HSA Distribution

[bill_s2]

I established and funded with after-tax dollars an HSA in 2021.  I became eligible for and enrolled in Medicare on 7/1/2021 so I only contributed half the permitted annual amount. I was on a HDHP in the first half of the year.  My 2021 after-tax HSA contribution is showing up on form 8889 as a Qualified HSA funding distribution. I took no distribution from the HSA in 2021.  

Why does TT put my HSA contribution on line 19 of form 8889 as a qualified HSA funding distribution? TT did put zero on line 10 for qualified HSA distributions.

Why am I being penalized for failing to maintain a HDHP?

[Cynthiad66]

These are the qualifications to be eligible for a Health Savings Account HSA deduction.

To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements.

• You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.

• You have no other health coverage except what is permitted under Other health coverage, later.

• You aren’t enrolled in Medicare.

• You can’t be claimed as a dependent on someone else’s 2021 tax return.

Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). 

IRS link for HSA:  IRS Pub 969 for HSA and Other Plans

@bill_s2

[bill_s2]

Thanks for the response.

According to the example for turning 65 in July 2021 (that's my situation exactly) in this link: Publication 969 (2021), Health Savings Accounts and Other Tax-Favored Health Plans | Internal Revenu..., I am able to contribute $2,300 which is also the amount that TT calculates for the Max Contribution Limit on the interview page "Let's maximize your contribution limit".  If both the Pub 969 example and the TT calculation both indicate I can contribute up to $2,300, why would they both say this if I am not eligible for an HSA deduction?  

The instructions for form 8889, line 19, point to the instructions for line 10 in form 8889.  TT correctly inputs zero for my situation (I had no qualified IRA distribution to the HSA), but it put my after-tax contribution on line 19 (slightly less than the $2,300 limit).  Since the instructions for line 19 are the same as for line 10, why does TT have my after-tax contribution to the HSA as a qualified HSA funding distribution on line 19?  Does this not mean that TT has made an erroneous calculation for line 19 in form 8889? 

[Mike9241]

you have made an incorrect entrysomewhere

apparently, you had self only coverage under a HDHP plan from 1/1/2021 through at least 6/1/2021. on 7/1 you had medicare e which disqualifies you for the rest of the year.

however, for the months not on medicare you would be allowed a max $3600 contribution. in addition, if you were over 55 at the end of 2021, you could make a prorata extra contribution of $500

a qualified funding distribution line 10 can only come from a direct transfer from an IRA to am HSA. did you mess up?

if this was done there would be no HSA tax deduction because the iRA withdrawal would not be taxable.

contact support for help, because apparently you made one or more incorrect entries or failed to answer all the HSA questions.

[bill_s2]

I made no direct IRA to HSA transfer and that's how I answered that question. I made only one after-tax contribution, below the $2,300 allowable amount as calculated by TT and as stated in the IRS example for Pub 969.

I'll contact support.  

But I wonder if the problem is caused by me answering literally the interview question "What type of High Deductible Health Plan did William have on December 1, 2020?"  I was not (and am still not sure) why this question asks about 2020 since this is for 2021 tax year.  I think the last-month rule should be checking for 2021.  I did answer the question literally (i.e. for 2020 and my answer for 2021 would be different).

[FangxiaL]

Check your entries to make sure the contribution is entered as a contribution, but a distribution:

@bill_s2

[bill_s2]

I input contributions as contributions.  Having no distributions from the HSA, I entered no distributions.

It seems the problem is that I did not remain an eligible individual for the 12 months following the 2021 contribution.  From the Testing Period part of the IRS instructions for Form 8889 (https://www.irs.gov/instructions/i8889#en_US_2021_publink37971yd0e194:( 

If you fail to remain an eligible individual during this period, other than because of death or becoming disabled, you will have to include in income the total contributions made that would not have been made except for the last-month rule. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. (See Part III.)

It's also addressed in Pub 969 (Publication 969 (2021), Health Savings Accounts and Other Tax-Favored Health Plans | Internal Revenu...).

