Hi,
Context: My HSA was connected to my employer, so I was making pre-tax contributions on every paycheck to reduce my taxable income. I got laid off, so my HSA is no longer connected to my employer.
Question: If I have outside income (example: rental income) that hasn't been taxed yet, and I use that income to make personal contributions to my HSA, and then use that HSA contribution to pay for a qualified medical bill, will I still get taxed on that withdrawal? Do I still get the pre-tax benefits? How do I record HSA contributions from outside income on my tax return?
The short answer to your questions are:
1. Yes, you can still contribute to the HSA even though you are not able to contribute via payroll deduction, as long as you still have a qualifying high deductible health plan (HDHP.)
2. Yes, you can take a distribution from the account to pay a qualifying medical expense, and that distribution will be tax free.
3. Yes, there is still a tax benefit to putting money into the HSA if you have income from other sources to fund your account - you will be able to report those contributions on your tax return when you file (the TurboTax interview questions ask you specifically about if you made any contributions OTHER than the ones via payroll deduction - for most people this answer is no. In your situation, you will say yes, and report the amount you contributed directly to the HSA plan.)
Job losses complicate life - but the good news is that your employment status does NOT impact your ability to own or withdraw from an HSA. An HSA is a portable benefit - you own the account, and the money that is stored there. As long as you take the funds out of the HSA to pay qualifying medical expenses, the withdrawal will be a tax free distribution.
You did leave out one detail that is relevant to the situation, so I did make the following assumption:
* You are still eligible to contribute to your HSA because you are maintaining your qualifying high deductible health plan (HDHP) through either an employer continuation of coverage or by paying COBRA premiums to keep the insurance. *
Hello SamC123!
Thanks for joining us for the event today, and for these great questions!
You can contribute to your HSA using other (non-employment, rental etc.) income, or even your regular savings account. Contributions you make on your own outside of your employer are eligible for the HSA deduction on your federal return, and potentially your state return as well.
TurboTax will ask you about the contributions you personally (not through the employer) made so that you can take that deduction - just keep track of them to report them properly! They'll also be reported to you on a Form 5498-SA, but that won't separate the contributions made though payroll versus your personal contributions.
Keep in mind you do need to continue to be covered under a high deductible health plan in order to be eligible to contribute to an HSA, and there are maximum contribution limits each year. Your plan should specify whether it is a high deductible health plan. The maximum contributions limits (most you can put in) are $3,850 if the plan only covers you, or $7,750 if it is a family plan.
If you withdraw from an HSA to pay for qualified medical expenses, your withdrawal will be tax free on your federal return. State laws may differ.