Category Archives: Reader Question

HSA Family Contribution Limit with Spouse on Medicare

This question was sent in by HSA Edge reader Tim. Feel free to email your question to evan@HSAedge.com

I have client whose wife is on Medicare. Client has parent child coverage in effect. Can client contribute full family amount of $7,000 plus $1,000 for being over 55?

Contribution Limit determined by HSA eligibility

It sounds like you are trying to determine the contribution limit for a family where the wife is not HSA eligible due to Medicare. The contribution limit depends on who is actually covered by the policy, and for what amount of time. Note that Medicare can retroactively affect your HSA coverage. Either way, the IRS test for contribution is called HSA eligibility. It contains 4 rules which are:

HSA-what-is-an-eligible-individual

If any of the above are violated, the individual is not HSA eligible and they cannot open or contribute to an HSA. It isn’t entirely clear from your email who is covered under the HSA eligible plan and who is not.

Family coverage includes the eligible individual and at least one other individual – whether they are an eligible individual or not.

Here are the valid scenarios I can think up:

1) Parent and child covered

If your client and the child are covered by the HSA insurance, you are correct in your assertion: family coverage of $7,000 + $1,000 catch up if client is 55+. This assumes the parent is HSA eligible. For example, the wife’s Medicare doesn’t cover the client, which would disqualify based on rule #1 above.

2) Parent, wife and child covered

Same as the above. This would mean your wife is covered by both Medicare and the HSA plan. She is not an eligible individual, and can’t have an HSA, but assuming the client is eligible, he plus the child count as two members which allows the family contribution limit (plus any 55+ catch up contribution).

3) Wife and child covered

If only the wife and child are covered by the HSA insurance, a strange situation develops since the wife is not HSA eligible. Based on the IRS rules in Form 969, at least one eligible individual is required to contribute to the HSA:

This is supported by Form 969, which defines self-only and family coverage. Note the specific language for family coverage and the “Other” individual who is covered:

HSA-self-only-or-family-coverage-definition

This leaves the determination based on the covered child, since the wife is not eligible due to Medicare:

If child is an eligible individual, family contribution applies (no 55+) but must go into eligible individual’s (child’s) HSA.
If child is not an eligible individual, no contribution limit seems to apply.

Likely, the above test of the child will boil down to point 4 in the eligible individual calculation: is the child is a dependent or not? Basically, “are they old enough to pay taxes?”. The result is odd, in that only the child could open the HSA and contribute the full family contribution limit (no 55+ likely applies). Of course, they would need those funds, or you would need to contribute it for them. Note that this is the scenario discussed in Your Adult Children can Fund their HSA. However, note that the parent’s could not fund the HSA in this scenario.

Covered by HSA, but no contribution limit

The above discussion displays the possible scenario where one’s family can be covered by an eligible HSA plan but they are not allowed a contribution limit. This is generally due to violating the eligible individual definition, but could take the following forms:

Husband, wife and child are covered. Wife on Medicare, and the Medicare applies to Husband. Child is a dependent.
Husband and wife have HSA eligible insurance. Wife has an FSA at work, which also covers the spouse, violating the “Other coverage” clause. (Note – in 2018 there was legislative discussion of changing this FSA rule.)
Family coverage begins on the 2nd of the month. Not eligible to contribute for that month, but can contribute going forward. Note that they have the option to make this up this missed month using the Last Month Rule.

In all of the above examples, HSA coverage exists but due to other factors, the individual has a $0 contribution limit and cannot contribute to the HSA at this time.

Note: If you want help calculating your HSA contribution and filing your taxes, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

Delaying Reimbursement for HSA Purchases

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

Does a $45 unreimbursed qualified medical expense (QME) equal only a $45 tax free withdraw later, or does it equal a ($45 + interest/gains) tax free withdraw later? Do you see the distinction?

Paying for Medical Expenses

Each year, you are allowed to make contributions to your HSA based on your coverage and age. Funds in your HSA can be distributed tax free for qualified medical expenses. Regardless of how the funds get in the account, they can come out tax free if used correctly.

That said, you face a choice each time you make a purchase for a qualified medical expense. You can either:

Pay for the expense using funds from your HSA
Pay for the expense using non-HSA funds (say, cash or your credit card)

If you use option 1, the transaction occurs quickly: you buy your medical item and your HSA is reduced.

If you elect option 2, the transaction can occur quite slowly: you buy your medical item with non-HSA funds, and you are now allowed to reimburse that purchase from your HSA at any time in the future. Reimburse means you can transfer funds from your HSA to another (bank) account you own to “pay back” the expense. Doing so in effect pays for the expense with tax-free funds from your HSA. See more information in the article “Using your HSA as an ATM“.

Delaying Reimbursement of Medical Expenses

The interesting thing is the timing of this distribution. If you do it immediately, the transaction ends up looking a lot like #1 above: the money flows from your HSA to your account, and the transaction is fully paid and reimbursed and completed. However, delaying this reimbursement provides some interesting options:

The amount of the purchase remains in your HSA
It can earn interest
It can be invested in stocks, ETFs, or bonds
It may grow to more than the initial amount of the purchase

The crux of your question is with the last bullet above – the purchase may grow to more than the initial amount. Perhaps substantially so. How do I handle this increased amount in my HSA?

Investment Gains in your HSA

In your example, you made a $45 purchase paid with cash instead of using HSA funds. You can reimburse (transfer) that $45 from the HSA to your bank account tax-free at any time, but not more than $45 since the receipt does not justify a higher amount. Going further, say you invested that $45 and it earned $100 before you reimburse (transfer) out the $45. You now have $100 sitting in your HSA. You cannot reimburse it against the $45 receipt, but you can use it to pay for future medical expenses.

Earnings in your HSA are handled just like any other HSA contribution.

When a new medical purchase occurs, this “new” $100 in your account provides two options:

Distribute it to pay for the purchase
Again pay using other funds and continue to invest the $100

Using #2 above, you can see how the whole cycle can repeat and grow your HSA.

This is a powerful concept because doing so allows you to grow medical (and later, retirement) funds tax free and distribute them at no (or low) cost. In theory, you can invest your HSA and grow it beyond the contribution limit for a given year.

Note: I created TrackHSA.com to track medical expenses you plan to later reimburse from your Health Savings Account. It provides record keeping to store purchases, upload receipts, and record reimbursements securely online, no matter how far in the future you choose to reimburse them.

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.