IRS Rules on the 1 time IRA to HSA trustee transfer issue

[Serge]

I may have cornered myself with an excess HSA contribution.

I have a family plan HSA. No employer contribution. My wife has been on Medicare Part A from 2022. I have been on part A since July 2023. She had an HDHP for both of us during 2023 until Dec 2023 when she was laid off. She is only elligible for an HDHP on April 2024 (90 days freeze)  in her new job to cover me. (Reason why we had to apply for Medicare Part B this month to avoid medicare penalties).

I made my one time contribution IRA to HSA towards year 2023 in January 2024 to cover my first 6 months of the year on HDHP when I was not on Medicare, thinking that was my last year to be able to do so.

However it appears that there are rules about keeping the HDHP for the next 12 months after the trustee to trustee transfer. There are also rules about medicare enrollement but I think I am clear on this, since I only contributed for the time allowed before my enrollment on July 2023.

My thinking is that we had HDHP for the entire year 2023, thus we have 12 months but I am not sure anymore. Can anyone help clarify? If i need to reverse this, how will that impact me taxwise?

Thanks 

[dmertz]

You did fail to complete the testing period for a qualified HSA funding distribution, but if you are eligible for Medicare, it seems likely that you have no need to claim an HSA funding distribution since the only purpose for doing so is to avoid an early-distribution penalty on the distribution from the IRA (which you would not have anyway).  If so, when entering the Form 1099-R simply do not indicate that the IRA distribution was used to fund the HSA, then separately claim a deduction for a personal HSA contribution.

[Serge]

The transfer was made Trustee to Trustee.

The paperwork from the IRA viewpoint would force me to pay taxes on the money. The problem is also that this transfer is now taxable and puts me slightly over the income threshold for Medicare payments to come. Bad deal.

Could this be adressed just by reversing the IRA payment by making a check to the IRa from my savings versus having the HSA doing a refund for error and then me doing a straight contribution?

[dmertz]

"The transfer was made Trustee to Trustee."

That's a requirement for claiming an HSA Funding Distribution, not something that requires you to claim an HFD.  There is no benefit to claiming an HFD after age 59½.

The deduction for the personal HSA contribution will exactly offset the increase in taxable income resulting from not claiming that the distribution was an HFD, resulting in no change to your Medicare IRMAA.

Report the IRA distribution as an ordinary distribution and enter a personal, deductible HSA contribution.

[Serge]

Thanks for this info. I am not sure I can go that route. Here is how this was handled:

I left the HSA transfer stand and I will declare it just as a contribution and not the one lifetime transfer so that will work. (I wished I knew that rule better last year)

To avoid the taxation of the IRA distribution I did a 60 IRA day rollback. That should trigger a form 5498 later this year. The issue is that I need to file my taxes before the 5498 arrives much later in the year. Doing it this way allow both the HSA deduction and the tax avoidance of a IRA withdraw.

How can I handle the 60 day IRA rollback in Quicken deluxe to show the rollback? There seems to be no obvious ways

[dmertz]

As I understand it, the distribution from the IRA occurred in January 2024, so nothing about the IRA distribution and rollover goes on your 2023 tax return.  The only thing that you'll report on your 2023 tax return is the amount deposited into the HSA as a 2023 HSA contribution.  The IRA distribution and rollover will be reported on your 2024 tax return.

Make sure that the HSA custodian recorded the deposit as a 2023 HSA contribution and not a 2024 HSA contribution.  With no specific instruction to treat the contribution made in 2024 as a 2023 contribution, the HSA custodian is required to treat a deposit made in 2024 as a 2024 contribution.  If they recorded it as a 2024 contribution, the deadline for them to correct their records is April 15, 2024.