Excess HSA contribution calculation seems incorrect

[deb46]

My husband contributed $1000 to his HSA  in February 2020 and his employer contributed $1600 in January 2020 (reported on his W-2 in box 12, code W). Husband started Medicare July 2020. Using TurboTax Premier CD, completed interview, TT says we have an excess contribution of $500. TT doesn't explain how this was calculated.

Contributions to HSA are not allowed when enrolled in Medicare. Thus, his contributions must be prorated by the number of months he is not covered by Medicare (6, for Jan thru June). So it seems to me that the excess amount should be (1000 + 1600) * 6/12 = 1300, not 500. Is this an error by TurboTax? Or am I missing something?

[BillM223]

What was the type of HDHP policy? Family or Self-only? Did either of you have Family coverage at any point in 2020?

Did he have excess contributions in 2019 that he carried over to 2020 (this would have been reported on form 5329 in Part VII).

How did your husband contribute the $1,000? Was it directly to the HSA custodian, or through his employer (by payroll deduction)?

Did you make any contributions to his HSA?

The annual HSA contribution limit is calculated this way:

$3,550 <= I am assuming that he had Self-only coverage

$1,000 <= I am assuming that he is surely 55+

$4,550 <== subtotal

$2,275 <==times 6 and divided by 12

The excess contribution is the amount that the contributions exceeded this limit, which would appear to be -$325 ($2,275 minus $2,600).

But I have made a number of assumptions, so please go through the questions above and give me the answers.

[deb46]

Thanks for the reply. We were both covered by the same family HDHP policy for all of 2020. No excess contributions for 2019. We are both 55+. The $1000 was contributed directly to the custodian (so not a payroll deduction). I did not make any contributions to his HSA, but I did contribute $6500 to my own HSA.

[BillM223]

OK, we have to start all over again, because you two share the annual HSA contribution limit for a Family HDHP policy. 

The annual HSA contribution limit is calculated for each HSA separately.

For your HSA, the limit starts out as $7,100 plus the $1,000 "bonus" for 55+. But, as I noted, the $7,100 is shared with your husband. So your $6,500 represents the $1,000 plus $5,500 of the Family coverage.

That leaves only $1,600 ($7,100-$5,500) to share with your husband. Your husband's $1,000 "bonus" gets prorated from $1,000 to $500 because of Medicare.

So his annual HSA contribution limit is $2,100 ($1,600 + $500). But since $2,600 was contributed to his HSA, his excess contribution is $500, just as TurboTax reported.

Doing the Family HDHP coverage when you are 55+ and one spouse goes on Medicare is a complicated calculation, and not one that I would expect most taxpayers to easily figure out.

I hope you can be content that the calculation is correct, and be glad that you won't have this situation again.

[deb46]

Thanks for the details. I have a question:  why isn't the $1600 also prorated (for Medicare) just like the bonus/catch-up $1000? I thought his total allowed contribution for the year, including any bonus/catch-up contribution, would need to be prorated.

[DawnC]

The $7,100 family limit applies to married couples even if one spouse is covered by a family plan and the other spouse has their own individual plan. In this scenario, the couple may split their respective contributions any way they like, as long as the couple's total contribution doesn't exceed $7,100. (Spouses 55 or older at the end of 2020 are allowed to contribute an additional $1,000 to their own HSA.)   Only the bonus portion is specific to his HSA account, the rest of his contribution ($1600) can be used for the joint contribution limit of $7100. 

Your $6500 represents your $1K bonus and $5500 of the joint limit of $7100.   His employer contribution of $1600 max out the joint limit of $7100.  If he was the only one with an HSA, both amounts would have been pro-rated as Bill described above.   

[deb46]

So it seems that the $1600 does not have to be prorated because we have HDHP family coverage and share the $7100 HSA contribution limit (for 2020). I appreciate the explanation and am also wondering if there an IRS link that would explain this so that I have something to keep with my records. Thanks.

[BillM223]

"So it seems that the $1600 does not have to be prorated because we have HDHP family coverage and share the $7100 HSA contribution limit (for 2020)."

The $1,600 is his part of the $7,100. For all we know, it could be allocated to him in the first few months of the year when he was still eligible.

Since this limit calculation is done on an annual basis, you are free to allocate as you see fit.

However, the $1,000 "bonus" belongs to individual's HSA, and the IRS says that the "bonus" has to be pro-rated just like the main amount. Since only HIS eligibility applies to his HSA, the $1,000 has to be pro-rated. As Dawn reminds us, the Family coverage is good for the whole year, because you had the Family coverage for the whole year.

I wish that I could point out an easy place to find this. However, IRS Publication 969 does not cover many unusual situations. You could also look in the instructions for form 8889, where there is some discussion that suggests that this is how Family coverage should be applied.

But you would also have to read the various IRS Notices that have been issued over the years, for discrete Q&As that often provide much more insight. IRS Notices are typically read only by tax professionals, but they do tend to fill in the gaps in the official publications and instructions.

Bear in mind that as a TurboTax user, you benefit from the Tax Accuracy Guarantee, so if the IRS ever questions how your return is done, then you can apply under the guarantee, and the group in charge of that will show why our calculation is correct. You are not going to be left out on a limb.

[Opus 17]

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@deb46 wrote:

So it seems that the $1600 does not have to be prorated because we have HDHP family coverage and share the $7100 HSA contribution limit (for 2020). I appreciate the explanation and am also wondering if there an IRS link that would explain this so that I have something to keep with my records. Thanks.

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Not exactly.

His limit for 2020, if covered by a family HDHP, is $7100 plus $1000 catch-up x 6/12, or $4050.

Your limit for 2020, if covered by a family HDHP, and you are not Medicare-eligible yet, is $8100.

However, your overall family limit is $7100 plus your $1000 catch-up plus his $500 catch-up ($1000 x 6/12th), or $8600.  The $7100 family max can be split up any way you like, but the $500 and $1000 catch-up contributions can only be contributed to that specific person's account.

Since you contributed $9100 between you, there is $500 excess.  It doesn't matter whose excess it is, it could be yours or your spouse's.  If you want to withdraw the excess contribution to avoid a penalty, you could withdraw it from your account or your spouse's, it doesn't matter.  

The rules and a worksheet are here.

https://www.irs.gov/pub/irs-pdf/p969.pdf

[deb46]

Good to be reminded about the accuracy guarantee. Thanks for your help.