Tag Archives: Prior Year Contribution

Paying for Medical Expenses with Prior Year HSA Contributions

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

My tax adviser informed me I can set up an HSA for 2017 if I do so quickly before the tax filing deadline in April. However, I don’t have a health savings account yet so need to open one. They also told me I can reimburse myself for the eligible out of pocket healthcare expenses that I had in 2017, from my 2017 contributions. However, the HSA custodian tells me I am not allowed to do so. What are the facts?

Your tax adviser offered good advice about opening the HSA and using prior year contributions to fund 2017. Even though we are in the new year, as long as you make the contributions by the tax deadline, you can apply them to the prior year. That said, the credit union is correct that HSA funds can only be used for expenses occurring after the HSA is established. This means that you cannot use the prior year contributions in you newly created HSA to reimburse prior year medical costs. This is called out in IRS Form 969:

HSA-expenses-before-opening-HSA

While you can make contributions for 2017, no medical expenses in 2017 will be considered qualified medical expenses. Even though you lose the ability to pay for those medical expenses with HSA funds, you at least make the contribution, gain the tax deduction, and can pay for future medical expenses with your HSA funds. This is on top of whatever you do in the current year, so assuming you have the funds to contribute, this is the best remaining option.

You cannot reimburse medical expenses that occur before the HSA is established

Note that if you had opened the HSA during the year, you could have used the prior year contributions to pay for qualified medical expenses. Since your HSA was opened after the medical expenses occurred, you cannot use the HSA (ever) to pay for them.

The takeaway is that it is important to open your Health Savings Account if you plan on contributing to it. Delaying this runs the risk that medical expenses will not be qualified medical expenses.

Note: to track valid prior year expenses that you plan to reimburse, consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online, no matter how far in the future you choose to reimburse them.

Health Savings Account Deadlines

Overview

Health Savings Accounts function by tax year. So 2017 is distinct from 2018, so on and so forth. Each tax year that you have HSA coverage gives you the opportunity to contribute to your HSA up to your contribution limit. However, eventually that tax year passes and you can no longer contribute to your HSA for that year. This article discusses when those timelines are and how to get the most out of your HSA for a year before the deadline.

HSA Current Year Contribution Deadline

For a given tax year, you can contribute normally to your account from January 1st until December 31st. You can contribute whatever amount you want at any time. This means that some people put the full year’s contribution in on January 1st, some contribute a pro-rata 1/12th each month, and others wait until the end of the year to make the contribution. The only risk you run by contributing early (say, in January) is over contributing. If you contribute the full amount in January, and subsequently end HSA eligible insurance, you will have excess contributions in your account that you need to remove.

The point is you can contribute to your HSA any time during the tax year. But what if you wait too long and miss that deadline?

HSA Prior Year Contribution Deadline

Luckily, the IRS is quite lenient and let’s you make prior year contributions to your Health Savings Account. This means that for a few months in the following tax year, you can make a contribution but flag it as a contribution for the prior year. The deadline for this prior year contribution is the day your taxes are due, generally April 16th.

You have up until tax day (generally April 16th) to make contributions to your Health Savings Account for the prior year. You can make contributions to your HSA for 2016 until April 18, 2017.

Note that making a prior year contribution requires a simple but special action taken with your HSA custodian. When you make the contribution, you will have to indicate specifically that it is going towards the prior tax year. This is because a contribution made in say, January, can be used for either the current year or prior year. Your HSA custodian needs to know how you handle this contribution and to which tax year you want it to count. When you make the contribution there should be an indicator for the tax year, so make sure you pick the correct one.

The IRS outlines the legalities of this in HSA Form 969:

You can make contributions to your HSA for 2016 until April 18, 2017. If you fail to be an eligible individual during 2016, you can still make contributions, up until April 18, 2017, for the months you were an eligible individual.

The interesting thing this points out is you do not need to remain an eligible individual to make prior year contributions. This means that your HSA insurance can end, but you can still wait until the following year to make prior year contributions. As an example, say you have HSA eligible insurance from January – June of 2016. Even if you contribute nothing in 2016, and even though your HSA eligible insurance has ended, you have until April 18th (tax day) of 2017 to make your full contribution limit for 2016. In this case, that would be 6/12 or 1/2 of the full contribution limit for 2016, since you had coverage for 6 months.

