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Apparently a \"high deductible\" isn\'t enough to qualify for a HSA...

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  • Apparently a \"high deductible\" isn\'t enough to qualify for a HSA...

    So apparently I was misinformed as I thought that as long as your deductible was higher than the minimum requirement and that your OOP maximum was less than a certain amount, your plan would automatically qualify for a HSA. However, I just found out that your plan cannot cover anything else other than preventative care (my plan covers part of your prescription and office visits). Since I already contributed the full $6750 for my family 2016, what do I do now that I realize I am actually not eligible for a HSA? TIA!



  • #2
    Unfortunately, you owe a 10% tax on any contributions made in a calender year in excess of what you are qualified to make.


    • #3
      It cannot cover anything *until the deductible is met* other than preventive care. So, bummer.

      From IRS pub 969:
      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      You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.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      You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

      If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income is not an excess contribution. If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later.


      • #4
        Wow, that's really a bummer...


        • #5
          So I re-read IRS pub 969, and it appears to be ambiguous as to the amount of the penalty. My interpretation is that if you are qualified to have an HSA, but that you overfund the HSA beyond what is allowed, then you must withdraw the overfunding amount and declare it as income or pay a 6% excise tax. However, if you are not qualified to contribute to an HSA but you do so anyway, you have to declare it as income and pay a 10% penalty. OP's situation unfortunately appears to fall into the latter category.


          • #6
            Researching this situation and it is surprisingly difficult to find clear information directly addressing the individual's contribution when ineligible. Most contributions for ineligible employees are discussed from the employer viewpoint. Will continue the search later when I'm in office, but my understanding so far is that you must remove the excess by 12/31 or pay the 6% excise tax plus pay tax on any earnings, which is logical since you would have done, anyway. i do not believe you have to count the full amount of contribution as income. You should notify your HSA custodian asap and they should be able to advise you as to how it will be reported to you.

            Still think it should be a 6% excise tax if not withdrawn by 4/15, but that is not what I've seen so far.

            Hopefully, someone else will find definitive information that I have been unable to come up with.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


            • #7
              Treatment of contributions to HSA by ineligible owner:

              1. Discovery Benefits piece

              2. CarePlus - see example on page 4. At first blush, this appears to be the worst possible news for PNWskindoc. But this seemingly onerous result appears irrational until you understand that the reason Alex has to include the full contribution in 2016 income is because he received a disallowed deduction in 2015. The tax code can be unbending and complicated, but I find it, in most cases, to be quite logical.

              I stopped searching after this and believe you will have minimal adverse tax consequences.
              Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


              • #8
                Thanks everyone. I'll keep you posted after I hear back from my HSA custodian.


                • #9
                  Ineligible contributions are excess contributions. There are two ways to deal with excess contributions:

                  1. Remove your excess contributions and their earnings by your tax filing deadline including extensions. For this year it is April 18, 2017 or October 16, 2017 if your file for an extension. There is no requirement that you needed to do this by December 31, 2016.

                  2. File Form 5329 and pay a 6% excise tax on the excess contributions, but not on the earnings. However, this is not a good idea even if your earnings were >= 6%, because that balance will subject to that 6% excise tax indefinitely until you have a year that you are eligible for an HSA. Then you could take a deduction for the amount and reconcile the 5329 balance.

                  EDIT: I now believe that in this case the second option is not available anyway, because the IRS considers that if the individual was not eligible then the HSA never legitimately existed, therefore no funds can remain.

                  If you choose 1. above, how this is taxed will depend on how the contributions were made. For contributions made by payroll deduction, your taxable income W-2 box 1 was already reduced by this amount and you will have to claim this amount as income on Form 1040 line 21 other 21 income and write "HSA". For contributions made directly, you just don't take the deduction on Form 1040 line 25. In either case the the earnings are claimed on Form 1040 line, either added to the total for the former or as alone for the latter. See IRS Publication 969, page 7, 2nd column, midway down.

                  Your provider will be very knowledgeable about removing excess contributions. Just make sure you do this by your tax filing deadline including extensions.

                  The 10% penalty only applies in the case of a "testing failure" when someone takes advantage of the "last month rule" which most certainly does not apply in this case.

                  The typical additional conditions that will disqualify an HDP for HSA eligibility other than minimum deductible and max out-of-pocket:

                  1. Any non-preventive payments before the deductible is met such as first dollar, co-pays and co-insurance. This is true for medical services, prescriptions and products, but does not apply to vision or dental payments.

