I had an HSA for all of 2019 supported by a Qualified High Deductible Health plan. I retired in June of 2019. My wife was on my employer coverage until July of 2019. She started medicare when I retired. I continued employer health plan under COBRA with the family coverage on the QHDHP for the entire year as I could not change it until open enrollment at the end of 2019. Not knowing what changes would occur, I made sure my payroll deductions funding the HSA would reach the maximum allowed for us by the time I separated in June (8000.00). Turbo Tax is telling me now, when I enter the coverage dates, that I over-funded the account and should withdraw 1750.00 from the HSA account by April. Is this because my spouse was only on the family coverage for 6 months / started medicare in July? Confused, and thinking we made a mistake by not leaving her on for the full year and delaying her medicare until 2020.
Thanks
What happened is that when your wife started Medicare, she probably left your HDHP, so you no longer had a Family HDHP policy but a Self-only policy.
If you have her with Family coverage for the first 6 months and you with Family coverage for the first 6 months and Self-only coverage the last 6 months and you contributed $8,000, the $1,750 is exactly the amount of the excess, because your actual annual HSA contribution limit was reduced to $6,250.
I can't address which way would have been better to do it, because I don't have all your facts, but if you still have the money in the HSA to withdraw the $1,750, you can withdraw it with no penalty if you (1) tell TurboTax that is what you are going to do, and (2) contact your HSA custodian before April 15th(see footnote***) to request the withdrawal of excess contributions (use this exact phrase).
Yes, you will owe income tax on that $1,750, but the HSA custodian is going to send you a check for the $1,750 so you will have the funds to pay the tax.
Oh, next year, you will get a 1099-SA that lists the earnings on the excess contributions before they were withdrawn (they will be added to your Other Income), but with things the way they are, this is not likely to be much.
***In IRS Notice 2020-18, the IRS has announced that for HSA owners, the last date for contributions for the previous year has been extended to July 15, 2020 (this year only). One presumes that other due date-related items like the last date to request a return of excess contributions would follow suit.
[Edited 3/24/2020 4:45 pm CDT - updated date]
What happened is that when your wife started Medicare, she probably left your HDHP, so you no longer had a Family HDHP policy but a Self-only policy.
If you have her with Family coverage for the first 6 months and you with Family coverage for the first 6 months and Self-only coverage the last 6 months and you contributed $8,000, the $1,750 is exactly the amount of the excess, because your actual annual HSA contribution limit was reduced to $6,250.
I can't address which way would have been better to do it, because I don't have all your facts, but if you still have the money in the HSA to withdraw the $1,750, you can withdraw it with no penalty if you (1) tell TurboTax that is what you are going to do, and (2) contact your HSA custodian before April 15th(see footnote***) to request the withdrawal of excess contributions (use this exact phrase).
Yes, you will owe income tax on that $1,750, but the HSA custodian is going to send you a check for the $1,750 so you will have the funds to pay the tax.
Oh, next year, you will get a 1099-SA that lists the earnings on the excess contributions before they were withdrawn (they will be added to your Other Income), but with things the way they are, this is not likely to be much.
***In IRS Notice 2020-18, the IRS has announced that for HSA owners, the last date for contributions for the previous year has been extended to July 15, 2020 (this year only). One presumes that other due date-related items like the last date to request a return of excess contributions would follow suit.
[Edited 3/24/2020 4:45 pm CDT - updated date]
Thank you for the reply. That is what I assumed, and we will proceed with the withdrawal. I have followed up and checked the COBRA account and found that She was not on the plan starting in July. So you are correct, still had the plan for a year but the second half was for self only coverage. I understand why it calculated that way now. I had assumed that we still qualified for the full family rate for the year (wrong).
Thanks again!
I am confused. You were under a Family plan all year? Did you enter that in TurboTax for each month (or if it was all year, you can just check "Under Family Coverage for all of 2019".
After all, you can still claim a Family plan, so long as your spouse is on the plan even if she is no longer an eligible individual because of Medicare.
The IRS says,
"Family HDHP coverage is HDHP coverage for an eligible individual and at least one other individual (whether or not that individual is an eligible individual)." See IRS Pub 969, page 4.
If you entered Family for you for all 12 months, and Family for your spouse for 6 months and None for the rest, your annual HSA contribution limit is still $8,000 (because you are 55 or older, I assume). So you should not have gotten the excess contribution message in this case.
What did you actually enter for your 12 months and her 12 months?
Thanks for the reply - my mistake, sorry for any waste of time. I had to confirm through the COBRA paperwork and billing and found I was in error I was changed to self coverage, although I had to maintain the QHD plan until open enrollment late 2019. The initial response was correct - 12 months coverage for me and 6 for my spouse.
Are you sure that we still get the full 8000.00 credit if she was on for 6 months (family) and I was 6 months family as well and then 6 months self only when she went to medicare? I think that is what I assumed when I set up the plan choice, and at the time I was unaware there would be a problem if I fully funded the HSA account by June (doubled my contribution for the first 6 months of the year and then separated). I guess I can call the IRS - but TT keeps coming up with the lower amount of 6250.00 as my max contribution when I enter type of coverage for each month for spouse and I.
Thanks
Based on what you have described, you cannot contribute $8,000 for 2019. Your contribution limit is prorated based on months of eligibility. Beginning with the first month you are enrolled in Medicare, your contribution limit is zero.
If you are, or were considered an eligible individual for the entire year and didn’t change your type of coverage, you can contribute the full amount based on your type of coverage. However, if you weren’t an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of:
The limitation shown on the Line 3 Limitation Chart and Worksheet in the Instructions for Form 8889, Health Savings Accounts (HSAs); or
The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year.