Deadline for HSA Employer Contributions

In addition, the deadline for employers to make contributions to your HSA for a given year is also tax day of the following year. Per IRS Form 969:

Your employer can make contributions to your HSA between January 1, 2017, and April 18, 2017, that are allocated to 2016. Your employer must notify you and the trustee of your HSA that the contribution is for 2016. The contribution will be reported on your 2017 Form W-2.

Note that the prior year employer contribution will be reported on your current year W2. This means that it will show as non-taxable income, and won’t affect that year’s contribution limit, but note that it will be there.

HSA Deadline for Reimbursement

One of the benefits of an HSA is there is no true deadline for reimbursing a qualified medical expense. To explain further, note that you can purchase health care using 1) your HSA or 2) something other than your HSA, such as a credit card or cash. If you buy a qualified medical expense with something other than your HSA, you are allowed to “reimburse” yourself for that expense at some point in the future. This reimbursement involves transferring funds from your HSA to yourself, generally the checking account. This in effect pays for the purchase with the HSA, giving you tax free medical spending.

Why would you want to do this? The benefit is that you can keep funds in your HSA longer. If you are investing your HSA, those earnings on HSA funds are growing tax free. By leaving purchases “in” your HSA and fully invested, not only is that money growing, but it is growing tax free, which is a huge IRS advantage. In addition, this reimbursable amount functions as a rainy day fund for you. You are allowed to reimburse it at any time, so if you ever need cash it can be quite helpful.

This is why record keeping and recording your HSA purchases is so important. You need to know what you have purchased, how it was paid, and whether it has been reimbursed or not. These needs were a big reason why I created and use TrackHSA.com, as it provides an audit trail for all of your HSA activity with which you can justify transactions to the IRS should they come knocking.

Note: if you need help accounting for your HSA contributions come tax time, please consider using my service EasyForm8889.com to complete Form 8889. It asks simple questions in a straightforward way and will generate your HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.

How Much Did I Contribute to My HSA?

This question was submitted by a user of EasyForm8889.com. Feel free to send in your question today to evan@hsaedge.com.

I don’t know where to find the amount I contributed to my HSA. The IRS says I had $774 in my HSA account. My W2 says my employer contributed $850. Does this make sense?

The bad way to determine your HSA contribution

First off, using your bank account, HSA transaction history, or W2 isn’t the way to determine your HSA contributions for a given year. Why is this? While these numbers may often equal the amount you contributed to your HSA, they may not equal what was reported to the IRS as contributed to the HSA. Mistakes happen, and sometimes your HSA administrator will miss a contribution or mess up the dollar amount. If this happens, they will report a different amount than you report on your taxes. This discrepancy can be a red flag to the IRS, which is why it is critical to have a “source of truth” for your HSA contributions. This serves as the official amount contributed to your HSA for the year, and if it is not correct, you can have your custodian fix it fairly easily.

Form 5498-SA reports contributions for the year

Each year, your HSA custodian (bank where you have account) is required to send you IRS Form 5498-SA. This form provides an accounting of all contributions to your HSA for the tax year, including personal, employer, prior year, and rollover contributions. Form 5498-SA is the “source of truth” we describe above, and is the final say in what was contributed. It is basically the “writing in stone” between you, your HSA custodian, and the IRS. Thus, if it is not correct, contact your custodian and make it so.

Here is an example of what Form 5498-SA looks like:

HSA_Form_5498-SA_2016 completed

For more detailed information on Form 5498-SA, please see this article.

Where is my Form 5498-SA?

Your HSA custodian is required to send you this form each year before you file your taxes. Generally, you should get the form by January 31st. However, mail gets lost or sent to wrong addresses. If you do not have your Form 5498-SA, don’t worry, you should be able to find this form on your custodian’s website in the document archive. Worst case, give them a call and ask to resend it or email it to you.

Why HSA Contribution amounts are important

Getting your HSA contribution amount is critical when you go to file Form 8889 each year, as an incorrect value can cost you money. If you under report your contribution to your HSA, you will not receive the tax deducation that Form 8889 allows you (by means of Form 1040). You basically did all the hard work for the HSA and didn’t get any benefit. On the other hand, if you over report your contribution, you risk taking too much of a deduction. This results in filing your taxes wrong and spending time dealing with fixing them or wost case, a friendly chat with the IRS.

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Note: if you need help calculating your contribution on your HSA taxes this year, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.