                  2. An embedded individual deductible within a family plan that is less that the minimum family deductible.


                  • #10
                    My interpretation of OP'S situation is that he has a "testing failure." He contributed to an HSA when he wasn't eligible to do so (had a bare bones but not eligible HDHP). Therefore, every contribution made while ineligible is subject to the 10% penalty. This is obviously worse than just withdrawing the money, but also logical from IRS perspective of not wanting ineligible people to open HSA's.


                    • #11

                      My interpretation of OP’S situation is that he has a “testing failure.” He contributed to an HSA when he wasn’t eligible to do so (had a bare bones but not eligible HDHP). Therefore, every contribution made while ineligible is subject to the 10% penalty. This is obviously worse than just withdrawing the money, but also logical from IRS perspective of not wanting ineligible people to open HSA’s.
                      Click to expand...

                      Go read IRS Publication 969, page 5, 1st column, halfway down. See "last month rule" and "testing period".

                      The 10% penalty ONLY applies to "Testing Period" failures, which ONLY apply to "last month rule" contributions and "qualified funding distributions" from an IRA. Read  IRS Form 8889 Instructions, page 6, Part III.

                      IRS guidance is that if you were never an eligible individual, then no HSA ever existed.



                      • #12
                        The more I re-read pub 969, the more confused I get. I agree that it appears the 10% penalty applies to "last-month" eligibility failures only, where the individual is eligible at one point but fails to maintain eligibility for 12 consecutive months and makes contributions. I think there is some ambiguity and the route of withdrawing all contributions and hoping for no penalty is defensible. However, in the section regarding "excess contributions" there is a specific note that if you fail to remain an eligible individual during testing periods (12 consecutive months based on last month rule) withdrawals from the HSA are treated as non-qualified distributions from the HSA and are reported as income AND a 20% penalty.

                        So, to sum up, the penalty could be

                        1) nothing as long as you withdraw all the money before 4/15/17

                        2) 6% excise tax for leaving the money in the HSA, and 6% every year thereafter as an excess contribution

                        3) 10% penalty on the amount improperly contributed, once (I think this is least likely because OP was never eligible)

                        4) a 20% penalty on the amount withdrawn because it is a non-qualified distribution, once.

                        This is why there are tax attorneys.


                        • #13
                          pulmdoc, you are still misinterpreting. I mean this with the greatest respect, but maybe your forte isn't interpreting tax publications.

                          What happens with a testing period failure is that the excess becomes a non-deductible contribution which is also assessed a 10% penalty. An incorrect attempt to remove it just adds an additional 20% penalty as a non-qualified distribution.

                          To sum up:

                          1. If you remove excess contributions and earnings by your tax filing deadline (4/18/17), including extensions (10/16/17), they become taxable income reported in a manner dependent on whether they were contributed pre-tax or post-tax, but yes there is no penalty.

                          2. There is a 6% excise tax for the first year, but if you are an eligible HSA individual for the next year and you reduce your contribution such that the excess contribution + your next year's contribution <= your contribution limit there is no additional excise tax. It does not carryover forever.

                          3. I don't know where you are inventing this 10% penalty in the OP case. In your first sentence you already understood that the 10% penalty only applies to testing failures. There is no special not eligible penalty, it is simply an excess contribution.

                          4. Something we can agree on.


                          • #14
                            I just got off the phone with my HSA custodian and it was a very easy process to close out my account and withdraw my money. I just filled out a form saying that my contributions were an "excess contribution" and because I did not take a payroll deduction, no extra paperwork necessary. Also no tax implications at all. Thanks everyone for your help!


                            • #15
                              Actually I just got this email back from them: "Excess contribution removals get reported on the 1099-SA form for the year the funds were actually removed. So, even though you are removing the funds for an excess contribution for tax year 2016, the excess funds will be removed during 2017. The excess contribution removal will show on your 1099-SA tax statement (distributions) for 2017. You will receive the 2017 1099-SA at the end of January 2018 showing the excess removal.

                              Your 2016 5498-SA shows the actual amount you contributed for 2016, which you should report on your taxes. The 2017 1099-SA you will receive at the end of January 2018 will cancel out the excess contribution showing on the 2016 5498-SA. If you were to be audited before January, 2018 for tax year 2016, you can pull statements from your online account showing you withdrew the excess funds."

                              So does that mean I just take the deduction for 2016 and in 2017 it will be counted as added income? Seems like a bad deal for me because this is my first year out of residency so I'd be in a lower tax bracket than next year