HSA Contribution for partial year

[jmsnyc]

Hi,

I joined a company in September but my health insurance with that company will start Nov 1 so 2 months for 2019.  With my previous employer this year I did not have a HDHP and I did have an FSA which I used up before I left.

My HR rep is saying that I can still contribute the maximum, $3500.   They contribute on my behalf $750 however I am sure that will be prorated.  

Is the HR rep correct or incorrect?  I am paid weekly so if I subtract the $750 and prorate I can only contribute $45-$50 a week.  I am under 55.

[Anonymous]

The Last Month Rule states that if you are covered by an HSA eligible health plan on the first day of the last month of a given year, you are considered an eligible individual for the entire year. This gives you the option to contribute the entire year’s contribution limit to your HSA, which is more than you would be allowed otherwise (pro rata by month).

The Testing Period states that if you use the Last Month Rule, you must remain an eligible individual (covered by HDHP) for the next 12 months, so through December 1st of the following year. If you fail to remain an eligible individual (change insurance plans, lose insurance plan, receive other health coverage) during that time, any “excess” contributions you made as a result of using the Last Month Rule will be taxed and penalized.

Perhaps the safest strategy is waiting until the following year (but prior to April 15th) to make a Prior Year Contribution. This ensures you do not over contribute during a period and have to declare and pay tax on the excess

i'am assuming you are not married and won't be married on 12/31/19.  what spouse has in the way of health insurance and HSA could affect what you can contribute

as single you can contribute $3,500 for 2019 reduced by employer contributions.  so you need to either know this amount so you don't over contribute or if permissible  make the contribution for  balance for 2019 by 4/15/2020 or whatever your plan permits.

in theory say employer contributes max of 750 then you can contribute  up to $2,750, but if the 750 is prorated you can contribute more,   if you want.    there is no requirement to max out the HSA contribution

[jmsnyc]

Thank you.   I was only planning on doing the HDHP for this year, not next year.  Next year I plan to switch to a lower deductible plan.  

I am almost positive that the $750 is prorated, which means that I can only contribute $229  ($2750/12)per month?

[dmertz]

Since you will not meet the testing period, if you use the last-month rule you'll pay a 10% extra tax on the amount you contribute over what you are eligible to contribute without using the last-month rule.  Because you will be covered for only two months, the amount that can contributed on your behalf by you or your employer without using the last-month rule is 2/12 of the annual limit.

Because you will be covered for December, TurboTax will automatically calculate the maximum contribution based on the last-month rule.  You can force TurboTax to calculate your maximum contribution without using the last-month rule by indicating that your coverage is for October and November instead of November and December.  The details of which months you are covered will not appear on your filed From 8889.

[dmertz]

To add to my previous comment, you own calculation is incorrect.  Since you are under age 55 the combined total that can be contributed by you and your employer to your HSA for 2019 without using the last-month rule is $3,500 * 2/12 = $583.33.  Even if you don't contribute through payroll deduction or directly, if your employer separately contributes $750 you will have $166.67 contributed under the last-month rule.  Since you'll fail to meet the testing period, you'll owe a $17 extra tax with your 2020 tax return.  The $166.67 contributed under the last-month rule will not be an excess contribution, so it makes sense to allow your employer to contribute that even though you'll pay the extra tax.  Better to pay the $17 extra tax than to not get the $166.67 from your employer.

Also, you are not permitted to get the full $750 contribution by your employer and then obtain a return of contribution of $166.67 to avoid the $17 penalty because only amounts that are actually excess contributions are permitted to be returned in this way and the $166.67 is not an excess contribution as I mentioned above.  (Even if you obtain this distribution and the HSA custodian reports it as a return of excess contribution, legally it would constitute a regular distribution, you would still own the $17 extra tax and, if you did not use the $166.67 for medical expenses, it would be subject to ordinary income tax and to a 20% early distribution penalty.)

[jmsnyc]

What if we assume I am not getting the $750, I am only getting a prorated amount of the $750?   (according to the benefit handbook provided by employer its prorated) - which is $125 (2/12). $583 -125 = $458.  Divide that by 2 and I get the $229 per month.

Also, would it be easier to wait and see? If I do not deduct anything, do I have until April 2020 to contribute the $458 and also deduct that $458 from my taxes even if I take the standard?

Also, will Turbotax 2018 calculate this ? Or do I have to wait until I get the 2019 software ?

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@dmertz wrote:

To add to my previous comment, you own calculation is incorrect.  Since you are under age 55 the combined total that can be contributed by you and your employer to your HSA for 2019 without using the last-month rule is $3,500 * 2/12 = $583.33.  Even if you don't contribute through payroll deduction or directly, if your employer separately contributes $750 you will have $166.67 contributed under the last-month rule.  Since you'll fail to meet the testing period, you'll owe a $17 extra tax with your 2020 tax return.  The $166.67 contributed under the last-month rule will not be an excess contribution, so it makes sense to allow your employer to contribute that even though you'll pay the extra tax.  Better to pay the $17 extra tax than to not get the $166.67 from your employer.

Also, you are not permitted to get the full $750 contribution by your employer and then obtain a return of contribution of $166.67 to avoid the $17 penalty because only amounts that are actually excess contributions are permitted to be returned in this way and the $166.67 is not an excess contribution as I mentioned above.  (Even if you obtain this distribution and the HSA custodian reports it as a return of excess contribution, legally it would constitute a regular distribution, you would still own the $17 extra tax and, if you did not use the $166.67 for medical expenses, it would be subject to ordinary income tax and to a 20% early distribution penalty.)

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@dmertz wrote:

To add to my previous comment, you own calculation is incorrect.  Since you are under age 55 the combined total that can be contributed by you and your employer to your HSA for 2019 without using the last-month rule is $3,500 * 2/12 = $583.33.  Even if you don't contribute through payroll deduction or directly, if your employer separately contributes $750 you will have $166.67 contributed under the last-month rule.  Since you'll fail to meet the testing period, you'll owe a $17 extra tax with your 2020 tax return.  The $166.67 contributed under the last-month rule will not be an excess contribution, so it makes sense to allow your employer to contribute that even though you'll pay the extra tax.  Better to pay the $17 extra tax than to not get the $166.67 from your employer.

Also, you are not permitted to get the full $750 contribution by your employer and then obtain a return of contribution of $166.67 to avoid the $17 penalty because only amounts that are actually excess contributions are permitted to be returned in this way and the $166.67 is not an excess contribution as I mentioned above.  (Even if you obtain this distribution and the HSA custodian reports it as a return of excess contribution, legally it would constitute a regular distribution, you would still own the $17 extra tax and, if you did not use the $166.67 for medical expenses, it would be subject to ordinary income tax and to a 20% early distribution penalty.)

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[dmertz]

If the employer contributes only $125 for the year, the remaining $458.33 that can be contributed without using the last-month rule can be contributed by you through payroll deduction or by personal contribution.  If the contributions through your employer are through a cafeteria plan, those contributions are be exempt from Social Security and Medicare taxes,but if you make a personal contribution you will have ended up paying about $35 in Social Security and Medicare taxes on the $458.33 (assuming that you will have not maxed out on the Social Security wage base for the year).

2018 TurboTax uses the self-only coverage limit of $3,450, not the 2019 limit of $3,500, so without using the CD/download version of TurboTax and using overrides you cannot get an accurate calculation from 2018 TurboTax.  You'll need to wait for 2019 TurboTax to get a correct calculation without using overrides, and even the initial release of 2019 TurboTax might not have the necessary updates; cost-of-living-dependent limits are often not updated until a few weeks after the initial release for a particular year.