HSA Front-Loading Contribution Question

[medelste]

Hi!

2016 is the first year my employer offered an HSA with a HDHP and we chose it because we are relatively young and healthy (knock wood). A question about the HSA - I see that I am able to deposit the full year's contribution into the HSA directly via wire-transfer instead of them taking a proportional amount out of each paycheck. That would allow me to contribute the full year amount each January, effectively front-loading it each year.

My question is this: since I'll be contributing with taxable funds when doing that wire transfer, will I still get the pre-tax treatment? Will my 2016 contribution still be deductible when doing the 2016 tax return? Or is that only possible when contributions come directly from paychecks?

 

[Lakedog]

Yes, the contribution is still deductible. I always make the full contribution in January each year so I can invest asap.

 

[Senator]

If you do it all at once, you may have to pay medicare/FICA insurance on your contributions. I believe HSA money is taken out of your gross pay, and no taxes whatsoever are taken from them. It may depend on how your employer has it set up.

I would do it per-paycheck. If you get laid off, and do not have a high-deductible policy, you may have to pay a penalty on it.

 

[rodi]

Yes. The HSA contribution reduces your taxable income when you are filing your taxes.

 

[medelste]

If you get laid off, and do not have a high-deductible policy, you may have to pay a penalty on it.

Thanks, Senator, I was not aware of that clause, but it makes sense. I do plan on retiring this year, so this is very much a real concern with my January front-loading.

So it sounds like when I leave my employer, I need to either:
(a) request that my plan administrator (UMB) remove my excess contributions
or
(b) sign up for a new health plan (likely on the ACA exchange) that is also a HDHP that has an HSA

Agreed?


IRS pub 969 says:

Excess contributions. You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions are not deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return.
Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.
You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.
- You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
- You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

 

[Senator]

Thanks, Senator, I was not aware of that clause, but it makes sense. I do plan on retiring this year, so this is very much a real concern with my January front-loading.

So it sounds like when I leave my employer, I need to either:
(a) request that my plan administrator (UMB) remove my excess contributions
or
(b) sign up for a new health plan (likely on the ACA exchange) that is also a HDHP that has an HSA

Agreed?

That is my understanding too. Otherwise I would get a policy for a month, front load the HSA and cancel the policy. I retire in July of this year.

A COBRA policy would likely do it, medicare would not.

 

[MBSC]

When I was w*rking, the HSA contributions by payroll deduction reduced my Medicare/FICA taxes.

When you make after-tax HSA contributions, you complete IRS Form 8889 to claim the HSA deduction and reduce income taxes. You can withdraw any excess contributions and associated earnings to avoid an IRS penalty, however, the HSA custodian may charge an "excess contribution removal fee".