HSA Showing Excess due to Spouse eligibility

[Wedge]

I contributed $7,300 to my wife's HSA in 2022 through my employer (payroll deduction).  I have a Family HDHP in my name through my employer which my wife is covered under.   She did not make any contributions.  I did not make any individual contributions  The total contributed between both of us is the $7,300.  I do not have an HSA in my name. 

During the HSA interview, I originally selected my wife has family HDHP coverage.  The question later comes up if I had family HDHP coverage.  I selected yes (cuz I do) and it then asks why my coverage lapsed.  After searching these forums I figure out that the question is actually asking if coverage was held in persons name and not if they were just covered.  I then realize my wife should be listed as having HDHP coverage if this is the case and select she has none.  Now the form claims I have Excess of the full 7300.  How do I fix this?

Why did we set it up so that I contribute to wife's HSA?  Originally the insurance was in her name and she made the contributions.  We didn't want to create another account to keep track of it.  From what I understand, the IRS doesn't care as long as we only make a combined 7300 contributions between the both of us and have a Family HDHP plan.

Turbotax needs to clarify these questions and make the software account for more possibilites.  I fight this every year and getting tired of it.

[Mike9241]

what your employer is doing is wrong.  An employer is not allowed to make pretax contributions to the HSA of a nonemployee — in this scenario, the spouse. Any contribution by an employer to the HSA of a nonemployee, including salary reduction amounts made through a Sec. 125 cafeteria plan, must be included in the gross income and wages of the employee.

from iRS Notice 2008-59

Q-26. Are employer contributions to the HSA of an employee’s spouse (who is
not an employee of this employer) excluded from the employee’s gross income and
wages?
A-26. No. The exclusion under § 106(d)(1) is limited to contributions by an
employer to the HSA of an employee who is an eligible individual. Any contribution by
an employer to the HSA of a non-employee (e.g., a spouse of an employee or any other
individual), including salary reduction amounts made through a § 125 cafeteria plan,
must be included in the gross income and wages of the employee.

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The issue is not with Turbotax because what you and your employer are doing is not allowed.  Should the IRS catch this both you and your employer will have tax issues.   the best thing you can do is open your own HSA a/c and then spend down hers before touching yours.  

[dmertz]

What your employer is doing is perfectly fine as long and the amount is not excluded form box 1 of your W-2.  In fact, TurboTax has specific provisions for allocating such contributions to the spouse who owns the HSA.  Given this restriction, the HSA contribution should be shown on Schedule 1 as a deductible contribution.

"After searching these forums I figure out that the question is actually asking if coverage was held in persons name and not if they were just covered."

Whoever has said that is wrong; this falsehood seems to be perpetuated by numerous (but not all) TurboTax employees.  Your original interpretation is correct.  Your wife is covered by the family HDHP plan (and has no disqualifying coverage), so she is eligible to have HSA contributions made to her HSA on her behalf, including through your employer.  There is no requirement that the HDHP policy be in her name.

[Wedge]

@Mike9241 

Interesting.  Thank you for the response.  If that is the case; when entering my W-2 information, why would TurboTax ask "Did any of your HSA contributions go into SPOUSE's account?"  It then allows me to specify how much of the contributions went to my spouse's account.

Everything I read suggests, "The contribution limit is divided between the
spouses by agreement. (IRS Notice 2008-59)" The only reason I can find to make separate accounts is for catch up contributions.  "An individual who is eligible to make catch-up contributions may only make such contributions to his or her own HSA. If both spouses are eligible for the catch-up contribution, each spouse must make catch up contributions to his or her own HSA. (IRS Notice 2008-59)"

[Wedge]

@dmertz  Thank you for the easy to follow words!  This makes more sense to me than the IRS language.  If it is included in Box 1 does that mean it counts as taxable income?

The reason I love my HSA so much is because of the so called triple tax advantages.  If I remember correctly, not only is it pretax income, but I don't have to pay FICA either.  By having contributions put in my spouse's account, am I forfeiting the so called triple tax break?  Am I actually paying FICA and federal taxes on that money when I didn't think I was?

[dmertz]

It's included in taxable income in box 1 of the W-2, but then a deduction on Schedule 1 line 13 would take it out of taxable income.  The result is largely equivalent to you not having the funds taken out of your paycheck by your employer but your spouse instead just making the same HSA contribution directly to your spouse's HSA, except that when made through the employer the employer must still include the contribution amount with code W in box 12 of the employee's W-2.

I suspect that the reason that the IRS wants these contributions not to be excluded from box 1 of the employee's W-2 is that the amount in box 1 (the employee's "compensation") might be used on someone's tax return for purposes other than determining total income on (2022) Form 1040 line 9.  For example, the lower amount that would otherwise be in box 1 of the W-2 could limit how much the employee or the employee's spouse could contribute to an IRA.  If the employee earns $5,000 (and neither spouse has any other compensation) and has the entire $5,000 diverted to the spouse's HSA, the fact that the $5,000 must still be in box 1 of the W-2 which allows IRA contributions of up to $5,000 while still getting the amount of the HSA contribution excluded from income by the HSA deduction on Schedule 1.  If the HSA contribution was instead excluded from box 1, leaving $0 in box 1, no IRA contribution would be allowed by either spouse.