Tag Archives: Taxes

2016 HSA Form 8889 – Instructions and Example

As tax season for 2016 falls upon us, the IRS has released the 2016 version of Form 8889, the official form for HSA tax reporting. Notably, as of January 15th, the 2016 HSA Form 8889 instructions have not been released. However, you should be able to get by with the 2015 instructions – just keeping in mind that a few contribution maximums have changed.

I have created the following video to walk through changes and an example for 2016’s Form 8889. Check it out, otherwise, the transcription of the information is below.

Watch on Youtube: HSA Last Month Rule and Testing Period

In the following article we will cover:

Changes to 2016 Form 8889 tax form

For those of you who have filed HSA taxes before, you won’t notice much change in the 2016 version of Form 8889. Obviously the tax year of the form has incremented, so just verify you have the correct form which says “2016” in the upper right hand corner. The main difference reflects the maximum contribution limit increase for family coverage, from $6,650 to $6,750. This is indicated on Line 3 which is used to determine your contribution limit. It is assumed that when the IRS updates the 2016 instructions, they will include this update in the calculations for more complicated (e.g. partial year coverage) situations, which are explained there.

2016 Form 8889 Family Contribution Amount

Pretty minor, but you will also notice year updates throughout the form. For example, you see this in “Part II – HSA Distributions” section, where in Line 14a they state that we are concerned about distributions occurring in tax year 2016:

2016 Form 8889 distribution section year change

There were also some changes to HDHP definitions in 2016 so read on if those apply to you.

Changes to 2016 Form 8889 instructions

At this point the 2016 Form 8889 instructions have not been released, but we will check for changes in methodology once they are available.

2016 HSA Contribution Limits

For family coverage, the maximum contribution limit increased by $100 to $6,750 in 2016. The IRS defines the maximum amounts that may be contributed to a Health Savings Account each year. Per IRS Publication 969, the 2016 HSA contribution limits are:

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 2016, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage you can contribute up to $6,750.

Here are HSA contribution limits for years 2014, 2015, 2016, and now 2017 since it has been released:

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

So the cap or maximum contribution amount to your HSA is $3,350 for self-only coverage and $6,750 for family coverage in 2016. 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 2016, you can contribute $4,350 for self-only coverage or $7,750 for family coverage.

2016 HDHP Definitions

To qualify as an HDHP, your health plan cannot exceed an out-of-pocket maximum limit established by the IRS. For 2016, the out-of-pocket max was increased for both self-only and family coverage. Self-only increased $100 to $6,550 while family increased $200 to $13,100. Plans with an out-of-pocket max that exceeds these amounts are not HSA eligible. The IRS defines what constitutes an HDHP (High Deductible Health Plan), which is a prerequisite for contributing to an HSA. Again, you can see the HDHP definitions in IRS Publication 969 for 2016. The HDHP definitions for 2014, 2015, 2016, and 2017 (because they are now available) 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



EasyForm8889.com - complete HSA Form 8889 in 10 minutes!

2016 HSA Form 8889 example

Let’s walk through an example of the 2016 Form 8889 to show how it works.


Let’s assume I am a 30 year old who had self-only, HSA eligible coverage from January – June of 2016 (6 months). On July 1st, I changed to a non-HSA eligible plan. I contributed $1000 to my HSA and my employer contributed $250. I distributed $500 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 self-only. Line 2 then goes on to ask how much you contributed to your HSA during the year. In our case this was $1000, 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 self-only coverage for 6 months, so our contribution limit is $1,675 for 2016. Line 4 asks about Archer MSA’s (does not apply here) and Line 5 is a simple subtraction.

[Note: all 2016 tax forms were generated in minutes using EasyForm8889.com]

2016_Form_8889_part_1_contributions

We continue with Line 6, which for self-only filers is just Line 5, but family filers where both spouses have HSA’s have the option to distribute part of their contribution limit to each account. For some situations, Line 7 adds the $1,000 catch up contribution, but our example assumes the HSA holder is 30 years old so this does not apply. Line 8 is simple subtraction, and the $250 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 2016 HSA deduction is, which makes its way to Form 1040. In our case, it is the $1,000 we contributed to the HSA.

Part II – Distributions

The second part of the 2016 Form 8889 deals with distributions, or amounts that came out of your HSA. We assume that we distributed $500 from the HSA, so that amount is shown on Line 14a. Line 14b lists rollover amounts and excess contributions 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 $500 were legit and puts that value 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. Otherwise, that Line 16 amount is taxed 20% on Line 17b, which gets recorded on Form 1040.

