Tag Archives: HSA

Short Term Investment Tax Implications for HSAs

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

What is the tax consequence for holding an investment through an HSA brokerage account for a short term? Iknow that HSAs are tax free if you obey the rules of the HSA, so I’m assuming there’s nothing limiting the length of time held in an investment?

Tax Free Growth

You are correct that there is nothing that limits or penalizes investment length in the HSA. As part of the HSA’s triple tax advantage, investments grow tax free. This means that capital gains, either short or long term, are not assessed on any growth in the HSA. Per IRS Form 969:

The interest or other earnings on the assets in the account are tax free

In a non-tax advantaged (regular “brokerage”) account, a tax liability is created when earnings occur from buying and selling a financial instrument. The rate of those capital gains is determined by how long the investment is held. That amount must be aggregated at tax time and paid, with any losses offsetting taxes on gains. This is not the case with an HSA, and this is a benefit to the user in terms of:

long term growth
tax savings
reduced paperwork

Thus, the HSA can be used as a “trading vehicle” without penalty, although the risk of that strategy is up to the account holder to decide.

FYI Fidelity recently started offering HSA’s with no fees and very good investment options.

Note: If you want help filing 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.

HSA Expenses Incurred Before Opening Account

Opening an HSA

The timing of opening your Health Savings Account –going to a bank and actually creating an account in your name– ends up being quite important for your finances. The reason is the date you open your Health Savings Account is the date that qualified medical expenses begin for you. Any medical care incurred before you open your HSA does not count as a qualified medical expense. Said another way, you cannot use pre-tax dollars to purchase medical care that occurred before you actually created your Health Savings Account. Per IRS Form 969:

For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses. State law determines when an HSA is established.

It is actually easier than most people think to open up a Health Savings Account. The main difficulty comes in choosing a provider. Things I look for are low fees, online banking ability, phone app, and investment options. Once you find the financial institution you wish to bank with, you need to apply for the account. While this sounds painful, it is actually quite simple. To open the HSA, they will need standard information such as name and address, and also some information about your health insurance. They will use this to validate that you do in fact have an HDHP, and also use your self-only or family coverage for a rough determination of your contribution limit for the year. They use that information to help prevent contribution mistakes and it aides in generating Form 5498-SA and Form 1099-SA. Once you submit that, you are all set, and you can begin making contributions to your HSA.

The cost of not opening an HSA

You must overcome the tendency to delay opening your HSA, as it could come back to bite you. If you have HSA eligible insurance but have not yet opened a Health Savings Account you may be on borrowed time, as any medical expense incurred cannot be paid with pretax dollars. The risk to you can be equal to the (amount of expense) x (your tax rate). Even a $100 expense for someone in a 25% tax bracket will end up costing them $33 extra. Said another way, it takes $133 dollars taxed at 25% to pay for a $100 medical expense. For an HSA holder, they only need to earn $100 to pay for the expense. Multiply this expense by 10 and this $1,000 expense will cost you $333 in extra tax dollars paid, all of which is completely avoidable. This money adds up and there is no reason to pay it with the generous HSA contribution limits.

Effect on Contribution Limit

While opening the actual Health Savings Account begins the process of allowing qualified medical expenses, it does not have an effect on your contribution limit for the year. Your contribution limit is based on when you are an eligible individual. So you can have HSA eligible insurance and be allowed to contribute to your not-yet-open HSA. Of course, you will need to open that Health Savings Account before you make that year’s contribution.

Take the following scenarios as an example:

HSA coverage begins	HSA opened	QME begin	Contribution Limit	Last Month Rule?
January 1st	June 1st	June 1st	Full	N/A
January 1st	January 1st	January 1st	Full	N/A
June 1st	June 1st	June 1st	1/2 up to full	Optional
June 1st	October 1st	October 1st	1/2 up to full	Optional

As you can see above, delaying in opening your HSA can prevent you from paying for medical care from your HSA. If you plan on contributing to an HSA you might as well open the account as soon as possible, to take advantage of paying for medical care tax free with the HSA.

————————————

Note: if you need to keep track of HSA purchases for yourself, your spouse, or your children, please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.

