Tag Archives: Contribution Limits

Remove Amount Greater than Excess Contribution from HSA

This question was sent in by HSA Edge reader Dale. Feel free to send in your own question.

I was only eligible for an HSA in 2018 for July and switched health plans immediately after my contribution. I contributed $685 which is more than 1/12 of my allowable amount ($371). If I request an Excess Contribution Reversal for the entire $685 + interest, am I allowed to consider my entire $685 as Other Income and just pay income tax on it?

Making and Removing Excess Contributions

Each year, the IRS determines the contribution limit, or maximum amount, one is allowed to contribute to the HSA. However, note that your contribution limit may differ from the IRS limit. Reasons that this may differ are:

Anything above your personally calculated contribution limit is considered an excess contribution. Excess contributions are not good – in effect, you have exceeded the tax deduction afforded you by the IRS. The IRS likes to collect what is due to them, so, understandably, frowns on this.

You can remove excess contributions from your account in the tax year they occur without penalty.

Luckily, there are options to correct Excess Contributions after they occur. This involves removing your excess contribution from your HSA before the tax date of a given year. For most people, this is mid April, though extensions do apply. If excess contributions are not removed, a 6% penalty is due each year for as long as the excess contributions remain in the account. This can add up over time.

You are correct that you can remove the excess contribution for 2018 up until your tax filing deadline (with extension). Per Form 969:

HSA-excess-contribution-removal-IRS-rules

Removing non-Excess Contributions

However, one very important point is that you cannot just remove funds willy nilly from you HSA. In your above example, you contributed $685 compared to your contribution limit of $371. This means you have a $314 excess contribution that can be removed. The whole $685 cannot be removed without penalty.

Any funds removed from your account that are not excess contributions face penalty and tax.

The IRS is firm on the fact that once funds go into the HSA account, they are to be used for medical purposes. Besides excess contribution correction, any removal of funds from the account are considered “Non Qualified Deductions”. Per IRS 696:

HSA-non-qualified-distribution-tax-and-penalty

Note that the above text “not used for qualified medical expenses” is incredibly broad. It includes any sort of scenario, other than removing excess contributions, where HSA funds are coming out of your HSA and not being spent on qualified medical expenses. This comes up often from readers as they assume they have flexibility to contribute / distribute from the HSA as they see fit. The IRS does not agree, and once the money goes in, it is not easy to just take out. Thus, care and planning should occur for calculating how much to contribute to your HSA during a year.

Calculating Non Qualified Distribution Penalty

Removing funds from the HSA not spent on medical expenses is costly. If this applies to you, see our article “Can You Cash Out An HSA?” for options on getting the money out.

If the penalty is indeed due, you will need to pay both tax and penalty on the amount. This sort of makes sense – the IRS is 1) undoing the tax benefit you got from the initial contribution and 2) penalizing you for not following the rules. This assessment occurs in Part 2 of Form 8889 under “HSA Distributions”. Here is what that section looks like:

Form-8889-HSA-Distribution-Penalties-and-tax

As you can see above, assume you have a non qualified or “excess” distribution that came out of your HSA. #1 indicates where your non qualified distribution is added to income and is taxed. #2 indicates where the 20% penalty is calculated and added to your tax bill due.

Overall, it is an expensive way of getting your money out. Plan accordingly.

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


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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:

  1. If child is an eligible individual, family contribution applies (no 55+) but must go into eligible individual’s (child’s) HSA.
  2. 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:

  1. Husband, wife and child are covered. Wife on Medicare, and the Medicare applies to Husband. Child is a dependent.
  2. 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.)
  3. 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.


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HSA Contribution Limit When Insurance Plan Changes

This question was sent in by HSA Edge reader Oscar. Feel free to email any questions you may have to evan@HSAedge.com

I switched jobs this year. My insurance changed from an HSA to another HSA plan with a different deductible. How does this affect my contribution limit?

Contribution Limit determined by monthly HSA eligibility

The answer to your question is “it depends”, so here is the way to determine this.

Your HSA eligibility is determined on the first day of each month. If you are an eligible individual on the 1st, you “earn” that month’s worth (e.g. 1/12) of the maximum contribution limit. At the end of the year, the sum total of these amounts is your contribution limit for the year.

Remember that an eligible individual is someone who is:

  • Covered by a HDHP on the first of the month
  • Has no other health coverage (including FSA’s)
  • Aren’t enrolled in Medicare
  • Can’t be claimed as a dependent on someone else’s tax return

IRS Form 969 confirms this:

HSA-what-is-an-eligible-individual

Note that the Last Month Rule can “override” the above logic and increase your contribution limit for the year, based on your eligibility on December 1st.

Calculating contribution limit

Assuming there was no gap in coverage on the first of any month, you will earn that month’s contribution limit as normal. If that means you are an eligible individual during each month of the year, you will earn 12/12 month’s credit and thus 100% of the full contribution limit for the year. This is the maximum contribution afforded to Health Savings Accounts.

On the other hand, if you had a gap in HSA coverage, you might have a reduced contribution limit. For example, if your original HSA coverage ended in August and your new coverage did not begin until October 1st, you would have missed September. That means you lose that 1/12 for September. Assuming you had coverage for the other months in the year, your contribution limit would equal 11/12 x (family/self only limit). Visually, it looks like this:

  1. January – eligible
  2. February – eligible
  3. March – eligible
  4. April – eligible
  5. May – eligible
  6. June – eligible
  7. July – eligible
  8. August – eligible
  9. September – not eligible
  10. October – eligible
  11. November – eligible
  12. December – eligible

For 2018, this equation would be 11/12 x $6,900 family limit = $6,325 for your contribution limit.

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.


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