HSA Self Funding

[jl_brooks]

I was laid off on April 2, 2024, and have been funding an HSA through payroll deduction. I'm 62 and have contributed $2500 for the year so far. We're on COBRA with an HDHP and expect to stay through the end of the year. My husband, I, and my 23 yo daughter are covered and we met our $6000 out of pocket maximum. Daughter started a new job and will have access to insurance in 90 days, which is another life event. My husband can cover us through his plan at that time. (We didn't choose that plan due to the coverage not being as good as what we have.) My former employer is subsidizing COBRA through July 26, 2024. We live in Texas. I don't know if I'll go back to work this year or not. Combined income is expected to be around $162000.

Is there a tax advantage to fund the HSA account for the year (after tax) to the limit and use that money to pay the COBRA premiums and other healthcare expenses? If not, what is the best way to handle this?

Can 401k or rollover IRA money be used to fund the HSA without penalties and would it be wise to use it?

Is there a tax on the HSA balance at the end of the year (assuming no excess contribution)?

Inspira charges $5 per month for my HSA now that I'm unemployed. Are there other HSA companies that do not charge a monthly fee outside of an employer arrangement?

Given this scenario, what is your recommendation for the best tax outcome for 2024?

Thank you for the guidance.

[Opus 17]

If you have family HDHP coverage and no other medical coverage, you can contribute up to $8300 per year, plus $1000 catch-up since you are over age 55.  That breaks down to $775 per month for each month that you are covered by a qualifying HDHP (and have no other coverage) on the first day of the month.   You don't say if your spouse's coverage option is also an HDHP or not.  If yes, you could contribute $9300 for the year ($6800 additional).  If it is not an HDHP and you switch to your spouse' insurance effective August 1, then your HSA contribution limit for 2024 would be 7 months x $775 = $5425 (from the $2500 already contributed, that would be up to an additional $2925).

The advantage is that you can contribute money, take a tax deduction, then withdraw it for qualified expenses that you would have to pay anyway, and be able to get a tax advantage on those costs.  You are not limited to payroll deductions, you can contribute your own money out of pocket. 

You can fund your HSA from your IRA, however you can only do this one time in your life and your overall contribution limit is still the same, so your maximum qualified funding distribution would be either $6800 or $2925.  However, there is no tax deduction for doing this, since the IRA money is already pre-tax.  You can't directly fund an HSA from a 401k.  The only reason to fund your HSA from an IRA is if you have significant medical bills  and can't pay them unless you withdraw from the IRA.  The QFD allows you to move IRA money into the HSA so you can then withdraw it and pay your bills with tax-free money instead of withdrawing from the IRA and paying tax.  But if you can afford to deposit money in the HSA and then withdraw to pay the bills, you get the tax savings.

The lowest HSA maintenance fee I have seen is $3.  You will have to shop around and see what you can find at different banks. 

[jl_brooks]

Thank you for taking the time to answer. 🙂
I was told that the HSA balance is taxed at the year end; however, I didn't find IRS docs to back that up. I only saw taxation for over-contributions and non-healthcare related disbursements - not for correct contributions and fund use.

[Opus 17]

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@jl_brooks wrote:

Thank you for taking the time to answer. 🙂
I was told that the HSA balance is taxed at the year end; however, I didn't find IRS docs to back that up. I only saw taxation for over-contributions and non-healthcare related disbursements - not for correct contributions and fund use.

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Correct. Excess (ineligible) contributions are subject to a 6% penalty in the year you make them, and if they remain in your account unspent, the excess contributions are subject to an ongoing 6% penalty until you correct or remove the excess in some way.  So in a way, the account balance can be "taxed" if you have past or current excess contributions.  But there is no general tax on the account balance.  If you contribute eligible funds, they can remain in your account as long as you like, and you can spend them for qualified medical expenses at any time, even if you are not eligible to make new contributions.  (Contributions and spending have separate rules.)

[jl_brooks]

Thanks again.

Your answer matches up to the IRS info I've found.

The person who told me the HSA balance is taxed said it was due to a change in the law "24 months ago". Are you aware of what change was made around this topic at that time?

[Opus 17]

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@jl_brooks wrote:

The person who told me the HSA balance is taxed said it was due to a change in the law "24 months ago". Are you aware of what change was made around this topic at that time?

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The SECURE act and SECURE act 2.0 changed some provisions for retirement savings, but did not impact HSAs.  

[Mike9241]

Do you live in California? It does not allow an HSA contribution either directly or through employer as a deduction. Turbotax can handle this if you indicate your state of domicile is Ca, 

[jl_brooks]

I live in Texas.

[Opus 17]

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@Mike9241 wrote:

Do you live in California? It does not allow an HSA contribution either directly or through employer as a deduction. Turbotax can handle this if you indicate your state of domicile is Ca, 

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New Jersey as well, I think.  But that still only applies to the deductibility (or not) of the contributions.  Neither state taxes the ongoing balance.

[trapezewdc]

Quick question.

How to "self" fund an HSA, and how TurboTax deals with this situation ? If funding with "personal" money, the money is already taxed(after-tax) and therefore people will not get the same tax benefits from pre-tax contributions(like from an employer through payroll deductions)

Thoughts ?

[NCperson]

duplicate post 

[Opus 17]

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@trapezewdc wrote:

Quick question.

How to "self" fund an HSA, and how TurboTax deals with this situation ? If funding with "personal" money, the money is already taxed(after-tax) and therefore people will not get the same tax benefits from pre-tax contributions(like from an employer through payroll deductions)

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If you participate in an employer sponsored HSA via salary reduction agreement, your employer puts money in the account for you on a pre-tax basis.  You save federal and state income tax, and also 7.65% social security and medicare tax.   If you deposit money directly in an HSA from your after-tax dollars, you claim a tax deduction when you file your return, which reduces your state and federal income tax by the same amount as if the money had been deducted from your paychecks pre-tax.  You don't get the additional savings in social security and medicare tax.  So employer participation is better, if you have that option, but a self HSA is still a really good deal.