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2017 Form 8889 – Instructions and Examples

If you made contributions to or distributions from your HSA in 2017, you will need to file the federal tax form 8889. This form is specific to HSA’s and records all activity with your HSA for the year. It flows to Form 1040 to adjust your income: your contributions reduce your taxable income, whereas any penalties adds back to income, increasing tax.

Form 8889 is not as straightforward as it could be, so I created a service called EasyForm8889.com that completes your form for you. I have also created the following video to walk through how to file Form 8889. Little has changed since the 2016 form used in this video. Check it out, otherwise, the transcription of the information is below.

Watch on Youtube: How to File HSA Tax Form 8889

In the following article we will cover:

Changes to 2017 Form 8889
2017 HSA Contribution Limits
2017 HDHP Definitions
2017 Form 8889 instructions and example

Changes to 2017 Form 8889 tax form

The 2017 HSA tax form presents little difference to prior year tax forms. Throughout the form you will see the tax year incremented to 2017, so make sure you are working on the correct version. This can be confirmed in the upper right of the form. Contribution limits have increased in 2017, so these amounts are reflected throughout the form (specifically Line 3).

There were also some changes to HDHP definitions in 2017 so read on if those apply to you.

Changes to 2017 Form 8889 instructions

The 2017 Form 8889 instructions have been released by the IRS and can be found here. They are substantially the same as prior years save for year and contribution limit updates.

2017 HSA Contribution Limits

For self-only coverage, the maximum contribution limit increased by $50 to $3,400 in 2017. There were no changes to the family coverage amount which is $6,750, as well as the 55+ catch up contribution amount of $1,000. The IRS defines the maximum amounts that may be contributed to a Health Savings Account each year. Per IRS Publication 969:

The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you became an eligible individual, and the date you cease to be an eligible individual…for 2017, if you have self-only HDHP coverage, you can contribute up to $3,400. If you have family HDHP coverage you can contribute up to $6,750.

Here are HSA contribution limits for prior years:

	2014	2015	2016	2017
Self-Only HSA Contribution Limit	$3,300	$3,350	$3,350	$3,400
Family HSA Contribution Limit	$6,550	$6,650	$6,750	$6,750
55+ Additional Contribution Limit	+$1,000	+$1,000	+$1,000	+$1,000

The maximum contribution amount for your HSA in 2017 is $3,400 for self-only coverage and $6,750 for family. Note that this does not include the additional 55+ catch up contribution of $1,000 allowed to properly aged HSA holders. Thus, if you are over 55 on or before the end of 2017, you can contribute $4,400 for self-only coverage or $7,750 for family coverage.

2017 HDHP Definitions

To qualify as an HDHP, your health plan cannot exceed an out-of-pocket maximum limit established by the IRS. There were no changes to these amounts from 2016 to 2017. For self-only plans, the minimum deductible remains $1,300 and the out of pocket maximum is $6,550. For Family plans, the minimum deductible is $2,600 while the out of pocket maximum is $13,100. Plans with a deductible below that specified are not HSA eligible, nor are plans with an out-of-pocket max greater than those listed. The HDHP definitions for recent years are summarized below:

	2014	2015	2016	2017
Self-Only Min Deductible	$1,250	$1,300	$1,300	$1,300
Self-Only OOP Max	$6,350	$6,450	$6,550	$6,550
Family Min Deductible	$2,500	$2,600	$2,600	$2,600
Family OOP max	$12,700	$12,900	$13,100	$13,100

2017 HSA Form 8889 example

Let’s walk through an example of the 2017 Form 8889 to show how it works.

Let’s assume I am a married 40 year old who had family HSA eligible coverage from January – June of 2017 (6 months). On July 1st, I changed to a non-HSA eligible plan. My spouse does not have their own Health Savings Account. I contributed $1,800 to my HSA and my employer contributed $800. I distributed $800 from the HSA during the year, all of which I spent on qualified medical expenses.