HSA 55+ Catch Up Contribution When Spouses Have Separate HSA’s

You are probably aware that Health Savings Accounts have a contribution limit that changes slightly each year, and that your coverage (self-only or family) determines how much you can contribute to your HSA. For example, the contribution limits for 2017 are $3,400 for self-only coverage and $6,750 for family coverage. In addition, there is a catch up contribution for those that are 55 or older before the end of the year in the amount equal to $1,000. The IRS defines this catch up contribution in Form 969:

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 $4,400 (the contribution limit for self-only coverage ($3,400) plus the additional contribution of $1,000).

To qualify for the 55+ catch up contribution, you must be 55 within the tax year, be HSA eligible, and not be enrolled in Medicare – basically all of the stuff to be able to contribute to an HSA. The only addition is the age constraint thrown into the mix. This is generally easy enough for self-only coverage, but what do you do if your spouse is over 55 and you are not? Or, what do you do if both you and your spouse have separate Health Savings Accounts? You may be surprised to learn that the $1,000 can go on different lines on Form 8889 based on your coverage situation.

Catch Up Contribution follows the HSA Holder

A guiding principle is the $1,000 catch up contribution follows the HSA account holder, i.e. you or your spouse. To determine your household’s eligibility for a 55+ additional contribution, you must determine if the HSA account holder is age 55 or older by December 31st of the tax year. If they are, you can contribute to additional $1,000 to their HSA account.

The downside is your household may not qualify based on arbitrary factors of who opened the HSA and their age. For example, assume you are over 55 but your spouse is not. If your spouse owns the HSA, neither can contribute a 55+ catch up contribution for that year, until the spouse turns 55. Only then can one extra contribution be made, even though you are already 55 or older. Again, the 55+ contribution follows the account holder, so your age (as a non account holder) is irrelevant. The risk here is you may be shortchanging your household that $1,000 catch up contribution if the HSA account holder is younger.

[The way to get around this is, assuming you are on family coverage, to open an HSA in your name, so that you can contribute that $1,000 (assuming 55+) on top of the shared regular HSA family contribution limit. See next sections.]

Both Spouses have Separate HSA

Remember when we said earlier that the 55+ catch up contribution follows the HSA account? That also applies if you have family coverage and both spouses have their own HSA in their name. However, the rule still holds that only account holders 55 or older during the tax year can contribute the $1,000 catch up contribution to their HSA.

As another example, if you have family coverage with separate HSA’s and you are over 55 and your spouse is under 55, only your HSA can receive the $1,000 catch up contribution. Since this scenario requires the HSA’s to split the family contribution limit among them, for 2017 you will divide the $6,750 up however you like but your account must have the catch up contribution in it, if you make that extra contribution.

Thus, valid contributions for 2017 might look like this for the 55+ / < 55 accounts:

$6750 / $0
$0 / $6750
$3375 / $3375
$7,750 / $0 ($1,000 catch up used)
$1,000 / $6,750 ($1,000 catch up used)

In contrast, the following contribution combinations are invalid for 2017 for 55+ / < 55 accounts:

$0 / $7,750 (can’t put $1,000 in < 55 account)
$100 / $7,650 / $0 (must put all $1,000 in 55+ account)
$999 / $6,751 / $0 (must put all $1,000 in 55+ account)

Both Spouses 55+ and have Separate HSA

If both you and your spouse are over 55, have your own HSA’s, and are on family HSA coverage, you can both contribute the $1,000 catch up contribution to each of your HSA’s. For 2017, assuming full year coverage, this would be a household HSA contribution of $8,750 ($6,750 + $1,000 + $1,000). Again per Publication 969:

If both spouses are 55 or older and not enrolled in Medicare, each spouse’s contribution limit is increased by the additional contribution. If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,750. Each spouse must make the additional contribution to his or her own HSA.

This is a secret HSA backdoor to increase your contribution limit above and beyond the stated family contribution limit, all by opening an HSA for each spouse. Many people don’t know that they can contribute so much money to an HSA as a family. Doing so should not bring additional cost, as it requires simply opening an HSA in your name. The cost being your time, a tax form, and perhaps an account minimum, but you gain an extra $1,000 / year in triple tax advantaged contributions.

————————————

Note: if you have an HSA, please consider using my service EasyForm8889.com to complete Form 8889 come tax time. It is fast and painless, no matter how complicated your HSA 55+ contribution situation.