2016_Form_8889_part_2_distributions

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, and place the difference here. On a similar note, if you made a qualified funding distribution from your IRA but failed its Testing Period, 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.
2016_Form_8889_part_3_penalties

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Donald Trump and the Future of HSA’s

Overview

Regardless of your political leanings, Donald Trump’s election was an upheaval which will have stark implications for health care in this country. We know he has campaigned to repeal and replace Obamacare, but exactly what he attempts to replace it with is still an open question. Based on the limited evidence that we have, Health Savings Accounts (HSA’s) will make up a core tenant of Trump’s health insurance policy. In this article we will dive into this proposal and what it may mean for the future of Health Savings Accounts.

How Obamacare nearly killed HSA’s

First a quick story. We know that the Affordable Care Act (ACA or Obamacare) is broken: not only for the insurers who lost billions of dollars in ACA markets last year, but the subscribers whose premiums are unaffordable and options severely limited. However, 2017 was to be a critical year for Obamacare regarding Health Savings Accounts, as a process designed to systematically phase out Health Savings Accounts (HSA’s) from ACA coverage began. They engineered this by making all ACA plans ineligible for HSA’s – by exceeding the limits on the upper bound. This was based on how the IRS defined HDHP’s for 2017:

For calendar year 2017, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage.

So what did the brilliant engineers of Obamacare come up with? Roy J Rantham explains how they “stacked the deck” in this excellent article (from April 2016). His analysis:

  • Bronze standardized plans will be required to have a deductible of $6,650. This amount is $100 above the projected maximum deductible of $6,550 for HSA-qualified plans for 2017.
  • Gold standardized plans will be required to have a deductible of $1,250. This amount is $50 below the projected minimum deductible for HSA-qualified plans for 2017.
  • Bronze and Silver standardized plans will be required to have out-of-pocket limits of $7,150, well above the projected out-of-pocket limit of $6,550 for HSA-qualified plans for 2017.

In summary, Obama’s team made their ACA plans so bad that they fell outside the upper bound for what constitutes an HSA. A maximum deductible of $6,550/year is incredibly expensive, and every single ACA plan in 2017 had a higher deductible. This pattern would likely continue in future years, with HSA’s being priced out for subscribers to government run health insurance. They would no longer be an option for the ACA population, and while HSA’s would still be available for non-ACA plans, they would remain at risk in a government not favored to their existence.

Trumps Proposed Health Care Policy

While specifics are not yet available for Donald Trump’s numerous policy recommendations, we can gauge the general ethos based on his history and current documentation on his website. Trump took to his favorite medium Twitter back in February 2016 to (concisely) explain how to fix Obamacare, which made mention of Health Savings Accounts:

trump_twitter_health_savings_accounts_hsa

So a general repudiation of the signature law enacted by President Obama, with more free market choices for the consumer. Trump recently provided some specifics on his website, and the page is worth a read. There are good ideas there about making health insurance more competitive across state lines, allowing consumers to deduct health insurance premiums (like corporations), and eliminating the individual mandate. Notably for this website, he even includes a section on HSA’s saying:

Allow individuals to use Health Savings Accounts (HSAs). Contributions into HSAs should be tax-free and should be allowed to accumulate. These accounts would become part of the estate of the individual and could be passed on to heirs without fear of any death penalty. These plans should be particularly attractive to young people who are healthy and can afford high-deductible insurance plans. These funds can be used by any member of a family without penalty. The flexibility and security provided by HSAs will be of great benefit to all who participate.

Clearly Trump is in favor of Health Savings Accounts. However, like much of his policy at this time, not much exists in terms of details. That leaves us to speculate on how Trump may implement a broader HSA approach in lieu of Obamacare.

Possible Changes Trump Will Make to HSA’s

Since we don’t know exactly how Trump will further the use of HSA’s, we have come up with some predictions (suggestions?) of how he may utilize these plans to provide more Americans with better options for their health insurance. The goal of each of these would be to offer more consumers more choices to help ease the pain of rising health insurance costs.

1) Increase HSA contribution limits

One quick win would be to increase the amounts individuals can contribute to HSA’s. In 2017, the contribution limit for self-only/family coverage is $3,400/$6,750, respectively. Trump could increase those amounts to give more choices to those who can fully fund their HSA, including workers in the prime of their working years and those who receive employer contributions. Doing so would better allow them financially manage health care costs (and retirement) in the future.

