Category Archives: Reader Question

Reimbursing HSA purchases from prior years

This was an Ask to Answer question submitted on Quora. Send your questions to evan@hsaedge.com

Can I withdraw from my HSA this year for a medical expense paid by cash during the previous financial year?

You can definitely do this, and in fact this can be a recommended strategy.

Your HSA is used to pay for health services and avoid paying tax. However, there are many methods you can use to implement this. The most straightforward is using a debit card linked to your HSA to purchase qualified medical expenses, so that that cost is immediately removed from your HSA. Another option is to pay for health services using a non-HSA method (cash, credit, check) and then reimburse yourself from your HSA. The reimbursement is generally just a bank transfer from HSA > checking account (or wherever) but can occur at any time.

The 2nd option is the one you are using, with a 1 year delay. You made a purchase in the prior year, and are now reimbursing yourself using your HSA. When you file Form 8889 for the reimbursing year, this amount will appear on lines 14 (distributions) and 15 (distributions paying qualified medical expenses), so there is no tax impact. Playing it exactly by the book.

The reason you may want to employ this strategy is it builds up reimbursable “credits” in your HSA account. You have this money as a safety net that you can withdraw at any time, since you already paid for the expense. Moreover, if you are investing your HSA, you are allowing that money to grow tax free.

HSA Catch Up Contribution Limits for Age 55+

This question was submitted by HSA reader Theresa. Send yours in to evan@hsaedge.com

Help, just watched your video on form 8889. Line 3 baffles me. What is entered on line 3 if you are NOT under age 55?? My husband is over 55 and I am under 55. He is the policy holder of the HSA. So does that mean I leave line 3 blank? So confused!

Thanks for your email. This certainly is confusing as upon review, I had not observed the nuance in making 55+ contributions when filing Form 8889 for HSA’s. You will see that filing Form 8889 for 55+ contributions depends on your age / plan coverage / marital status, so I’ll go through it in detail.

Background

To account for higher medical costs, and as an incentive for older HSA participants to increase their total savings, the IRS allows an additional $1,000 to be deducted from your taxes if you are over age 55. There are a few important things to consider regarding eligibility for this “catch up” contribution:

Must be 55 at the end of the tax year (12/31)
Cannot be on Medicare (see below)
Must be an eligible individual with HDHP insurance

This is backed up by the IRS tax rules for HSA’s, regarding additional 55+ contribution:

Additional contribution. If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. For example, if you have self-only coverage, you can contribute up to $4,350 (the contribution limit for self-only coverage ($3,350) plus the additional contribution of $1,000).

HSA Contribution Limits for over 55

Thus, if you turn 55 during a year, you can contribute the entire $1000 to your HSA that year. Of course, if you are older than 55, you can also contribute that $1000 each year. In technical terms, this means that your HSA contribution limit is increased by that $1,000, so for 2016 this gives us a total of:

Single coverage – $4,350 = ($3350 + $1000)
Family coverage – $7,750 = ($6750 + $1000)

How 55+ Contributions are filed on Form 8889

There is actually a bit of nuance as to where the additional $1000 appears on HSA form 8889 when you file your taxes. Where this amount is taken into account strangely enough depends on your coverage type and if you are married. You can view this by viewing the Form 8889 Instructions and seeing how the flow chart works for Line 3. You will notice that if you are married on family coverage, you get diverted to Line 7. Here is how things break down:

If 55+, single coverage, and unmarried – the $1,000 gets added to your single contribution limit on Line 3
If 55+, family coverage, and unmarried – the $1,000 gets added to your family contribution limit on Line 3
If 55+, family coverage, and married – the $1,000 goes on Line 7. For Line 3, enter your contribution amount without the $1,000

So to answer the original question, it sounds like your husband is 55+ and you are < 55, and that he is the primary holder of family coverage on the HSA. As such, you fall into the 3rd example above, so make sure that Form 8889 Line 3 is your family contribution limit (2015: $6,650) and Line 7 reflects your catch up contribution (2015: $1,000)

65+ with HSA and enrolled in Medicare

However, Uncle Sam is not as kind to seniors who are using their HSA and enrolled in Medicare. In fact, they do not allow contribution to HSA’s while enrolled in Medicare. This is applied on a pro rata basis, so if you are on Medicare for part of the year your contribution limit is reduced by that “partial” amount (percentage) for the year. Back to the IRS rules:

Enrolled in Medicare. Beginning with the first month you are enrolled in Medicare, your contribution limit is zero.
For example: You turned age 65 in July 2015 and enrolled in Medicare. You had an HDHP with self-only coverage and are eligible for an additional contribution of $1,000. Your contribution limit is $2,175 ($4,350 × 6 ÷ 12)

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Note: if you have an HSA, please consider using my free service TrackHSA.com to manage your Health Savings Account. You can store purchases, receipts, and reimbursements securely online for free.

Can I use the Last Month Rule for my first year on HSA?

This question was submitted by HSA reader Jennifer. Send yours in to evan@hsaedge.com

In 2015 I had health coverage under my spouse’s PPO. We divorced and I went on the Health Exchange effective July 1. I also opened a HDHP and an HSA account effective July 1, 2015. I contributed the full family amount of $6650 because my kids are on it too.

It was my understanding that as long as I was an eligible individual on December 1, 2015, I could deduct the full $6650 on my 2015 return. According to the Last Month Rule, I thought I would have a testing period for the next 12 months (and I do plan on staying on this same plan with HSA). My accountant is saying I have to prorate for 6 months, and I can only deduct $3325. Is he correct? If he is, I don’t understand the point of the Last Month Rule.

Thanks for your email, you are exactly correct in your interpretation of the Last Month Rule. For reference, here is a detailed article about the HSA Last Month Rule / Testing Period.

Your accountant is correct that the general theme of calculating Line 3 (contribution amount) is pro rata across months. See this post on Determining your Contribution Limit. However, like you said, there is an exception which is the Last Month Rule and your situation appears to fully warrant its use. Per Form 8889 Instructions:

Last Month Rule: if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered to be an eligible individual for the entire year.

Thus, as long as you have health insurance on December 1st, you can contribute up to the full amount for that year’s contribution limit, based on the type of insurance you had on December 1st (Family / Single).

But as Jennifer astutely pointed out, she has to maintain compliance with the Testing Period. Again, back to Form 8889 Instructions:

Testing Period: you must remain an eligible individual during the testing period. The testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2015 – December 31, 2016). If you fail to remain an eligible individual during this period, other than because of death or becoming disabled, you will have to include in income the total contributions made that would not have been made except for the last-month rule. 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.

Thus, if you take advantage of the HSA’s Last Month Rule, make sure you plan on maintaining HSA eligible health insurance for the following year. Otherwise, the next year you will face a penalty in Part III of Form 8889 for 10%, plus owe taxes on that amount.