HSA eligibility and spouse insurance and employer contributions

[p_r_s]

Hello Team, 

Me and my family are enrolled in HDHP since Jan 2024, through my employer. And my employer contributes 2500/year in HSA. 

My spouse got a new job in Feb 2024, but her health and other employment benefits were applicable 90 days after starting a new job. So her health benefits started since June 2024.

I think we submitted documents to add me and my family to her insurance in last week of May or Jun 2024. Her health plan is a HMO with low deductibles ($600) making me ineligible for HSA. 

I am trying to get myself un-enrolled from her plan, but her health plan administrator says spouse can be removed only after a divorce. So I am stuck. 

So, assuming my spouse's coverage (where I am added) makes me ineligible for HSA for 6/7 months in year 2024. 

1. What can be done to funds contributed since July 2024 in HSA account by my employer?  I read a few articles asking to withdraw the excess contribution and pay taxes on that before plan year / April 2024. But my employer's benefits administrator is unaware and keeps repeating hsa benefits to me over email. So, I would like steps to follow to get this done may be bore 31st Dec 2024.  Or can I do it till April 2025 (by tax deadline date?)
2. If I withdraw excess contribution, do I need to pay 20% penalty on withdrawal?
3. I will be paying around 215/month for HDHP family coverage from next year and my employer adds nearly the same amount in HSA. So from tax perspective should I continue this and withdraw excess contribution next year again? Is it allowed to do so ? 
4. Or I should just stop my employer's health coverage and save premium amount.  I mean, we are kind of healthy and just do yearly preventive checkup. And have HMO care is at approx. 30 mins distance. So, we are ok with a HMO plan as well. But I have been in US for 2.5 years and not aware of everything. 
5. Spouse’s plan - https://www.seiulocal1.com/Content/Docs/Health%20&%20Welfare%20Plan%20Docs%20&%20Notices/2024_Schedu... 

Pls let me know if my understanding is correct, and what I can do for next year. 
Just to answer, this came up during next year's enrollment which asks about HSA related questionnaire. 

[Opus 17 · Accepted solution]

Let me just talk about the HSA first.

Eligibility is determined by your coverage on the first day of each month.  All contributions are counted together (employer, employee by salary deferment, or employee by after tax contributions.)  Your eligibility determines the total amount you can contribute, but when you contribute during the year is not important and not counted.  Lastly, once you have money in an HSA, you can use it to pay for medical expenses for yourself, your spouse or children, any time you want, even if you aren't eligible to make new contributions.  

If you are enrolled in a family HDHP (and assuming you are under age 55) you can contribute $691.66 for each month you are covered by the family HDHP and have no other disqualifying coverage.  As soon as the HMO covers you, you are not eligible to make HSA contributions.  If we assume you were covered at your employer on 1/1/24, and covered by your wife's employer on 6/1/24, then you were eligible for 5 months and your contribution limit is $691x5 months=$3458.33.  When the contribution was made doesn't matter, even if the contribution is made after 6/1/24.  What counts is that you don't go over the limit of $3458.33 for 2024.  

So if your only contributions are the free money from your employer, that can continue.  You can even contribute an additional $958 if you like, via payroll deduction or by a direct contribution that you can take a tax deduction for.

If your total is more than $3458, you have until April 15, 2025 to remove the excess.  This is not a regular withdrawal, this is a special procedure you need to discuss with the HSA bank.  If the excess contribution earned any money (interest or investments), that income must also be withdrawn and declared as taxable income on your 2024 tax return.  There is no penalty if you complete the excess withdrawal on time and using the correct procedure.  

I also believe the benefits administrator is incorrect about leaving your spouse's plan.  Generally, there is an open enrollment period once per year, where changes may be freely made.  Changes outside the open enrollment period can only be made if you have a "life event" such as birth of a child, marriage, divorce, or getting or losing a job.   You need to learn when your wife's employer's open enrollment period is, then you may be able to change insurances if you decide that's best.

I'm not going to offer an opinion on which insurance is better, that's very complicated and very personal.  

[Opus 17]

I'm going to address this separately.

I will be paying around 215/month for HDHP family coverage from next year and my employer adds nearly the same amount in HSA. So from tax perspective should I continue this and withdraw excess contribution next year again? Is it allowed to do so ? 

This is between you and your employer.   For income tax purposes, if you stay enrolled in the HDHP in 2025,  and allow the employer to make the $2500 deposit, you can withdraw it before April 15, 2026 and not pay a penalty, and keep the money instead of paying it back to the employer.  It will be treated as taxable income, but it's still free money to you.  The question "is this allowed" should be directed to your employer.  Are you required to certify your eligibility for an HSA?  If you don't take the insurance or the HSA, and rely on your wife's insurance, does the employer recognize that with any kind of incentive (since it reduces their cost?)

How they feel about giving you $2500 when you are going to withdraw it not for medical expenses, is up to them.

[p_r_s]

Hello @Opus 17  .

Thanks for the clarification. 

I am relieved that, no changes are needed for this tax year. I was doing the calculations based on enrollment date, but IRS does consider max contribution limits within  those enrollment dates. This was new for me.

Mostly my employer will not incentivize me for skipping health insurance, but I will get clarification. 

Reg. my wife's insurance - Yes, I was requesting my name to be removed during enrollment period, but they still turned me down.

I need to certify each year for opting HSA benefits, so I am just skipping the hassle of HSA and planning to waive Health plan benefits. So I will get same amount in hand after taxes.

Thanks again. 

TnR,

PRS