The TT on-demand help for form 8889 does address this, but puts it on the instructions for form 8889, line 18:

Line 18:
You must remain eligible for the 12 month period following any contribution made to your HSA. If you fail to be a qualified individual within the 12 month period the amount must be included in income and is subject to a 10% penalty.

So, in the end, I think the calculation is correct, despite the TT instructions and help not being abundantly clear.

[BillM223 · Accepted solution]

"What type of High Deductible Health Plan did William have on December 1, 2020?"

It is correct that TurboTax asks about 2020, because you would be subject to the last-month rule only if you had HDHP coverage on December 1, 2020 and made contributions to your HSA in 2020.

As you have probably read, the last-month rule is activated when you have coverage on the first day of the last month, because no matter what coverage you had for the rest of the year, the last-month lets you use the annual HSA contribution limit for the full year. 

The catch is, as you see, is that you need to stay under HDHP coverage for the next twelve months, i.e., 2021 (this is why it asks about 2020).

However, there is something else amiss with your return. First you are quite correct that you should have been able to contribute 1/2 a year's worth of HSA contributions.

And second, the HSA funding distribution should not be there in any case.

So let's do this. Let's clear out all your HSA data, and start over and see if we can get you back to where you belong.

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop***

3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one) and a 5329-T and -S (if one).

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview. 

When you see that question about "What type of High Deductible Health Plan did [name] have on December 1, 2020?", go ahead and answer it.

Because TurboTax knows that you did not have HDHP coverage for all of 2021, this now becomes significant, and TurboTax needs to know if you used the last-month rule in 2020 and whether or not you failed to maintain HDHP coverage long enough.

So TurboTax is going to ask you a series of questions, one of which may have been about an HSA Funding Distribution (otherwise, I don't know how that HSA Funding Distribution got in there).

Let's clear out everything and give it another go.

[bill_s2]

OK, I'm doing that.  About the question "What type of HDHP did <<Name>> have on December 1, 2020?", it says "If <<Name>> had HDHP coverage on December 1, 2020, but failed to be an eligible individual for other reasons, select None.

What does it mean by "for other reasons" in the context of that question.  I failed to be eligible 6 months later because I became eligible for Medicare.  My HDHP type was "Family".  Do I select "Family", or "None"?

[BillM223]

What type of HDHP coverage did you have on December 1, 2020? If you had Family coverage, say "Family".

It is asking about the reason you stopped being eligible, because if you died or became disabled, it wouldn't have to ask you all the stuff it is going to ask you to see if you owe for failure to maintain HDHP coverage.

But in your case, it needs to ask you. The net effect of these questions is to find out what your annual HSA contribution limit would have been in 2020 if you had not used the last-month rule, and whether or not you exceeded that amount with your actual 2020 HSA contributions.

From what I can tell, you had HDHP coverage for all of 2020, so when TurboTax figures out your annual HSA contribution limit for 2020 (which would have been the same with or without the last-month rule), it will tell you that you don't owe anything extra, and that will be that.

I hope the HSA Funding Distribution also goes away with the HSA "reset" (what I call that series of steps to erase all your HSA data in your return).

@bill_s2

[bill_s2]

I did have family HDHP all of 2020 so I ticked that button.    Now the entries in Part III of form 8889 have disappeared and my refund is higher.    

I'm a little confused by this from the form 8889 instructions which seem to indicate I need to report additional income and pay an an extra 10% tax:

If you fail to remain an eligible individual during this period, other than because of death or becoming disabled, you will have to include in income the total contributions made that would not have been made except for the last-month rule. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax.

I did fail to remain eligible during the testing period, due to turning 65 and being on Medicare.  FWIW, the HSA was only established in January 2021 so there were no contributions in 2020.

Thanks for your help with this. Clearing out the W-2 and various forms made a big difference.

[BillM223]

"If you fail to remain an eligible individual during this period,..., you will have to include in income the total contributions made that would not have been made except for the last-month rule."

But since you didn't create your HSA until January 1, 2021, you couldn't have made any HSA contributions in 2020, hence could not have over-contributed because of the last month rule.

Think about the underlined part...if you didn't make any contributions more than you would have without the last-month rule, then your have no income to add and no 10% penalty.