HSA Last Month Rule in the year you become eligible for Medicare

[mister_bill]

My wife and I both went on Medicare last year (July for her, November for me). Prior to that, we had HDHP coverage and contributed  to an HSA in 2019. When completing my 2020 taxes, Turbotax is claiming that I have to report $1333 as income because of the Last Month Rule because we did not have HDHP coverage for all of 2020.  But once we went on Medicare, we could not contribute to an HSA by law and thus did not have an HDHP plan. We were on the HDHP plan for 10 months in 2019 and I contributed the appropriate pro-rated amount.

Do I really get hit by the last month rule in this case, or is Turbotax wrong? I am likely going to change the number to $0 and let the IRS complain if they think I really am covered by it. 

And what will happen with next year's taxes if I fund the HSA for 2020, which I can still do until tomorrow? Obviously I can only fund it for a partial year.

[Mike9241]

the last month rule affects 2 tax years. if you used it in 2019 to qualify for an HSA contribution then you have to be covered by an HDHP for the entire testing period in 2020. 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 which includes medicare) during that time, any “excess” contributions you made as a result of using the Last Month Rule will be taxed and penalized.

it does not appear you used the LMR in 2019 since you say you made only a pro-rata contribution - 10/12 of the full-year amount - the months covered by a HDHP. using the LMR would have allowed both of you to make a full-year contribution for 2019.

so if the LMR was not used in 2019, your maximum contributions for 2020 would be

for her $3550 *6/12 for her (the fraction of the year not covered by medicare) and for you $3550 *10/12 total is $4733 which can be split any way you want if you both have HSA accounts. in addition, if you each have an HSA a/c she can make an additional contribution to her a/c only for $1000 * 6/12 and for you if you have your own HSA a/c $1,000 * 10/12. 

the extra amount is for being over 55

[BillM223]

The last-month is automatically invoked by TurboTax if you have HDHP coverage on December 1 of the previous year (12/1/2019 in this case).

It appears that you did not have HDHP coverage for every month in 2019 - is that right?

Yes, once you use the last-month rule, then you must pass the "testing period", which is basically the next year under HDHP coverage. If you don't then TurboTax asks you about your 2019 coverage and your 2019 contributions and recalculates what you would have been allowed as a annual HSA contribution limit if you had not used the last month rule. This is added to income on line 8 of Schedule 1 (1040) and an additional 10% penalty is calculated on the 8889 and added somewhere on Schedule 2 (1040).

You said, "We were on the HDHP plan for 10 months in 2019 and I contributed the appropriate pro-rated amount." If so, then you would not have owed anything for the last-month rule, so I would like to know what kind of coverage you had in 2019, how much you contributed in 2019, and was it really 10 months of HDHP coverage in 2019.

***continued***

[BillM223]

As for 2020, you said you both went on Medicare. Did the SSA backdate your application (happens all the time if your application is received after your 65th birthday)?

If so, for which months do each of you have actual HDHP coverage without any Medicare? How much have you already contributed to your HSA for 2020? I assume that you had Family coverage in 2020, right?

Answer these questions, and I tell you if you can contribute anything more to 2020 tomorrow...

[mister_bill]

Thanks for the helpful responses.

I contributed 7,500 in total to our HSA's for 2019, 6,500 in my account  and 1,000 in my wife's. That was based on the pro-rating of the max contribution.

We had HDHP coverage from March-December of 2019 and then January-June 2020 for my wife and January-October for myself.

We both registered for Medicare in advance of our 65th birthdays and started our coverage (and cancelled the HDHP coverage) on the first day of the month of our birthdays.

[BillM223]

So on your 2020 return, you reported that you had Family coverage for 10 months, that you each had an HSA, and you contributed $6,500 to your HSA and $1,000 to your wife's HSA, you should have been assessed a penalty as follows:

2019 Family HSA contribution limit: $7,000

2019 "bonus" if the owner of an HSA is 55+: $1,000

Pro-rated Family limit: 10/12 * 7,000 = 5,833

Pro-rated "bonus amount: 10/12 * 1000 = 833

Max permitted to either HSA: $6,666

If max contributed to one HSA, then the max to the other HSA - $833.

