Wife moved from self HDHP to husbands employer medical coverage causing negative $1000 from my refund. What do I do?

[micjohnson]

From year 2016, my wife is having her HSA with a HDHP (self).  She continued to be on her HDHP until June 2017. From July 2017, I added her on my employers plan. But TurboTax assumes that my wife had break on her health coverage and deducting nearly $1000 from my refund. What do I do?

When I worked on the HSA section, I answered Yes to "I was covered by an HDHP during at least one month during 2017" and selected "I had different plan types at different times of the year".

On the next page, I chose "Self Only" from January 2017 to June 2017 and selected "None" from July 2017 to December 2017.

If I select "Family Plan", instead of "None",  then nothing is deducted from my refund.

The HSA bank account is still open and we did not contribute for year 2017. ($1700 allowed for Jan 2017 - June 2017)

Screen shots attached. Please help.

[BMcCalpin · Accepted solution]

The type of HDHP coverage that your wife had is a function of whether or not she was alone on that HDHP policy or if someone else (you or a dependent) was on the policy as well. "Family" to the IRS means "Self" plus at least one other person, no matter what the insurance company calls it.

But this is not something just get to select at tax time - you have to confirm with her HDHP provider (or her benefits coordinator) what kind of HDHP policy she had.

Based on your description, it sounds like you entered your information correctly.

The issue is that the annual HSA contribution limit in her case is pro-rated by the number of months she was under the HDHP coverage. If she had Self coverage and is under 55, then the limit is $3,400 times 6 months divided by 12 months, or $1,700. Any amount that she contributed over $1,700 would be an excess contribution that would be added to line 21 on the 1040 as Other Income.

You may have another situation: if your wife took advantage of the "last-month" rule in 2016, then she was required to stay in the HDHP for all of 2017. Clearly she didn't.

The last-month rule means that if you have HDHP coverage on December 1 (of 2016, in this case), she could contribute based on the full annual limit, not based on the number of months. Suppose she started the HSA in July 2016. She could have contributed the full $3,400 in 2016 because she was covered on 12/1/2016. 

However, since she did not stay under HDHP coverage for the "testing" period (i.e., all of 2017), she has "failure to maintain HDHP coverage" and will be penalized for overcontributing in 2016. I am thinking that this is also part of your $1,000 change in tax, because the change due to overcontributing in 2017 because of leaving HDHP coverage doesn't seem large enough to cause that number.

[micjohnson]

Hello TurboTaxBillMc ,

Thank you very much for your time to answer our question. Appreciated.

Actually, this HDHP was opened 6 years back. Initially, myself, wife and kids were on the HSA plan. Then got my full time employment and myself, kids were joined the employers health plan. Due to the employers restriction, my wife was unable to join my employers plan so she stayed with the HSA. As of 2016, she was not on the last month rule. She was enrolled in the HSA from year 2012.

I am not sure why do we need to pay the penalty.

[BMcCalpin]

Did you have an HSA in 2016? Did you contribute to it? I feel like I am missing a key piece of data. When did your wife begin the Self coverage? In the middle of 2016? Did you have HDHP coverage in 2016, even for part of the year? If so, was it Family coverage.

Hmmn, when do you two change coverage in 2016 and how did it change (i.e., which coverage in which months)? Also, how much did the two of you contribute in 2016 to your respective HSAs?

[micjohnson]

Hi TurboTaxBillMc, Thanks again for your time to look at this.

HSA opened: Year 2010.
Family coverage: 2010 - Feb 2015.

 From March 2015, myself and kids were got out of the HSA to join my employers plan. My wife's self coverage started from March 2015 as she can't enroll into my employers plan. So she continued with the HSA. She was having the same HSA until June 2017.

