HSA Contributions

[SocMO]

I'll see if this makes sense. In 2021 after completing open enrollment in 2020 I was covered under a HD insurance plan. I open a HSA with my employer, and they contributed funds per pay cycle. At the end of the year, I had a remaining bal of $101. During the 2022 open enrollment was told I could not participate in a HD insurance plan as I was turning 66 in Jan 2022, and that I could retain my HSA. So during the year of 2022, I contributed funds per pay cycle. I used the funds accumulated in 2022 for medical expenses. I thought of adding funds in the HSA to take advantage of any tax deferments to save on my tax burden. I found after TT software informed me that since I have a pension plan via my company, I cannot contribute to HSA. Then found out that since I don't have a family HD insurance plan, I can't or wasn't suppose to contribute fund, but the HSA bank bi-weekly took funds to apply to HSA. So I have a remaining balance in the HSA, I can't contribute, and I wonder if there will be some type of penalty or should I just remove the funds and close the account. I was hoping to roll over some IRA funds to the HSA to make the funds tax free and apply to future medical expenses. 

[BillM223]

"I could not participate in a HD insurance plan as I was turning 66 in Jan 2022" - this is not accurate. The restriction is NOT on how old you are, but whether or not you have started Medicare. You do not have to start Medicare at age 65, if you are still covered by a large group medical policy AND have not started Social Security. So have you actually started Medicare, and if so, when?

"since I have a pension plan via my company, I cannot contribute to HSA." - this is also not accurate. Where did TurboTax tell you this? There is no connection between a pension plan and an HSA. What did the screen actually say - even better, can you take a screen shot and post it in your reply?

"family HD insurance plan" - does this mean that you never had an HDHP policy? Even when you started with the HSA?

Please address these questions, and we will address your issues.

[SocMO]

Thanks for sharing information:

Q1: I do not have Medicare, and had not taken SS since I still work at this time. I provide coverage for me and my wife. So I found it strange that I was not allow to take a HDHP with my employer for 2022. Since that occurred, I retained my HSA and contributed $1200 in 2022. But within the 1099 SA it states Gross Distribution of $568.12, but if I add in TT that I contributed in 2022, it tells me to withdraw the $1200, but obviously there isn’t $1200 available, only $631.88. And if I input the $1200 in TT, I then have an increase in tax payment, not a large amount, but its obvious that something is wrong or how I am reporting this.

Q2: My comment on the company sponsored pension plan and contributions to HSA, was based on research on the eligibility to have the HSA, my error in stating it was TT. But apparently, unless I have an HDHP, I can’t contribute to the HSA. Was thinking of moving Trad IRA to HSA to have in a tax free environment and have it for future medical expenses, but it seems I can’t as I have a company pension plan, plus it doesn’t look like I have an “actual” HSA as well given what I know now.

Q3: I had a HDHP policy in 2021 when the HSA was started, but then that changed as I noted earlier. So it’s a bit confusing. Do I have an HSA? Can I contribute to it either with personal funds or from an Ira?

[RalphH1]

I think I’m clear on most of this, and if I am, you’ll want to check the “We’ll withdraw some of the excess…” box, then specify your $631.88 as the amount. Then you’ll be saving both the regular tax and the 6% penalty on that amount. It’s too late to do anything about the other $568.12, but at least it’s not taxable as a distribution, since you used it for medical expenses.

The increase in the tax payment makes sense (and there’s nothing you can do about it, unfortunately, unless something has been entered inaccurately), as the lack of a high-deductible health plan for any given month means you cannot contribute to an HSA for that month (see this page). It appears there was (and possibly still is) some confusion about the implications of a pension plan, but as BillM223 said (along with his other relevant points and questions), there is no connection between that and the HSA, unless you’re possibly referring to some specifics in the rules of the company for which you work.

If there are no such considerations, I don’t see anything (in what you wrote) stopping you from resuming your high-deductible health plan (unless you’ve started Medicare, as Bill said) and having an HSA going forward. (Even if you adopt this plan, you’ll still want to withdraw the current $631, since it’s for 2022.) If you end up doing this, you can possibly still contribute the maximum allowable amount for 2023 ($3,850 / $7,750 — if you keep the plan through the rest of this year and next year too).  We’ll be here to help as more questions come up!

