Need Experts on HSAs and HDHPs (and taxes!)

[erkevin]

I need some tax help with HSAs and HDHPs:
Taxes are already complete for 2018. This question/problem is for the 2019 tax return (I plan ahead). In 2018, my wife was on a single HDHP Jan –June. July-Dec, she was on a family plan. During 2018, I was on a co-pay plan Jan- June and then joined my wife’s HDHP family plan for the remainder of the year. Using the Last Month Rule, I (we) took the full deduction for 2018, $7900 (I was 55). It was divided up as $2500 contributed to my HSA and $5400 to my wife’s.
In 2019 we continue to both be on a family plan. However, my wife’s COBRA runs out on November 30. I haven’t found any way to extend our HDHP one more month to be in compliance with the 2018 Last Month Rule. We will be transitioning to a co-play plan through our retirement as of December 1. I have gone through example and example of how the taxes work but none of the examples quite cover our situation. Can anyone provide me with an explanation on how to determine our penalty for not being in an HDHP plan for all of 2019? Thanks.

 

[gauss]

So your concern is for your 2018 contributions - which you tried to qualify for the whole year via the last-month rule, but now you will be 1 month short (ie Dec 2019) to meet the requirements for this.

Did I summarize your problem/question correctly?

 

[audreyh1]

I'm just a bit confused, because if you qualified for the HSA in Dec of 2018, wouldn't Nov 2019 be 12 month inclusive?

Oh weird - it looks like it's a 13 month rule. That is strange.

 

[gauss]

Since you plan to fail the last-month testing rule, then your 2018 contributions will be limited to only the months that you actually qualified in 2018 ie July-Dec.

So about 1/2 of your contributions that you deducted in 2018 would need to be added back into your income in 2019 plus the 10% penalty if I am reading this correctly.

It seems like you would NOT be subject to the 6% 'excess contribution' tax that is applied yearly until resolved so at least you have that going for you.

From Pub 969

If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are calculated on Form 8889, Part III.

There is also a couple of examples in Pub 969 near this paragraph that illustrate this.

-gauss

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ed: Background info that is only marginally useful follows. I posted it first, so I don't want to delete it, but I think the main points above will tell the story.

"Limit on Contributions (continued)
If the taxpayer was not an eligible individual for the entire year or changed his or her coverage during the year, the contribution limit is:
Last-month rule allows eligible individuals to make a full contribution for the year even if they were not an eligible individual for the entire year. They can make the full contribution for the year if:
They are eligible individuals on the first day of last month of their taxable year. For most people this would be December 1, and
They remain eligible individuals during the testing period. The testing period runs from December 1 of the current year through December 31 of the following year (for calendar taxpayers).
If the taxpayer does not qualify to contribute the full amount for the year, the contribution is determined by using the sum of the monthly contribution limits rule.
OR
Sum of the monthly contribution limits rule (use Limitation Chart and Worksheet in Form 8889 Instructions). This is the amount determined separately for each month based on eligibility and HDHP coverage on the first day of each month plus catch-up contributions. For this purpose, the monthly limit is 1/12 of the annual contribution limit, as calculated on the Limitation Chart and worksheet."
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[-]If I am not mistaken, you will be subject to a 6% tax on the amount of your excess contribution each year that it remains in there and you do not have a HDHP.

Perhaps you should contact the HSA custodian to request a "removal of excess contribution".[/-]

 

[erkevin]

My confusion stems from the fact that my wife had an HDHP for all of 2018- me, only 6 months. Is the penalty based on half of ALL eligible contributions ($7900)? Half of the contributions made to my HSA ($2500)? Or some other fraction?

 

[RunningBum]

I don't think the games you played by putting less in your HSA than your wife's works to prorate that way. If you had an HDHP plan for 6 months, your eligible contribution is 6/12 of $3450. Your wife gets the full $3450. I'm not sure if your catch up contribution is prorated as well. I don't know about penalties.

 

[SumDay]

I had a somewhat similar situation last year, as DH became Medicare eligible mid-year.

I found a couple of calculators and links that helped me:

https://www.optum.com/content/dam/optum/consumer-activation/PRJ2053/59520_HSA_Mid-year_changes.pdf

https://www.dinkytown.net/java/health-savings-account-hsa-contribution-calculator.html

https://hsastore.com/learn/taxes/mid-year-hdhp-enrollment

H&R Block's tax program was pretty thorough in asking relevant questions and calculating my contribution, which luckily agreed with the various calculators I used.

Hope this helps. HSAs can be hard.

 

[erkevin]

I think RunningBum is correct. Regardless of what was actually deposited into my HSA, my half was $3450. Having an HDHP for 6 months makes my eligible deduction only $1725. The penalty on top of that would be 10%, so $173. If I am unable to find a one-month HDHP policy then i have to add $1898 to my income in 2019.

Does that sound correct?

And then, I cannot deduct the full eligible amount for 2019, only 11/12. Correct?

 

[ocean view]

The end of your cobra coverage is a qualified event which would allow you to sign up for a one month plan through ACA. Is there a HSA-qualifying plan available to you on the exchange in your state?

 

[thefinancebuff]

Having an HDHP for 6 months makes my eligible deduction only $1725. The penalty on top of that would be 10%, so $173. If I am unable to find a one-month HDHP policy then i have to add $1898 to my income in 2019.

Does that sound correct?

The penalty is a tax, not an addition to your income.

 

[erkevin]

The penalty is a tax, not an addition to your income.

Yes, of course. thank you

 

[erkevin]

The end of your cobra coverage is a qualified event which would allow you to sign up for a one month plan through ACA. Is there a HSA-qualifying plan available to you on the exchange in your state?

Yes there is. Not cheap ($900) but it helps me avoid a tax mess. Thank you for the suggestion

 

[erkevin]

Using the info posted here (a one-month ACA HDHP policy), that would leave me eligible for the full 2019 deduction $3450 (+1000 for 55 yrs old) and my wife with an 11/12 deduction of $3162. Correct?