HSA contributions made erroneously

[VelcroFace]

After I turned 65 in September, I continued to make contributions to my HSA account, and to pay for my family’s medical expenses using that account.  It was only after I sat down to do our taxes that I discovered persons covered by Medicare are not eligible to contribute to an HSA account.  I have only Medicare Part A (no Part B), as I am covered under my (much younger) wife’s employer-sponsored health insurance.  The HSA institution has issued forms 5498-SA and 1099-SA.  How can I correct this, and still take advantage of the tax benefits for the contributions made prior to September?

[Opus 17]

You are covered under a family HDHP?  Does your spouse also have an HSA?  What is the total amount you have each contributed this year, including payroll contributions by your spouse and free money from your spouse's employer?  What is the current balance of your HSA?  Is your spouse age 55 or older?

[VelcroFace]

Yes, in 2018 we had a high-deductible ($6,500 per individual) health plan.  My spouse does not have an HSA.  I contributed $3,050 ($1,450 of that was after September, when I was covered under Medicare).  Gross distribution for 2018 was $3,042.  The current balance in my HSA is $314.  My spouse is in her early 40s.

[Opus 17]

First of all, when either spouse has an HDHP, both spouses are considered to have an HDHP and both spouses are eligible to contribute to their own HSA.  The limit is $6900 per person for 2018, but the combined limit for spouses is also $6900.  Over age 55, you are eligible for an additional $1000 catch-up contribution.  If you enrolled in Medicare in September, then your maximum contribution for 2018 would be $7900/12 x 8 months = $5925.

The fact that you made some of the contribution after September does not actually matter.  Turbotax should not flag this as an excess contribution.  In fact, you should be eligible to contribute an additional $2875 and take a tax deduction, if you do it before April 15 and if you inform the plan trustee that you are making a directed contribution toward your 2018 limit.  

Once you own an HSA, you can spend the balance for qualified medical care for yourself,  a spouse or a dependent, and the money is tax-free, even if you are no longer eligible to make new contributions.  At age 65 or older, you can also withdraw the money for any reason and pay regular income tax but without the additional penalty for non-qualified use (similar to a regular IRA). 

An HSA is owned only by one person, like an IRA, there are no joint HSAs.  Your spouse is eligible to open an HSA in her name if she wants, there are many private banks that offer this, it does not have to be through her employer.  She can make contributions directed to 2018 if they are made before April 15 and she informs the bank of her intentions, her contribution limit would be $6900 minus whatever you contributed**.  Her contribution limit for 2019 would be $7000 (she is eligible even though you are not, as long as she is enrolled in  qualifying HDHP.)

**Her contribution limit is actually a tad higher than that due to the effect of your $1000 catch-up provision, but I don't want to go through the math right now.  If you really want to contribute every possible penny, I will help you figure out the amount.

[VelcroFace]

Thanks for such a detailed and reassuring explanation.  TurboTax did, in fact, calculate my maximum contribution to be $5,925.  So I understand that I can report all my contributions for 2018, even those I made after enrolling in Medicare, if they total less than that amount.

[Opus 17]

Yes.

[Maintguy]

I have a similar issue:

I had a family HDHP insurance and a HSA account in my name for several years. We have always filed as married filing jointly, and used the HSA funds for both of our medical expenses.  I was disabled and went on SSD and medicare prior to 12/1/2017.  So the last month rule doesn't apply, and I was ineligible for a HSA the entire 2018 year.  The HSA account referenced had a balance of $3121.25 on 1/1/2018.  We unwittingly contributed the 2018 maximum ($7900 family both 55+) into it thinking it would (as in previous years having a family HDHP) qualify as a family account when we filed since my wife had a HDHP through her employer.  I think  after reading your reply, it should have.  However, when I did our taxes with TurboTax, it appeared that my spouse’s individual HDHP did not cause the HSA account in my name to qualify as a family account since I selected on "medicare or none" all 12 months.  We had steep medical expenses in 2018, and used all but $11.25 of the funds on qualified medical expenses in the HSA during the 2018 year.  In Jan 2019, we withdrew the remaining $11.25 and closed the HSA account in my name.

I was disappointed that we were not going to be able to take the tax advantage by contributing to a HSA, but I see that TurboTax didn’t show a 6% penalty on excess contributions. However, it did register a 10% penalty ($790) on the $7900, 2018 contributions, even though I selected that I will withdraw all of the funds from the account (before the 4/15/2019 deadline).   After reading your reply to this question, I am even more confounded by the results of my entries to the HSA section.  We received no tax benefit from the HSA, and withdrew the funds.  Four questions:

• Is there a non-excusable 10% penalty for contributing to an ineligible HSA?
• Is there a error in TurboTax in that it did not omit the penalty on the withdrawn funds?
• Shouldn’t TurboTax have allowed a $3450 contribution since my wife had a HDHP all year?
• Can I amend our return and get the $790 penalty refunded?