[SocMO]

At this point I am reaching out to my company to determine why they told me I couldn't apply for an HDHP in 2022. As to the funds in the HSA, I will leave them there and use what's left for some 2023 expenses when they arise. As to the reported contributions, I guess I can leave off what I added, as I will only input the data from the 1099 SA. 

The Pension plan was just an query which probably didn't need to be part of the posting. 

So as to the HSA, there needs to be some clarity from my employer as to why I was told I couldn't have an HDHP and the HSA if I wasn't retiring, collecting SS or file for Medicare. So we will see how this unfolds. Thanks everyone for your input.

[Opus 17]

Let's go back.

1. You can't contribute to an HSA if you have other non-qualified medical coverage.  Medicare counts as non-qualified coverage, and most people enroll in Medicare at age 65.  If you skip Medicare enrollment, then whenever you do enroll, it will be backdated 6 months, which will affect you contribution limits, assuming you were enrolled in qualifying coverage.

2. You did not enroll in qualifying coverage in 2022.  Maybe your employer made a mistake, or maybe they have a policy that Medicare-eligible employees who refuse Medicare must take the PPO insurance instead of the HDHP.  (As a point of law, if you are over 65, you are not allowed to decline Medicare unless you are enrolled in coverage from your employer that is equal to or better than Medicare.  It may be that the HDHP your employer offers is not considered equal or better than Medicare, which forced you to enroll in the alternate insurance plan that is not HSA-qualified.)

3. Since you were not enrolled in a qualifying HDHP for 2022, any contributions you made are disallowed.  This includes any contributions made for you by your employer (shown on your W-2 in box 12 with code W). plus any contributions you made yourself.

4. You were allowed to spend any remaining funds from the HSA, but you are not eligible to contribute new funds.  You are also not allowed to make a qualified funding distribution from an IRA unless you are eligible to make new contributions.

5. The contributions you made in 2022 must be reported.  If you fail to report them, you will get a letter and a tax assessment from the IRS.  Because they are ineligible, they will not be tax deductible.  (Will not reduce your tax.)

6. After reporting the contributions, Turbotax will tell you that you have excess contributions.  You have two choices.

a. Leave the money in the account and pay a 6% penalty, calculated from the current HSA balance or the amount of ineligible contributions, whichever is less.  So if you leave the money in the account you should be seeing a $36 penalty if your remaining account balance is $600.  (Note that depending where you are in the Turbotax interview, you might not have entered the remaining balance yet.  You need to fully run the HSA contribution and withdrawal sections of the interview.)

b. Withdraw the remaining balance as a "return of excess contribution" before April 15 to avoid the 6% penalty.  The HSA bank will also be required to return any earnings on the money (interest, dividends) which will be taxable income that has to be reported on your 2022 return (even though it would technically be paid to you in 2023).

If you leave the money in the account, you could continue to spend it for medical expenses.  If there are still funds in the account on 12/31/2023, you will pay another 6% penalty on your 2023 tax return, because that excess funds designation carries over. 

7. Having a pension has nothing to do with eligibility to contribute to an HSA.  It's the fact that you enrolled in non-qualifying medical insurance. 

[SocMO]

1. Skipped Medicare as I have health coverage under my current employer (more than 200 employees).
2. There could be something behind their policy – I’ve reached out to my employer to get clarity. Note the HDHP in 2022 was very similar to the one I had in 2021 with the HSA, so if the 2021 plan was better than Medicare so would have been the 2022 plan. So again, clarity from my employer is needed.
3. This seems to be the scenario, and answers to 3 and 4. So it looks as if my contributions were not allowed (whether from me or any other funds). Just interesting that my HSA provider never addressed this from the get-go.  
4. Will remove the funds from my HSA, since the account appears invalid.

I will also see if my company seems to have made an error, and might opt to allow a change in insurance to an HDHP, if not, then the HSA will be closed, funds removed, and not have to deal this issue in the future.

Appreciate what you have shared.