HSA question

[merlin3942]

I've been FIRED for about a year and a half ... which means my COBRA option for health insurance is about to run out, and I'm about 2 years away from being old enough to qualify for Medicare. I've had an HSA health insurance plan through my employer for about 8 years, and have funded it with the maximum each year, and never used it for any sort of health expenses, with the idea of using it as another IRA after age 65. Now that I'll be forced to choose a "marketplace health insurance plan" for the next couple of years, I'm debating whether to keep an HSA plan or not (premiums are actually higher than the non-HSA bronze plans I have access to). But I already contributed the yearly maximum amount for 2018 back in January. If I now switch to a non-HSA plan on June 1, will I be forced to withdraw, say, half of that contribution? Do I have to try and calculate how much "gain" is already in the account from that half, and withdraw that as well? And are there any additional penalties/taxes I'll have to pay for "over-contributing"?

 

[Done]

Once you definitively know how many months you qualify to contribute, you should contact your HSA administrator to request a refund of the excess contribution and related earnings. The administrator will likely calculate the earnings for you. If you don't withdraw the excess this year, an excise tax applies. This article goes into more detail. https://www.hsaedge.com/2016/11/06/how-to-remove-excess-contributions-to-an-hsa/

In my case, there was also a slightly higher premium for an HSA-qualifying bronze plan from the marketplace. I thought it was worth it for the tax benefit.

 

[bingybear]

The HSA is better than an IRA. After medicare age you can use the HSA to pay medicare insurance cost (sans gap plans) tax free. Think of it more like a specialized Roth. I think of mine as part of my LTC planning. Depending upon you tax situation you may still have use for the taxable income reduction. It may allow for more roth conversions or potentially a PTC.

You need to decide if the HSA is right based on your situation.

you will need to figure how much to remove and potential penalties as noted above.

 

[gauss]

you will need to figure how much to remove and potential penalties as noted above.

Allow me to further elaborate here. You will need to know how many months you were eligible to contribute to your HSA. Based on this you can determine your maximum contribution for the year.

To avoid penalties, you would need to request that the HSA custodian return any Excess Contributions and the earnings they have produced. The custodian will determine the earnings. You will be taxed on the earnings since it is now regular income like bank interest. The HSA custodian should have a form to help you with this, but you will need to determine how much to remove.

IRS Form 8889 "Healthcare Savings Accounts" and Instructions will walk you through the process to determine your maximum contribution for the year based on your months of having a High Deductible Health Plan (HDHP)in place and any other requirements.

-gauss
p.s. If you don't remove the Excess Contributions and earnings, then a 6% penalty will apply to these amounts this year and every future year until it is addressed either by the withdrawal described above or resuming a HDHP but not actually contributing to an HSA.

 

[merlin3942]

Thanks, everyone, for these answers. After further consideration, I've decided to "stick it out" with the HSA for the next couple of years. I think the advantage of building up that HSA account for future use is worth the extra cost in premiums for the next 2 years.