Part I – Contributions and Deduction

Form 8889 starts off pretty simply on Line 1 by asking the type of insurance you had (mostly) during the year. For this example, it is family. Line 2 then goes on to ask how much you contributed to your HSA during the year. In our case this was $1,800, which does not include employer contributions. Line 3 can be quite complicated, but in essence you need to list your contribution limit for the year. If you had self-only or family coverage all year, the amounts are provided for you. Otherwise, you need to prorate your coverage by month. In this case, we had family coverage for 6 months, so our contribution limit is $3,375 for 2017. Line 4 asks about Archer MSA’s (does not apply here) and Line 5 is a simple subtraction.

[Note: all 2017 tax forms were generated in minutes using EasyForm8889.com]

2017 HSA Form 8889 part 1 example

We continue with Line 6, which for self-only filers equals Line 5. For family coverage where both spouses have their own Health Savings Account, each of you needs to file your own Form 8889. Then on Line 6, you allocate the share of the contribution limit that belongs to that HSA. In this case, only the insured has an HSA, so this line equals Line 5. For some situations, Line 7 adds the $1,000 catch up contribution, but our example assumes the HSA holder is 40 years old so this does not apply. Line 8 is simple subtraction, and the $800 employer contribution comes into play on Line 9. If you contributed to your HSA from an IRA you would indicate that on Line 10, and Line 11 is simple addition. Line 12 is subtraction, and Line 13 does a comparison to calculate what your 2017 HSA deduction is, which makes its way to Form 1040. In our case, it is the $1,800 we contributed to the HSA.

Part II – Distributions

The second part of the 2017 Form 8889 deals with distributions, or amounts that came out of your HSA. We assume that we distributed $800 from the HSA, so that amount is shown on Line 14a. Line 14b lists rollover amounts and excess contributions that were removed, and Line 14c subtracts them out. The filer tracked his qualified medical expenses and receipts using TrackHSA.com this year, so he can easily prove all $800 in distributions were used for medical expenses. He places that amount in Line 15. A subtraction occurs on Line 16 to determine any amounts not spent on qualified medical expenses; luckily that is $0 for us. If you had an amount on Line 16, Line 17a gives you the chance to exclude this from taxation based on a few exceptions. Otherwise, that Line 16 amount is taxed 20% on Line 17b, which gets recorded on Form 1040.

2017 HSA Form 8889 Part 2 example

Part III – Penalties and Taxes

For most people, Part III will look a lot below: all zeroes. This is good, but it is possible that you have accrued some taxes and penalties. If in the prior tax year, you 1) used the Last Month Rule and proceeded to 2) fail its Testing Period, a difficult calculation awaits you on Line 18. You are going to have to go back, figure out how much you contributed in the prior year, redetermine what you could have contributed without the Last Month Rule, and place the difference here. On a similar note, if you made a qualified funding distribution from your IRA but failed its Testing Period in 2017, you will have to enter the amount that failed in Line 19. Once that is done, Line 20 adds Line 18 and Line 19 and adds it back to income (where it is taxed) on Form 1040. Finally, for good measure, Line 21 assesses a 10% penalty against the amount on Line 20, which also makes its way to Form 1040.
2017 HSA Form 8889 part 3 example

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Using HSA Funds Once You Turn 65 Years Old

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Penalty on Non Qualified Withdrawals

Health Savings Accounts are generally required to be spent on qualified medical expenses. Contributions you make have great tax advantages based on the assumption that you will use them for their intended purpose, which is medical care for you and your family. Deviating from properly spending the funds can result in taxes due, as well as a 20% penalty. You can read about options for cashing out your HSA, but there aren’t many ways around getting money out without paying that 20% penalty.

That all changes once you reach the age of 65 years old. Besides being eligible for Medicare (which can affect your HSA eligibility), at age 65 your HSA no longer penalizes you for taking funds out of it. This is a huge advantage is your HSA becomes much more flexible and can be spent on anything, not just qualified medical expenses. This is one reason why HSA’s are a great retirement vehicle. While always avoiding tax on medical purchases, the HSA basically converts into a 401(k) or IRA (invest pre-tax, pay taxes later) at the time you turn 65. Conveniently, this is right around retirement time, so your HSA has served you like an IRA with a great medical option on it. As you will see, some distributions after age 65 will still incur a tax, but all distributions will avoid the 20% penalty. Per IRS Form 969:

Additional tax. There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. However, there is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

Using HSA funds for Qualified Medical Expenses at 65

Even after reaching 65, your Health Savings Account is still the best way to pay for medical, dental, or vision care for you and your family. This is because the triple-tax advantage still exists for the HSA: pre tax funds, no tax on earnings, and no tax for medical expenses. That means that any medical care you receive after age 65 is still paid for tax free using your HSA. You should remember this and guard those HSA dollars to avoid paying the tax man more than is needed.