Here are the detailed answers for your question.
1) Did you have an HSA in 2016?
    No. Only my wife had.
2) Did you contribute to it?
    Not me. Wife contributed to the allowed individual maximum.
3) When did your wife begin the Self coverage?
    Wife's self coverage started from March 2015.
4) Did you have HDHP coverage in 2016, even for part of the year?
    No. Myself and kids did not. We joined the employer coverage on March 2015.
5) when do you two change coverage in 2016 and how did it change?
    Not in 2016. It was 2015. Myself and kids cancelled ours and wife continued.
6) Also, how much did the two of you contribute in 2016 to your respective HSA?
    Wife contributed to the allowed individual maximum.

[BMcCalpin]

So, let me restate this to make sure I understand.

This problem happens when you answer the question on your wife's HSA "I was covered by an HDHP during at least one month during 2017" as Self instead of Family for the first 6 months of 2017, right?

When you hit the Calculate Max Contribution limit button, what was the answer?

Your wife contributed nothing to her HSA in 2017, right?

When your wife had the question, "Was [name] covered by a High Deductible Health Plan (HDHP) in 2016?", did she (you) answer "Self"? and on the subsequent screens did you indicate that she had Self coverage every month in 2016?

Did your wife report an "overfunding" of her HSA in 2016?

You have seen the HSA Summary screen, right? What are the differences between when you enter Family and when you enter Self?

[micjohnson]

Hello TurboTaxBillMc,

Yes. When I select "Yes, I was covered by an HDHP during at least one month during 2017" and selected "I had different plan types at different times of the year".

Then on the next page, selected "Self" from January to June and selected "None" for July to December.

When you hit the Calculate Max Contribution limit button, what was the answer?
  - The answer is "Your maximum contribution limit is $1,700"

Your wife contributed nothing to her HSA in 2017, right?
 - Yes Nothing contributed for year 2017.

When your wife had the question, "Was [name] covered by a High Deductible Health Plan (HDHP) in 2016?", did she (you) answer "Self"? and on the subsequent screens did you indicate that she had Self coverage every month in 2016?

 - No questions asked about year 2016. For question "Was [name] covered by a High Deductible Health Plan (HDHP) in 2017?" we selected "I  had different plan types at different times of the year".  (image 4 attached).
Then on the next page, selected "Self" for the months between January to June and selected "None" for July to December (image 3 attached).

Did your wife report an "overfunding" of her HSA in 2016?
-  Not over funded. so we selected "No".

You have seen the HSA Summary screen, right? What are the differences between when you enter Family and when you enter Self?
- The HSA summary screen shows same and $0 as no distribution (No 1099-SA) was made.

Overall I see the problem when I select "I had different plan types at different times of the year". Instead  If I select "I was covered by a Self only plan every month of the year", no penalty deducted. I am not sure If I can select "I was covered by a Self only plan every month of the year".

Appreciated your time.

[BMcCalpin]

"- No questions asked about year 2016."

I don't understand this. Every taxpayer gets asked this question ("Was [name] covered by a High Deductible Health Plan (HDHP) in 2016?"), even if they don't have an HSA. It's because you might have had one in 2016 and TT needs to check on whether HDHP coverage was kept through all of 2017. Note that it is asked at the end of the HSA interview, after you see the HSA Summary.

Indeed, when you answered "Family" or "Self" to the 2016 question, this is why "TurboTax assumes that my wife had break on her health coverage". That message comes up ONLY after you are asked the question about 2016.

[micjohnson]

Hello TurboTaxBillMc,

Yes I see the question related to year 2016 now after I have selected "Self" for months ( January 2017 to June 2017) and "None" for months ( July 2017 to December 2017) for the questions on the image #3.

Then got the question "Did [Wife name] High Deductible Health Plan coverage lapse in 2017 due to disability?  I have answered "No, the coverage ended for other reasons."

Then I  got the question "What type of High Deductible Health Plan did [Wife name] have on December 1, 2016?" and I answered "self". Further questions lead to select months in 2016. I have selected "Self" for all months of year 2016.

Now I see that the deducted amount is credited back to the refund.

I think this issue is solved now. Really I am very much appreciated for your time and effort. I can't thank you enough.

[BMcCalpin]

Thanks for telling me about the resolution!

[micjohnson]

Thanks to you. Appreciated much.