HDHP and Medicare

[childclan]

I started out 2021 under a family HDHP through my employer.  The combination of my employer's and my contribution to my HSA was $3508.  In May I qualified for Medicare due to a disability.  My family and I continued to be covered by the HDHP through yearend, but for me only, Medicare become primary on 5/12/2021 (Medicare technically says it kicked in retroactively to 2/1/21, but it didn't become primary until 5/12).    My contributions to the HSA stopped after 5/12.  In the Easy Step questions I have answered yes to being covered by Medicare in 2021 and, per the directions to answer "none" if you were covered by both an HDHP and Medicare, I have checked off "family" for Jan-April and then "none" for May-Dec.  This is generating a HSA maximum contribution of $2400 and therefore an excess contribution of $1108.  I am avoiding the extra 6% penalty by committing to withdrawing the $1108 by 4/18/22, but I'm still owing an additional $451 vs if I select family for the entire year (technically the maximum contribution exceeds the $3508 once I select family through June).  Am I correct that I have to answer "none" from May-Dec (pay particular attention to May, which was split) even though the HDHP continued for my family (and me as secondary) through year end?  Note that answering it this way is triggering a question "Did your HDHP coverage lapse in 2021 due to disability?".  I have answered "yes", but am confused since the HDHP didn't actually lapse, it just changed who was primary for me only.  Am I correct to answer "yes"?

[Opus 17]

If Medicare is effective February 1, that is the date you must use, even if it was not “primary“. Your maximum allowable contribution for 2021 is $600.  Everything over that must be withdrawn and it will be added back to your taxable income. That’s why it is increasing your tax, because you don’t get that income tax free any longer. However, you won’t pay a penalty if you withdraw the excess contributions in time.

However, you seem to be unaware that if your wife is covered by a qualifying HDHP and does not have other insurance, she can also contribute to an HSA in her name, even if she is not the primary person named on the medical insurance policy. She can open an HSA at any bank that offers them; my local credit union offers an HSA with a service fee of $3 per month. You may be able to find HSAs at many banks either local or online.   

Your combined maximum is also $7200 for the year, so if you are limited to $600, your wife could contribute up to $6600 and take a tax deduction for that amount. She can make contributions for tax year 2021 up through April 18, 2022, as long as she notifies the HSA bank before she makes the contribution that it is for the previous year.  Since you must withdraw $2908 from your HSA, that amount could be contributed to your wife‘s HSA and zero out the tax that you would have owed on the excess contribution.  Or, you could contribute more, up to $6600.  If your wife is still covered by an HDHP, she can make contributions in 2022 as well.

[Mike9241]

@Opus 17 couldn't he contribute $683 if he was over 54 at year-end? $600 for the regular contribution and $83 for the pro-rata portion of the $1,000 catch-up.

also if the spouse was over 54 at year-end couldn't she contribute $7600  to her own HSA - including $1,000 for the catch-up

[childclan]

Neither myself or my spouse are older than 54 so the catch-up doesn't apply.  Thanks for the thought though.

[Opus 17]

@Mike9241 

You would be correct of course, except I discounted that possibility because TurboTax told the customer that his maximum contribution was $2400 for four months.

[childclan]

So answering "none" back to February adds an additional question/complication.  As you predicted, answering "none" for Feb-Dec generates a maximum contribution limit of $600 and an excess contribution of $2908.  The problem with this is that the HSA value as of 12/31 is only $1497, so it isn't possible to withdraw the entire excess contribution to avoid the 6% penalty.  Do I have to check that I will only withdraw some of the excess by 4/18/22 and enter the $1497 for the amount I'll withdraw?  Also, I lost coverage for the entire family under the HDHP in Dec (I left that company).  Can I still do what you suggested and open up a new HSA for my spouse by 4/18/22 and contribute $2908 to avoid the taxes and penalty?  Also, just to confirm, you aren't saying I can transfer from the old HSA to the new one, right?  I would have to use up the old HSA on qualifying expenses and separately fund the new HSA with new contributions, right?

[childclan]

I have an additional question.  TT is asking what type of HDHP did my spouse have on 12/1/2020.  He was covered by my HDHP and did not have his own HDHP through his employer.  Do I answer "none" since he didn't have his own plan, or do I say "family" since he was covered under my family HDHP?

[Mike9241]

since he was covered under your HDHP you had family coverage and the rule is if one spouse had family coverage so did the other.

[Opus 17]

@childclan 

The penalty is based on the amount of excess contributions or the remaining account balance, whichever is smaller.  I’m not sure if you can end the year with a balance of $600 and avoid a penalty (removing $897 as an excess contribution) or if you must remove the entire $1497. I would have to go over your situation in detail with form 8889 to figure it out, but you could test it in the program.

You can never transfer money from an HSA that you own to an HSA that your spouse owns. HSAs are individual accounts like IRAs and the only time you can transfer directly to a spouse‘s account is as a beneficiary after your death.  Your spouse could open an account in their name, and make contributions in their name. Once you withdraw the excess contribution from your account and place it in your own regular bank account, it’s the same as all your other money, and it doesn’t matter what money your spouse uses to fund their account.

If your spouse is eligible for 2021, they can open an account and make contributions for the 2021 tax year up until the April 18, 2022 filing deadline.  They could not make contributions for the 2022 tax year if they are not eligible in 2022.  (but don’t leave it last minute, because the bank will probably take three or four business days to fully process the transaction.)

In TurboTax, you would check the box that your spouse has family HDHP coverage. They are covered by your policy, even though it is not in their name.

Eligibility is determined based on the kind of insurance you have on the first of each month. You said you left your employer in December. If you were not covered by the HDHP on December 1, then your spouse‘s contribution is limited.  Your overall family contribution would be $6600 (11/12ths of $7200), and if you contributed $600 then your spouse could contribute $6000. If you left the job in the middle of December and were covered by the family HDHP as of December 1, your overall family limit is $7200 and your spouse could contribute $6600.

Once you have funds in an HSA, you may keep them indefinitely and use them for medical expenses whenever you like, even if you are no longer qualified to make new contributions.