For this reason alone, it may make sense not to use the HSA for things other than qualified medical expenses. As you will see, while you won’t be penalized on those “other” distributions, you will still be taxed, and in turn you forfeit the ability to spend those funds tax-free on medical care. Of course, even after age 65 you can still contribute to an HSA, but at that point you may not be on an HSA eligible plan or may have begun Medicare coverage, which prevents you from contributing. So once the genie is out of the bottle and the HSA funds are gone, it may be tough to get them back in and regain tax free medical spending. The point is to protect those HSA funds since they have the special ability to pay for medical care tax free, and we know that medical spending increases as we get older.

Using HSA funds for anything at 65

Above we mention the way to play this by the book, let’s talk about the fun way to use HSA funds. Once you turn 65, you can withdraw funds from your HSA without penalty. This means you can spend them on retirement, vacations, gifts for your family, fine wine and leather-bound books, or whatever you want. Any time before age 65 doing so would incur a steep 20% penalty on this “incorrect” usage of HSA funds, but in your golden years you can spend freely and enjoy the high life with your HSA. You no longer need to spend your HSA dollars only on qualified medical expenses.

After 65, HSA funds can be spent on things other than qualified medical expenses, but these amounts are added to income, which creates a tax liability.

The only downside is that you will still owe tax on these distributions from your HSA. Any funds you pull from your HSA for non qualified medical expenses will be added to income and taxed, but I argue this makes sense given the tax history of the contribution. You were able to contribute tax-free, your earnings grew tax free, and your funds need to be spent on medical expenses to continue to be tax free. Since you are not spending them on medical expenses, they are added to income like they should have been the year you made the contribution. However, at this point you have enjoyed the advantage of tax free investment growth compounded over many years.

In addition, delaying HSA distributions until this time is beneficial as your tax rate is likely lower in retirement. This results in less of a tax hit than it would have had you been taxed at the time of contribution, likely years ago. For example, at the peak of your career your marginal tax rate may have been 30%. But in retirement, you may be in a 15% tax bracket, so you have effectively arbitraged the tax system and saved yourself significant money.

Accounting for Distributions after 65 on Form 8889

Regardless of what you spend your HSA funds on, you will need to account for it each year with the IRS. This is done with HSA Form 8889 and specifically takes place in Part II – Distributions. We will examine two scenarios and how to account for them.

If you are 65 or older and use your HSA to purchase qualified medical expenses, your Form 8889 activity will look the same as if you were not 65. Specifically, you will call out the distribution, and classify it as being spent on qualified medical spending.

The following was prepared quickly using EasyForm8889.com

If you are 65 or older and you use you distribute from your HSA for something other than medical expenses, the treatment is a bit different. In this case, you call out the distribution amount but enter $0 for the amount spent on qualified medical expenses on Line 15. This will lead to taxable distribution on Line 16. However, there is a checkbox on 17a that you check for distributions over age 65, and line 17b backs these out from the 20% penalty.

This way, the amount is added back to taxable income but the penalty is avoided.

Note: if you need help accounting for your HSA distributions at age 65, 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.

