Tag Archives: Form 8889

How to Make a Non Qualified Withdrawal from your HSA

This question was submitted by HSA Edge reader Felicia. Feel free to submit your question today to evan@hsaedge.com.

I would like to withdraw money from my HSA as a non qualified withdrawal. How do I do this?

Doing a non qualified withdrawal from an HSA is dangerously simple – all you have to do is take the money out. There are no forms during the distribution that declare whether it is qualified or not. Instead, this will be settled at tax time when you file Form 8889. It will ask how much money was withdrawn from your HSA, and how much of that was used to pay for qualified medical expenses. The difference is taxed and penalized as a taxable (non qualified) HSA distribution.

Here is an example of a non qualified withdrawal for 2016 created by EasyForm8889.com:

form-8889-non-qualified-withdrawal

In your case as in the above example, the amount withdrawn and the amount spent on qualified medical expenses do not equal. Thus, those are non qualified distributions and that amount is added to income and penalized. However, paying taxes and penalty may be worth it to get access to the funds.

There are some exceptions to paying the penalty – namely reaching age 65, becoming disabled, or dying – but those don’t often apply.

Of course, I would advise that you try to get this money out penalty free, so recommend my article Can You Cash Out An HSA. There are a few methods you can use to get funds out, but most involve incurring some sort of medical expense to disburse the funds. However, thinking creatively can help bridge this gap. For example, are there things you are spending money on that are actually qualified medical expenses? Or, are there any qualified medical expenses in your near future (e.g. glasses, doctor’s visits, procedures) that you can pull forward to at least get access to the HSA funds?

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Note: If you need to account for non-qualified withdrawals on Form 8889, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

How to Handle Excess Contributions on HSA Tax Form 8889

Overview

Excess Contributions occur when you contribute more to your HSA than you were allowed. This compares your contribution limit for the year (which can vary on many factors) and the actual amount of money that came into your HSA, including such things as Employer Contributions, Qualified Funding Distributions, and Prior Year Contributions. That being said, if you find yourself in a situation facing Excess Contributions, you may find it a challenge come tax time when you are faced with Form 8889. Fear not, as this article will guide you through how to avoid taxes and penalties and get this IRS required tax form filed.

Include the Excess Amount in Contributions

Part I of Form 8889 is appropriately called “Contributions”. It details amounts contributed to your HSA, your contribution limit, and calculates the deductible amount that flows over to Form 1040. It will feel strange, but you want to include all amounts contributed to your HSA, even if they are in excess. Doing so accurately reflects the account activity, so that when your HSA custodian provides Form 5498-SA to the IRS, the amount contributed will match your Form 8889. Remember, there is no taxes and penalty for having excess contributions in your HSA, if you remove them (and any earnings) before your tax filing deadline. The point is it is OK to show excess contributions in the contribution section of Form 8889, the key is that you have to proactively take care of them.

Example: Excess Contributions on Form 8889 Part I – Contributions

In this example we contributed $4,850 (contribution, employer contribution, and funding distribution) to our HSA. However, our contribution limit was only $3350, leading to an excess contribution of $1,500. The key is that we have included all contributions that caused the excess contributions and lived to tell the tale.

An example of 2016 Form 8889 prepared by EasyForm8889.com

HSA_excess_contribution_form_8889_1

Notice the warning at the bottom that states:

“Caution: If line 2 is more than line 13, you may have to pay an additional tax (see instructions).

Our Line 2 ($4,350) is indeed greater than Line 13 ($2,850), so we are at risk of paying excess tax. However, per the instructions, if we remove the excess contribution and any earnings on it before the tax deadline, we owe no taxes or penalty:

HSA_Excess_Contribution_instructions

To rectify this scenario, we would need to log into our Health Savings Account and request a distribution that specifically states it is a removal of an excess contribution for 2016 (see next section). You must specify this so that they don’t code it as a regular distribution for qualified medical expenses. In the above example this would be for $1,500 coming back out of the HSA. We will account for that removal in the next section.

Include the Excess Amount in Distributions

Part II of Form 8889 is called “Distributions” and details money that came out of your HSA. Similar to the logic stated in Part I, we need to be transparent about the excess contribution to avoid the ire of the IRS (and taxes and penalty). We will do this by 1) counting the removed excess contribution as a distribution and 2) calling it out as a distribution due to excess contribution. Again, you need to remove excess contributions (and any earnings) from your HSA before the tax filing deadline, and doing so creates a distribution from your HSA.

To actually remove the excess contribution, you need to go to the website of your HSA custodian and create a distribution for the excess contribution. When you do this (important), there should be a box stating “I am removing an excess contribution from my HSA”. This differentiates the distribution from one being used for qualified medical expenses, and informs your HSA custodian how to code the distribution on Form 1099-SA. If you correct the excess contribution before tax year end, this distribution will be reported on that year’s Form 1099-SA. If you do this in the following year (say, Jan-April 15th, before tax day), your HSA custodian may or may not send you a 1099-SA for the distribution before tax day. If they don’t, you need to keep that distribution of excess contributions in mind for filing taxes.