[Opus 17]

@Maintguy your problem is that you contributed to the wrong HSA.  An HSA is owned by one person, it is not joint or co-owned with a spouse.  If your spouse is covered by an individual HDHP and is over age 55, she could contribute $4450 to an HSA in her name, but nothing to an HSA in your name.

Going forward, you can certainly do that, if she is still covered by an individual HDHP.  There are many banks that will open a private HSA if her employer doesn't offer one.  

Since you were ineligible to contribute to an HSA in your name, the entire $7900 is subject to regular income tax.  The 6% penalty applies to the ineligible contribution, or the balance remaining, whichever is smaller, so the 6% penalty should be virtually zero if your ending balance was $11.  I'm not sure about a 10% penalty, I'll ask someone else for help.

[Opus 17]

@Maintguy  Your wife could also potentially open an HSA now and make a contribution directed to 2018 up to $4450, and deduct it on your 2018 tax return, if you do it before April 15 and make sure to tell the bank this is a directed 2018 contributions.  Then she could contribute up to $4500 for 2019.  Assuming she remains on a qualified HDHP and does not go on Medicare or some other type of insurance.

[dmertz]

The penalty for an excess contribution is 6% of the excess.  For TurboTax to come up with a $790 penalty it would have to be a $474 penalty for the $7,900 contribution and somehow a $316 penalty for something else.  $316 would be the penalty for 8/12 of $7,900 = $5,267, but I don't know where that would have come from.  It doesn't make sense that it would have come from a 2017 excess since the contribution limit for 2017 would have been some multiple of $7,750 / 12.  Perhaps the entire $790 is from something other than an excess-contribution penalty since you say that you told TurboTax that you would remove the excess.  Examine Forms 8889 and 5329 to see where the $790 is coming from.

[Maintguy]

The $790 is a 10% penalty on contributions to an ineligible HSA.  Attempted a screen capture to no avail.  Here is the text: 

Form 8889, pg 2, Part lll,  Lines:

18 Last-month rule . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . . . . .18            

19 Qualified HSA funding distribution . . . . . . . . . . . . . . . . . . . . . 19   7900.
20 Total income. Add lines 18 and 19...                            . . . . . . . 20   7900.

21 "Additional tax. Multiply line 20 by 10% (0.10)"  -                   21      790.

Additionally,  Schedule 1, Additional INCOME, Line 21:

21 Other income. List type and amount [Form 8889 Health Savings Accounts 7,900 ]            21    7,900.

The withdrawal is recorded as income, even though the contribution was listed as "personal"  not through an employer, and I made the selection that I would withdraw the fund (not sure I needed to claim over half to withdraw) .  Those funds are already being taxed as income on Form 1040 Lines 1-5b.  TTax  counts the withdrawal as income, taxing us again on the funds on 1040 Line 6 along with state refunds from last year.   I had already filed a few days ago, and didn't see this until I was printing a hard copy of the return for file.   I will have to amend the return, but after going back and looking, I am pretty sure TTax is not gathering enough information on Form 8889 to accurately allocate contributions, withdrawals, and penalties in our case. 

Also,  when I click "amend" to work on the errors,  I get a notice saying I have already amended one (of 2) of my state returns electronically, so I will have mail any future amendments to the return.  I have not filed any amendments, don't know why I'm getting this message.  Is there a way to reset it?
.

[dmertz]

The 10% penalty you are seeing is for failing to remain an eligible individual throughout an HSA funding distribution (HFD) testing period.  This says that you told TurboTax that you contributed $7,900 to an HSA for 2017 by making an HFD from an IRA in 2017.  That doesn't make any sense since the contribution limit for someone age 55 or over for 2017 was $7750 and you said that you "continued to make contributions," suggesting that you contributed either through your employer or by personal contribution with after-tax funds, not by an HFD.

It might be simplest to delete the 8889 form from TurboTax and redo your HSA entries.

[Maintguy]

Thanks Opus 17,

Regarding the "individual" status if an HSA: Before I was disabled and went on medicare,  I had the HSA through my employer along with a family HDHP.   We always contributed the maximum to reduce our tax liability.  I continued to contribute to the HSA, being ignorant to the fact that my medicare made my HSA ineligible. My mistake was assuming my HSA could be used as a family account because we file MFJ, and my wife enrolled in a HDHP through her employer after her COBRA on my family plan ended.  I accept that the entire 7900 is subject to income tax, but TTax counted is as income, and also included a 10% penalty for contributing to an ineligible HSA.  You can check out my reply to dmertz about the way TTax handled contributions and distributions.   

We did open a new  HSA for my wife after the first of the year.  We have already made contributions to it for the 2019 tax year thinking we had already maxed out the family limit with my HSA.   I have already contacted my wife's HSA bank about redirecting this year's contributions to the 2018 tax year since none of last years contributions  to my account are valid.