Contributing to HSA’s with a Cafeteria Plan

What are Cafeteria Plans

To understand Cafeteria Plans and HSA’s, it helps to understand the mechanisms for contributing funds to your Health Savings Account. There are four different ways to contribute to an HSA, all of which count towards your yearly contribution limit:

Your employer contributes their money to your HSA. In this case, your employer gifts you funds directly into your Health Savings Account during the tax year. This is by far the best way to fund an HSA since the money is free and being given to you. Employer contributions count towards your yearly contribution limit but they are yours to spend as you like.
You contribute after tax money to your HSA. This usually occurs by depositing cash or transferring funds between your bank account and your Health Savings Account. You have likely paid taxes on these funds (via payroll) so HSA tax Form 8889 helps you account for them and refund those taxes paid.
You contribute from your IRA or Roth IRA. This is called a Qualified Funding Distribution and moves money from one tax advantaged investment account to your HSA. Do note that these contributions contain a Testing Period,
requiring you to maintain HSA insurance.
Your employer withholds your earnings pre-tax and contributes them to the HSA. This is an example of a what is called a cafeteria plan. These funds are yours (since they are being paid to you and are no longer your employer’s) and are a part of your paycheck. The employer is just enabling the contribution for you through their payroll system.

Cafeteria Plans are not unique to HSA’s; in fact, it is a general term used to describe pre-tax contributions made by your employer. They can be established for a variety of employee related savings or expenses.

A Cafeteria Plan is a reimbursement plan governed by IRS Section 125 which allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated.

Benefits of HSA Cafeteria Plans

There are numerous benefits of cafeteria plans that not only make your life easier, but actually end up saving money. Besides all of the advantages of savings in an HSA, here are some additional benefits that contributing via a Cafeteria Plan provides:

You pay less taxes. You read this right, Cafeteria Plans reduce the amount of taxes you pay. This is because payroll tax is not the only tax you pay each paycheck. In addition, you pay into other programs such as Medicare, Social Security, and any state taxes that are taken from your earnings. When you file Form 8889 as part of your tax return, you will only be credited for the income tax that was paid. The other taxes stay with Uncle Sam. Using a cafeteria plan allows you to make these contributions before all these payroll taxes hit it, allowing you to keep a larger slice of your earnings.
Disciplined savings. One of the hardest things about saving is actually putting aside the money to save. There is always something that comes up or something tempting you as a “more fun” use of the money. Saving via a Cafeteria Plan eliminates this because you automate your savings plan and the money is taken pre-tax. It never even hits your checking account as it goes straight to the HSA, preventing you from spending it and making sure you make your contribution.
Easier transactions. I never had the luxury of a cafeteria plan so each month I had to initiate a transfer to my bank to make the contribution. Having this taken care of for you reduces the amount of work you have to do and transfers you make with your money.

If you are presented the option for contributing to an HSA via cafeteria plan you should definitely consider it, based on the benefits above. Their main drawback is decreased flexibility in changing HSA contributions, since they are happening automatically from your paycheck. For example, it may take time to adjust your HSA contribution amount during the year. There may be a lockout period, a delay before it takes effect, and you at least have to talk to HR to make the change. You should evaluate how your specific payroll plan handles changes to HSA contributions via a cafeteria plan and assess whether that is suitable to your needs before signing up.

Reporting Cafeteria Plan Contributions on Form 8889

The biggest mistake people make with Cafeteria Plan contributions and filing HSA tax Form 8889 is putting them on Line 2. Line 2 is where contributions you personally made (#2 above) are totaled and used to reduce your taxable income. This has the effect of making your contributions tax free. You can see that by adding Cafeteria Plan contributions to this line, you are “double dipping” because you never paid taxes on those contributions to begin with. Line 2 has a disclaimer that calls this out:

Do not include employer contribuitons, contributions made through a cafeteria plan, or rollovers in Line 2 (see instructions)

Due to the IRS’ confusing wording, most people don’t even know they are contributing through a cafeteria plan or what one is. Thus, they end up making a mistake on Form 8889 and potentially receiving a call from the IRS.

The correct place to put contributions made through a cafeteria plan is on Line 9 of Form 8889, which is called “Employer Contributions”. This makes sense because, in our discussion above, we saw how cafeteria plan contributions look a lot like employer contributions. There is no taxes being paid on both of these contributions, it is just a matter of whose money is being contributed. Again, the IRS doesn’t help us with Form 8889 because they describe the line as “Employer contributions made to your HSA for 2017”.

If you look into the Form 8889 instructions, you can see that this is the exact spot where Cafeteria Plan contributions should go:

Doing so will ensure the amount that travels over to your 1040 form is the correct amount to deduct.

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