@johnrlewis1273 wrote:
Thank you for your response.
You are correct - I am referring to lines 18-21 on my 8889 form.
I had HDHP coverage in 2021 for the months March-December. For 2022, I had HDHP coverage January-March and August-December. At this time, I anticipate I will have HDHP coverage for all of 2023.
So, based on your reply, if I have coverage for all of 2023, the last month rule will not be triggered and I shouldn't be subject to the additional 10% tax - is that correct?
There are two different kinds of HSA penalties. If you make excess contributions in general, there is a 6% ongoing penalty unless you remove the excess funds. However, if your contributions are considered excess because you fail the testing period for the last month rule, you pay a one-time 10% penalty, and not the ongoing 6% penalty. There is no need to remove any funds.
On your 2021 tax return, if you had HDHP coverage in December, you could make a full year contribution. Because you failed the testing period in 2022, some of the 2021 contribution is added back to your taxable income on your 2022 return and is subject to a 10% penalty. But that's a one time penalty.
Then, because you had an HDHP in December 2022, you can again use the last-month rule to make a full contribution for 2022. As long as you main coverage for all of 2023, you would not pay a new penalty on your 2023 tax return.
