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Level 3

HSA last-month rule...w/ Medicaid coverage error overlaid

My TurboTax rockstar friends,

 

I would love your insight into my "that's so 2020!" situation, below. 

 

Facts:

  1. My COBRA for my former employer was scheduled to end late November 2020.
  2. I was interviewing for a new job Sept-Nov.
  3. Since I was not sure if I would have the new job+new job healthcare coverage by the time my COBRA coverage lapsed late November 2020, I started the application process for Marketplace coverage for the month of December 2020.  I misinterpreted one of the income questions when I initially submitted my application for December 2020 coverage.  I quickly realized my mistake and amended and re-submitted my application that same day.
  4. My mistake, even though I quickly corrected it, started the whole "automatic approval for Medicaid because of COVID-19" process with my state and county.
  5. I was offered and accepted the job(!!), which gave me HDHP+HSA healthcare coverage in November 2020, before my COBRA lapsed(!!).
  6. I received some Medicaid automatic approval letters from my local county, so I called the caseworker around Thanksgiving and let her know that I had full coverage (COBRA) and that I would soon start my new employer's full coverage without any gap, so I did not need, nor did I want Medicaid coverage.  She asked me to email her that information when I received my first full paycheck, which I did today.
  7. I understand that the HSA's Last Month rule lets me contribute to my HSA up to the $7.1k max for 2020 if I had the HDHP plan as of 12/1/20.  My employer made its $2k contribution in early December.  I also read that a person who has active Medicaid insurance is ineligible for an HSA, so I emailed the caseworker today to confirm that my late November decline of Medicaid coverage "took" in the system and that I did not have coverage on 12/1/20.  She wrote that my coverage is actually active in the system, but she would stop the coverage on 12/31/20.  I spoke with her live, confirmed that I did decline Medicaid coverage in our late November phone call (she has that in her notes), but she said it was live in the system on 12/1/20 and it could not be undone in the system.  She said that, because of COVID-19, folks were automatically approved and enrolled in Medicaid, whereas in normal years my enrollment would have been able to be stopped in a phone conversation.

 

So...I have a few questions:

  1. Will a letter from the caseworker (on local county letter, about the error, that I quickly notified her and declined Medicaid coverage, and that me having coverage on 12/1/20 was an error) "allow" me to contribute to my 2020 HSA up to the $7.1k limit, undoing the disqualifying factor that I technically had Medicaid coverage on 12/1/20?
  2. Or is there another reasonable remedy available that will still allow me to take advantage of the HSA "Last Month Rule" and contribute up to the $7.1k family max (less employer contributions)?
  3. If not, I assume that I would have to somehow get my employer to unwind its $2k contribution, as that would be deemed an excess contribution for 2020.

 

Thanks for your help and wisdom, my rockstar TurboTax friends!

NoviceTaxLearner

1 Best answer

Accepted Solutions
Level 15

HSA last-month rule...w/ Medicaid coverage error overlaid

If you were covered by Medicaid on 12/1/2020, you are ineligible to make an HSA contribution (or have one made on your behalf) for 2020 because you will have had disqualifying coverage the entire year.  The law is explicit on that.  I don't see how saying that you didn't want or need the December Medicaid coverage would change the fact that you were covered, making you HSA ineligible for December.

 

Unless the employer can undo the $2,000 HSA contribution before the end of the year, it's likely that you'll need to obtain a return of excess contribution from the HSA before the due date of your 2020 tax return.

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4 Replies
Level 15

HSA last-month rule...w/ Medicaid coverage error overlaid

If you were covered by Medicaid on 12/1/2020, you are ineligible to make an HSA contribution (or have one made on your behalf) for 2020 because you will have had disqualifying coverage the entire year.  The law is explicit on that.  I don't see how saying that you didn't want or need the December Medicaid coverage would change the fact that you were covered, making you HSA ineligible for December.

 

Unless the employer can undo the $2,000 HSA contribution before the end of the year, it's likely that you'll need to obtain a return of excess contribution from the HSA before the due date of your 2020 tax return.

View solution in original post

Level 3

HSA last-month rule...w/ Medicaid coverage error overlaid

Thanks, @dmertz.

 

The odd thing is that I never asked to be on Medicaid, nor applied to be on Medicaid.  It just automatically happened due to my Marketplace health insurance application during a COVID year and I actually asked to not be on Medicaid a full week prior to 12/1/20.

 

So something from the county about the error wouldn't help?

Level 3

HSA last-month rule...w/ Medicaid coverage error overlaid

you're out of luck. The rules make no exceptions for "accidental" coverage.

 

you do have the option to request an IRS Private Letter Ruling.  It is expensive and you need a pro to prepare one. there is no guarantee the IRS would rule in your favor. 

Level 3

HSA last-month rule...w/ Medicaid coverage error overlaid

Thanks, @Mike9241. Bummer!  Time for me to fix it.  Thanks again to you and @dmertz !

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