Example: Excess Contributions on Form 8889 Part II – Distributions

Reporting this activity on Form 8889 is relatively easy, as there is a mechanism in Line 14 that handles excess contributions for us. Back to our example of a $1,500 excess contribution that was removed, our Form 8889 ends up looking like this:

An example of 2016 Form 8889 prepared by EasyForm8889.com

HSA_excess_contribution_form_8889_2

Line 14 has 3 parts that we use to detail our distributions. We include the excess contributions removed in this total amount, and call out the amounts that were removed due to excess in 14b. The breakdown of line 14 is below:

Line 14a – The total amount of distributions for the year, including those for excess contributions and their earnings
Line 14b – Distributions that were for excess contributions and their earnings
Line 14c – A calculation of distributions that should have been spent on qualified medical expenses

As you can see, excess contributions avoid taxes here because they are excluded from Line 14c. If any amounts in 14c are not spent on qualified medical expenses, they are taxed and penalized. We stated that $300 that we normally distributed was spent on qualified medical expenses, by tracking our receipts in a tool like TrackHSA.com. The takeaway from the above logic is that the IRS does not expect you to spend excess contributions on QME, and does not tax or penalize you on these distributions if they are handled properly.

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Note: if you want step by step instructions for your Excess Contributions on Form 8899, or just want to get it right the first time, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation may be.

How to File Form 8889 For Your Old HSA Funds When You No Longer Have HSA Coverage

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

I was no longer under the High Deductible Plan with my new employer in 2017, however I had some left over funds in my HSA account from my previous employer. No contributions were made in 2016.

I used up all the funds in 2016 for qualified medical expenses. Do I skip parts I and III on the form and just fill out part II about the distributions?

Overview

This is a pretty common scenario that occurs as life goes by and people change insurance coverage. Frequently, people who previously had and contributed to an HSA eventually change coverage to a non-HSA eligible plan, due to a job change, insurance change, or life event. One of the great benefits of Health Savings Accounts is that the money remains yours forever, even if your coverage changes. This contrasts with other health plans like FSA’s where there is a “use it or lose it” clause on the plan, forcing you to predetermine a contribution amount and spend it in the year. Thus, the good news is you still have your HSA funds to spend on qualified medical expenses, but how do you file HSA tax Form 8889?

If You Spent Funds, You Need to File Form 8889

First things first, you definitely need to file Form 8889 if this situation applies to you. Even if you had the HSA plan 10 years ago, and are no longer contributing to the account, as long as you are spending funds from the HSA the government wants to know about it. The hard and fast rule is if money is going into or out of your Health Savings Account, you need to file Form 8889 for the tax year in which that spending occurred. This form is due by your tax filing deadline, and can be extended if extension is filed. It will be best just to file it with your regular taxes.

Note that if you don’t contribute to or withdraw from an HSA in a given year, you likely do not need to file Form 8889 for that year.

What follows is a summary discussion of filing Form 8889 if you no longer have HSA coverage but spent old HSA funds this year. More detailed information can be found about How to File Form 8889.

Part I – Contributions

Form 8889 consists of 3 parts, and the first one should be fairly straightforward. It’s main focus is determining your contribution limit and the amount you (and others) contributed during the year. Since the topic of this post is that you no longer have HSA coverage (but have funds in an HSA account), you will neither have 1) a contribution limit or 2) (allowable) HSA contributions. As such, this section will be all $0’s, which logically follows that your deductible amount (Line 13) will also be $0 and flow over as such to Form 1040.

Part II – Distributions

The second part of Form 8889 details the funds that exited your HSA, and this is where you will have to do some work. Line 14a and 15 are the main tasks here, and they are asking “How much exited your HSA” and, “How much did you spend on Qualified Medical Expenses?”. Ideally, both of these amounts should be the same: any money I withdraw from my HSA should be spent appropriately. If that is the case, you will face no taxes and penalties, but as you can see in subsequent lines 16 and 17b, any delta between those numbers will be taxed and penalized.

This 2016 Form 8889 was prepared by EasyForm8889.com.

Form_8889_Part_2_HSA_Distributions

Part III – Taxes & Penalties

Part 3 of Form 8889 involves a calculation of various taxes and penalties you might owe. These can arise from failure to comply with the Testing Periods set forth in the Last Month Rule and Qualified Funding Distributions. Hopefully, these do not apply to you if you are simply spending remaining funds from an old HSA. If so, this section will be blank and you can just add $0’s there as well.

However, if you recently ended insurance and in the prior year 1) utilized the Last Month Rule to increase your contribution or 2) utilized a Qualified Funding Distribution from a IRA/Roth IRA, you could be in trouble. Both of these contain a Testing Period that stipulates continued HSA eligibility conditional with their use, in an effort to prevent tax abuse. If you fail to maintain coverage for the specific Testing Period, your contribution is considered “excessive” and will be taxed and penalized for the tax year in question. It is best to fully understand these rules before engaging them, and if you are facing a penalty, thoroughly review how they are calculated or use a service like EasyForm8889.com.