I am sure that you immediately noticed that these add up to $7,499 - one dollar off from your total due to rounding error.

So if you entered the information above, then you should not have gotten a $1,333 penalty in 2020 for failure to maintain HDHP coverage. Is it possible that you did not indicate that you had 10 months of coverage for 2019 when you answered the failure to maintain HDHP coverage questions in 2020? And did you indicate Family coverage for both of you for all 10 of those months? Something must be amiss with your input.

As for 2020, your spouse had 6 months of Family coverage and you had 10 months of Family coverage, right?

2020 Family HSA contribution limit: $7,100

2020 "bonus" if the owner of an HSA is 55+: $1,000

Your spouse

Pro-rated Family limit: 6/12 * 7,100 = 3,550

Pro-rated "bonus amount: 6/12 * 1000 = 500

You

Pro-rated Family limit: 10/12 * 7,100 = 5,917

Pro-rated "bonus amount: 10/12 * 1000 = 833

But the Family limit is shared. So if your spouse uses the entire $3,550 that is allowed to her, you cannot use more than ($7,100-$3,550) $3,550, so your limit is 5,917-3,550, or 2,367.

If you want to use use more than 2,367 to your HSA, then you will need to decrease the amount used for your spouse's HSA, dollar for dollar.

Separately and in addition to the Family limit, you can each contribute your part of the "bonus", thus that's $500 for your spouse and $833 for you.

So how much have you two already contributed to the 2020 HSAs?

[mister_bill]

Have not contributed anything yet. Turbotax calculated that my allowed contribution limit was $5188 and my wife's was $4050, which makes no sense. I was thinking of doing $5000 under my own name only to be safe.

In general, I was contributing the full amount for myself and only the $1000 kicker for my wife. Maybe I should add to hers this year.

I think your numbers are a bit off since it should be 6 months of family and 4 months of single 

My calculation (which I did last year and just found in a spreadsheet) was 6/12 of the year for family coverage = $3,550, 4/12 of the year for individual coverage = $1,183.33, 10/12 of the year for catch-up for me = $833.33, 6/12 of the year catch-up for my wife = $500, for a total of $6,066.67. 

Does that sound correct?

[mister_bill]

Final update. Decided to contribute $4,500 in my account and $1,000 in my wife's, total of $5,500. TT complained when I went up to $6,000, even though I thought I should have been able to. It was happy with $5,500. Now I actually have to start spending it, since I've never withdrawn from it.

[BillM223]

"Turbotax calculated that my allowed contribution limit was $5188 and my wife's was $4050, which makes no sense."

You're right, it doesn't. The problem is that TurboTax doesn't handle the sharing of the Family limit properly - it gives you the max amount for each spouse assuming that the other spouse is using any of it. So just ignore it.

"I think your numbers are a bit off since it should be 6 months of family and 4 months of single "

Ah, you did not mention that you switched to Self-only. A lot of people in your situation just continue the Family policy (it's legal to do this even when your spouse goes on Medicare) and drop the entire policy when you go on Medicare. OK - your numbers sound good. And good on you for piling up savings.

[mister_bill]

I was paying almost $900 a month PER PERSON for crappy retiree coverage from my former employer. I got my wife off that plan as soon as I could! Our no-fee Medicare Advantage plan is much better than the HDHP plan; the only saving grace was the HSA contribution.

Thanks for your help.

PS I think it's clear that Turbotax has some bugs in their HSA calculations, between wanting me to pay the last month penalty when it did not apply and telling me the incorrect limits for each of us. 

[BillM223]

The tax calculation is fine; it's just that "Calculate Max Contribution Limit" in the interview shouldn't be there for people with Family HDHP coverage as it is misleading. The calculations on the tax return itself are correct.

[mister_bill]

Except that it claimed I was responsible for a $1333 addition because I violated the Last Month Rule when I actually didn't.