2) Widen HDHP Definitions

Working in conjunction with the IRS, Trump could widen the net of to whom HSA plans apply by changing how High Deductible Health Plans are defined. By allowing more plans to be considered HDHP’s, more consumers would benefit from the option available from a Health Savings Account. For example, for self-only coverage in 2017, the minimal annual deductible could be reduced from $1,300 to $1,000 or even $500, lowering the lower bound of what constitutes an HDHP. In turn, Trump could raise the maximum out-of-pocket limit from $6,650 to $7,000 or even unlimited, which would include more plans, including all of those ACA plans that were left behind this year.

3) Increase eligibility for Health Savings Accounts

A stronger form of point 2 above, Trump could in theory make Health Savings Accounts allowable for anyone in the country, regardless of insurance coverage. Any why not? Why does someone have to have a certain type of health insurance to receive this government benefit? Is that truly “fair”? In an age where everyone’s health insurance costs are increasing, why would we limit access to a savings vehicle to help consumers manage costs? Trump could work with Congress to change HSA’s to a similar structure as IRA’s, which are allowable for anyone. Some would argue that the “rich” would receive an added $3,400 / $6,750 tax break, which is true (editor: as if this were a bad thing). However, the other side of this is anyone (poor, middle class, rich) who saw benefit could contribute to an HSA and save money on their medical expenses. In this situation, Trump would give everyone the opportunity to benefit from HSA’s equally.

4) Expand definition of qualified medical expenses

Trump has already hinted at this in the second point of his policy, which would make health insurance premiums tax deductible for individuals. In essence this makes them a qualified medical expense, but without the need for an HSA (since it would apply to everyone). The same could be done for a wider list (see page 16 of Publication 502 (PDF)) of common medical expenses that are commonly consumed, such as drugstore medications. Others include weight loss programs, cosmetic dentistry or procedures, nutritional supplements, and personal use items.

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Note: if you have an HSA, please consider trying my service TrackHSA.com for free for your Health Savings Account record keeping. You can store purchases, receipts, and reimbursements securely online.

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2017 Max HSA Contribution Limits and HDHP Definitions

The IRS has performed their magical inflation calculations for 2017 and updated definitions for High Deductible Health Plan as well as the maximum contribution limit is for Health Savings Accounts (HSA’s). These changes affect who is qualified to open / contribute to an HSA and how much they can contribute.

2017 HDHP Limits

One prerequisite for opening or contributing to a Health Savings Account is that you are covered by HSA eligible insurance, otherwise known as a High Deductible Health Plan (HDHP). The IRS sets limits as to what constitutes an HDHP to define who is HSA eligible or not. Per IRS Rev. Proc 2016-28, for 2017, the IRS has defined a High Deductible Health Plan as:

…a health plan with an annual deductible that is not less than $1,300 for self only coverage or $2,600 for family coverage, and the out of pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage.

So you need to have an annual deductible greater than $1,300 / $2,600 (self-only / family) to qualify for an HDHP, and thus, an HSA. In addition, your total out of pocket (OOP) expenses cannot exceed $6,550 / $13,100 (self-only, family) for the entire year. As you can see, the folks at the IRS have been hard at work as this represents no change in HDHP limits from 2016 to 2017. The following table compare HDHP limits for the past few years:

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 Contribution Limits

The IRS also defines the maximum amounts that may be contributed to a Health Savings Account each year. That amount is updated based on inflation calculations and whatever else the IRS feels like for a given time period. Per IRS Rev. Proc 2016-28, the 2017 HSA contribution limits are:

…the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,400… the annual limitation on deductions for an individual with family coverage under a high deductible health plan is $6,750.

So the cap or maximum contribution amount to your HSA is $3,400 for self-only coverage and $6,750 for family coverage. 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.

As evidenced by the following chart, the IRS has made the slightest change in increasing the 2017 HSA contribution limit by $50 over 2016. You can see the history of HSA contribution limit increases for 2014, 2015, 2016, and now 2017 in the chart below:

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

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Note: if you have an HSA, please consider using my service TrackHSA.com to manage your Health Savings Account receipts. You can store purchases, receipts, and reimbursements securely online, tracking the lifecycle of your purchases and audit proofing yourself from the IRS.

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