent on 2016 taxes. He is still on our health insurance plan, as it was the same cost to us.

My understanding is we cannot pay for his medical expenses with our HSA account, since he is not our dependent. I believe he is allowed to open his own HSA account. However, his work says he cannot open it through them, since he’s not on their health plan. My husband’s employer has told us he can open his own HSA but he can only contribute post-tax dollars, completely negating the purpose of the HSA account. What is the law and where/how does he open his own HSA account and contribute pre-tax earnings?

Thanks for your email. I only recently learned about the adult child HSA and it is a great benefit. Everything you say is true: your son has HSA eligible insurance, he can have his own HSA, his employer does not offer an HSA, and you cannot pay for his medical expenses using your HSA. There is just one key part missing that provides the tax benefit.

Your son does not need to have an employer open a Health Savings Account for him, he can do this on his own at whatever banking institution he likes. The only requirement is that you have HDHP eligible health insurance, which he does. All he has to do is some research on banks that offer HSA’s and go online and click “Open HSA Account” and fill out the forms. When selecting a provider, I would look at the fee structure because that can vary; I have had success with HSAbank.com.

In fact, many people establish HSA’s without their employer’s help. Employer’s that offer actual Health Savings Accounts (via a 3rd party banking institution) are likely also making contributions to the employee’s HSA. So in that regard it makes sense that they help you open the account as they will be directing their (and possibly your) contributions there. However, this is not at all required. There are many people (for example, the self employed) who have HSA eligible insurance and open up their own HSA account. Totally legit and acceptable, all the law states that you need is HSA eligible insurance.

As for tax benefits, it is true that your son will contribute post tax dollars to the HSA. However, this amount will be deducted from his income when he files his yearly taxes (see: Automatic vs. Manual Contributions), reducing the amount of tax he owes then. Specifically, when he completes HSA Form 8889, the amount he contributes to the HSA will flow down to Line 13, which will make its way onto Form 1040 and reduce his taxes.

So in summary, he does not need to contribute pre-tax earnings. Instead, his post-tax contributions will be converted into pre-tax contributions once he files his taxes, so he can enjoy all of the benefits of the HSA.

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Note: if you have an HSA, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

How Do Employer Contributions Affect My HSA Limit?

A common question readers have is how employer contributions to a Health Savings Account work and how they affect their HSA contribution limit for a year. HSA’s are very flexible in that basically anyone can contribute to your HSA (see: Who Can Contribute to a Health Savings Account), including yourself, your family, others on your behalf, and your employer. However, some differences exists for those contributions made by your employer in terms of taxation, reporting, and contribution limit.

Do employer contributions to HSA count towards maximum?

The short answer is yes, employer contributions count towards your HSA maximum contribution limit for the year. Looking at HSA tax Form 8889 shows you how this occurs:

form_8889_line_9_employer_contributions

The above Form 8889 was prepared quickly using EasyForm8889.com.

HSA Employer Contributions are entered on Line 9 of IRS Form 8889, so whatever your employer contributes to your HSA goes there. Line 12 is where the employer contribution actually affects your HSA contribution limit, since it subtracts the employer contribution from Line 8 which is a “running total” of your contribution limit up until that point. The result is compared to Line 2, your actual HSA contribution, and the smaller is reported on Line 13 which carries over as your deduction to Form 1040. So the net effect of this comparison is that employer contributions reduce your contribution limit from Line 3.

Are employer HSA contributions taxable?

For the account holder, if made directly to your HSA, Employer Contributions are not taxable to you. As you can see above, the amount flows into Form 8889 on Line 9 and then onto Form 1040 Line 25, which is in fact a deduction. So the employer contributions are reducing the possible tax deduction, but of course, this is free money. You can’t receive an employer contribution and then take a deduction for it. How the employer contributes matters, though. If your employer were to simply write a check and say “here is your HSA contribution”, this would be treated as a “bonus” or regular income and taxed. It would be wise to coordinate with the employer as it would be to both of your benefits.

For employers managing a corporation, HSA contributions are a deductible expense so are treated preferentially and reduce your tax liability. For S-Corps and Partnerships, the contribution is treated as a distribution which is claimed by the recipient, but not the business.

HSA Employer contributions found on W2

HSA contributions from your employer are shown on Box 12 of your W2 with code “W”. They will take one of the available Box 12 spaces, mark a “W” to indicate HSA, and enter the amount in the box to the right. If only your employer contributed to your HSA, this is easy and you are done.

w2_hsa_employer_contributions_box_12

However, one confusing aspect of this is that your personal contributions made to your HSA may show here if they were withheld from your paycheck. These are called “cafeteria plan” contributions and should in fact be put on Form 8889 on Line 9, not Line 2. This is a common mistake, but looking at Form 8889 Line 2 you can see that these cafeteria plan contributions are excluded and instead go on Line 9 (employer contributions):

form_8889_line_2_cafeteria_plan_contributions

The above Form 8889 was prepared quickly using EasyForm8889.com.

HSA contributions: employee vs. employer

The main difference between employee and employer contributions is who is paying for them. Of course, free money is free money, so if you can get employer contributions, do it! Another difference is how they get into your Health Savings Account: employer contributions should be directly deposited, whereas you will contribute your HSA contributions manually. Note the exception here is if you make cafeteria plan contributions, which are withheld from your paycheck (see above). Additionally, employer contributions go on Line 9 of IRS tax form 8889, whereas personal contributions go on Line 2.

On the other hand, there are many similarities between employee and employer contributions. Both types of contribution count toward your HSA maximum contribution limit. This occurs in different sections of Form 8889, but eventually they make there way to Line 13 which is your HSA deduction that flows to Form 1040. Both types of contribution go into your Health Savings Account and are yours forever, and you may spend them on whatever qualified medical expense you want. Your employer will never see how they were spent and cannot claw back those contributions.

HSA employer contribution limits for 2016

The maximum amount your employer can contribute to your HSA is calculated in the same manner as your personal contribution limit. For 2016, the HSA maximum contribution limit is $3,350 / $6,750 for single / family coverage. In addition there is a $1,000 catch up limit applied to those over 55 years old. So between your personal and employer contributions, you cannot exceed this limit. If you are on single coverage and your employer contributes $3,350 to your HSA, you can make $0 in personal contributions for the year without over contributing. However, if you are 56 years old with single coverage and your employer contributes $3,350, you could make a personal $1,000 contribution for a total of $4,350 as part of the 55+ additional catch up contribution.