HSA rules

[ripper1]

My new ACA plan will be a HSA approved account. Have been doing some research on them and looks like a good idea to me. What I am a little confused about is what they call a time test. It looks like for me to be eligible I have to be in the plan for a full year and for the rest of the month of the following year that I sign up. In other words if I become eligible on January 3, 2018 then I would still have to be in the plan on January 31, 2019. The problem becomes that my ACA plan could change in 2019 and I would be in another plan that was not a HSA. Am I correct in my understanding of this?

 

[LOL!]

I don't think so.

I had an HDHP and HSA for part of a year. I no longer have an HDHP, but I still have my HSA. Of course, I cannot contribute in months where I don't have an HDHP and moreover, my max contribution amount is pro-rated month-wise by the months I had an HDHP. And ...

If I front-loaded contributions into my HSA, then if I didn't have all 12 months of eligibility, I would have to get a corrective distribution of the overcontribution and any gains that overcontribution gained.

All this kind of administrative headache happens so often (people change plans for many reasons) that one's HSA has all the forms and know-how on fixing things (and fees to fix those things for you).

 

[sengsational]

Nah, not a concern. If you're still in the HDHP on December 1st, you're golden.

 

[ripper1]

Nah, not a concern. If you're still in the HDHP on December 1st, you're golden.

So if my plan starts 1/1/18 and ends on 12/31/18...I can contribute the full contribution sometime in January of 2018 and be fully eligible. Sorry I am having a foggy day today, sengsational.

 

[sengsational]

That's what I've been doing for many years.

 

[bingybear]

So if my plan starts 1/1/18 and ends on 12/31/18...I can contribute the full contribution sometime in January of 2018 and be fully eligible. Sorry I am having a foggy day today, sengsational.

yes you can do all the contribution in Jan if you want. If you have the hdhp plan all year, it would be fine. If you turn 55 or you are older, you could do a catch up contribution too.

There are other rules like the last (tax) month rule that can get a bit confusing. Since you are starting in January it is not important in your case.

 

[ripper1]

Thanks folks. Yes, I am going to use my one time IRA withdrawal to fund first year. Seems like a win win to me seeing that I also will get the deductions during the year to pay for any eligible ME.

 

[bingybear]

Thanks folks. Yes, I am going to use my one time IRA withdrawal to fund first year. Seems like a win win to me seeing that I also will get the deductions during the year to pay for any eligible ME.

Not sure what you mean. You will get the deductions for health related expense provided you don't pay for them from the HSA and the deductions still exist next year in tax reform.

I usually fund my HSA with after tax money which reduces my income and then do a roth conversion for the same or more than the HSA contribution and pay tax with after tax dollars and then can decide to pay medical expenses from the HSA or with after tax (after tax is typical) which allows taking the deduction if it exists.

This sounds like a win win as I end up converting IRA to Roth and funding the HSA instead of just converting from IRA to HSA. But this does require a little more after tax dollars for tax payments. If in a low tax bracket this can be useful

 

[audreyh1]

If you have two separate HSAs and two separate catch ups plus two individual health insurance policies you each get the single limit plus $1000, right?

I think this is the first year since we had accounts that 2x the single limit was $50 higher than the family limit.

Our total HSA contributions will be $8800 this year.

 

[ripper1]

Not sure what you mean. You will get the deductions for health related expense provided you don't pay for them from the HSA and the deductions still exist next year in tax reform.

I usually fund my HSA with after tax money which reduces my income and then do a roth conversion for the same or more than the HSA contribution and pay tax with after tax dollars and then can decide to pay medical expenses from the HSA or with after tax (after tax is typical) which allows taking the deduction if it exists.

This sounds like a win win as I end up converting IRA to Roth and funding the HSA instead of just converting from IRA to HSA. But this does require a little more after tax dollars for tax payments. If in a low tax bracket this can be useful

OK, Bingybear, correct me if I am wrong. Just as a hypothetical let's assume I am in the 25% tax bracket federal and state. I use my one time IRA rollover of 8000 for a HSA. Not using it as income so I save 2000 dollars. The 8k goes into HSA on January of 2018 and I am in this medical plan for all of 2018. Say my taxable income for 2018 is 50k and during the year I withdraw all of the 8k out of HSA account for medical expenses. Does this mean also that these funds are deducted as income and my new taxable income is 42k?

 

[audreyh1]

OK, Bingybear, correct me if I am wrong. Just as a hypothetical let's assume I am in the 25% tax bracket federal and state. I use my one time IRA rollover of 8000 for a HSA. Not using it as income so I save 2000 dollars. The 8k goes into HSA on January of 2018 and I am in this medical plan for all of 2018. Say my taxable income for 2018 is 50k and during the year I withdraw all of the 8k out of HSA account for medical expenses. Does this mean also that these funds are deducted as income and my new taxable income is 42k?

No.

You only get to deduct after-tax contributions to your HSA from income.

If you fund the HSA from your taxable income, then you get to deduct it from your income. But the rollover from the IRA is already pre-tax dollars so that is not deductible.

There is no tax benefit/savings for (the one time) funding your HSA from an IRA. So the only reason I can think that someone would do that, is that they didn't not have taxable funds available and wanted to tap into their IRA to fund medical expenses (tax free), so the rolled over what they could to an HSA.

 

[bingybear]

OK, Bingybear, correct me if I am wrong. Just as a hypothetical let's assume I am in the 25% tax bracket federal and state. I use my one time IRA rollover of 8000 for a HSA. Not using it as income so I save 2000 dollars. The 8k goes into HSA on January of 2018 and I am in this medical plan for all of 2018. Say my taxable income for 2018 is 50k and during the year I withdraw all of the 8k out of HSA account for medical expenses. Does this mean also that these funds are deducted as income and my new taxable income is 42k?

NO. I would assume if you were in the 25% bracket, then income would be higher than 50k. But then I'm use to MFJ. I'm not sure how the term "save 2000 dollars comes into this.

So say instead of using IRA $ to fund the HSA you use after tax dollars. So you take 8k after tax dollars to fund the HSA and and on page 1 of the 1040 you get a deduction of 8k. So if you started with an income of 50k, the funding of the HSA would reduce the income to 42k. For me I'm in the 15% bracket with much of the income as Qdivy, so I also do a roth conversion. If I do a roth conversion I and pay the tax with after tax $ then I pay little on the conversion. (some of the conversion in my case may be below 15%) But in your case the 8k roth conversion would raise you income from 42k back to the original 50k.

income 50k
after tax HSA contribution 8k
income after hsa 42k
8k roth conversion (assuming no tax basis)
income after conversion 50k

so you income stays the same and your taxable income stays the same. This assumes your income is treated as ordinary income.