HSA last-month rule incorrectly applying

[confusedHSA41]

I believe turbotax is incorrectly applying the last-month rule to my refund.

My wife and I were eligible individuals for all of 2018. I had Self HDHP coverage from Jan - Aug 2018. My wife had Self HDHP coverage under a separate plan from Jan - May 2018. We had a child in June and the baby was added to my wife's HDHP plan. So, she was covered under a Family HDHP from June - Aug 2018. Then, she retired from her job and both her and my son were added to my HDHP plan for the remainder of the year, Aug - Dec 2018.

I contributed the individual maximum to my HSA for 2018 of $3450. My wife contributed $2465 to her separate HSA account. Now turbotax is applying the last-month rule to my return because in 2019 we switched to a Low Deductible plan in August 2019. I understand that, under the last-month rule, you are required to maintain an HDHP for the following 12 month "testing period." But this should be irrelevant, given that we did not utilize the 12-month rule. Instead, we were simply eligible individuals for the entirety of 2018. Am I missing something?

[BillM223]

TurboTax assumes that you used the last-month rule, until you enter all the screens after the question, "What type of High Deductible Health Plan did [name] have on December 1, 2018?"

TurboTax is working with incomplete information at this point. It knows that you did not have HDHP coverage for all of 2019 (because you told it so in the HSA interview) and it also knows that you has HDHP coverage on 12/1/2018, so you COULD have used the last-month rule.

However, don't be concerned because it will work out.

TurboTax is going to ask you what kind of coverage did you have for which months in 2018 (yes 2018); when you two answer a mix of Self and Family, TurboTax will realize that the amount you contributed was under the HSA contribution limit that you should have had for 2018 without the last-month rule.

In this case, you will see at the end a screen that says, No Penalty or No Additional Income or something like that. This is what you want.

[confusedHSA41]

This is what I was expecting, however, once I proceed through the selections I get the following:

"Additional income under the last-month rule

We calculated $1,437 of income must be included in your return this year because of the last-month rule. In rare circumstances, you may need to change this number if your marital status changed in 2018 or 2019."

I have included an attachment that shows my selection for 2018 HDHP Coverage type by month for your reference. Should I edit the amount to $0.00?

[BillM223]

I admit that I had not done the actual HSA contribution for you when I answered before, because it looked good.

The problem is the way that the IRS calculates the contribution limit.

When I do the calculation by hand, I come up with a smaller excess. However, because this is the same algorithm that TurboTax has had for years, I am inclined to think that it is correct.

Tell me, since I cannot see your return, did you report any overfunding to either HSA from 2018? And $3,450 was your code W amount in box 12 on your 2018 W-2 and $2,465 was your spouse's code W amount on her 2018 W-2?

I will continue to work on this...

[confusedHSA41]

Thank you for investigating.

There was no overfunding of either HSA. My 2018 W-2 reports $3,450.00 for code W amount in box 12. The code on my spouse's 2018 W-2 reports $2125.05 for code W amount in box 12. But, Form 5498-SA provided by our HSA provider shows $2464.72 from employer contributions, which is corroborated by the 2018 transaction history of our HSA. Nonetheless, $2125.05 or $2464.72 is well below the individual contribution limit. Or the spouse allocation (assuming 50/50) of a family contribution limit.

[BillM223]

The 5498-SA doesn't list the "employer contributions" anywhere; it lists total contributions. Perhaps you meant the same thing, that all of your contributions were through the employer. But if you made direct contributions, it would show up on the 5498-SA, too.

But I am now concerned on this discrepancy. Why did her employer report $2,125.05 on her W-2? What did you do with the $2,464.72? What is the difference? Did she make a direct contribution to the HSA outside of her employer?

What did you enter for the following:

Your 8889 - Lines 2 + 9

Your 8889 - line 5 minus line 6

Her 8889 - Lines 2 + 9

Her 8889 - line 5 minus line 6

[confusedHSA41]

Neither of us ever made any direct contributions to our HSA accounts. All contributions were through our respective employers. I cannot explain the discrepancy between what was reported on my spouse's W-2 ($2,1,25.05) versus what was actually contributed via the HSA transaction history ($2,464.72). It appears to be a mistake by the employer. I have attached a screenshot of the HSA contribution transactions, it very clearly adds up to $2,464.72, all categorized as 2018 employer contributions. 

Regarding our 8889 details, see below:

Your 8889 - Lines 2 + 9 = $3450.00

Your 8889 - line 5 minus line 6 = $3450.00 

Her 8889 - Lines 2 + 9 = $2464.72

Her 8889 - line 5 minus line 6 =  $3450.00

[BillM223]

@confusedHSA41

Thank you for the posting. While I am working through the numbers, could you clarify the exact date you changed policies?

Let me explain: your coverage for a month is determined by what coverage you had on the first day of the month. That is, if you had Self coverage on May 1st, and switched to Family coverage on May 2nd, you are considered to have Self coverage for the month of May, and that Family coverage began in June.

So, knowing this, can you restate who had what coverage for each month? Thanks!

[confusedHSA41]

Yeah, understood. So, my personal plan was Self Only from Jan 01, 2018 - August 14, 2018.  Then, I added my spouse and son to my plan for the remainder of the year, August 15, 2018 - December 31, 2018.

However, my spouse's plan was Self Only from Jan 01, 2018 - June 09, 2018. Then, she added our son to her plan on June 10, 2018. They both remained on this plan until August 15, 2018 when they were switched to my plan, as mentioned above. 

So, per your description, it sounds like I was Self Only for January thru June or January thru May. I'm not sure if I'm supposed to consider my spouse's family plan for June? Btw, thanks for your efforts on resolving this issue, I understand it's a complicated situation.

[BillM223]

@confusedHSA41

Thanks!

So what I see is

• You were Self-only January - June, and you converted to Family HDHP coverage July through December.
• Your spouse was Self-only January - June and converted to Family HDHP coverage for July to December.

Seem weird? This is because the moment either spouse has Family coverage, then both spouses are considered to have Family coverage. So when your spouse started July 1st with Family coverage, then you, too, were considered to have Family coverage, not withstanding the fact that you had a separate HDHP Self-only policy. 

This is done because the two of you share the $7,000 annual HSA contribution limit for Family coverage.

OK, now that I have the specifics, let me reproduce the numbers. I have something else I need to dispose of and then I'll get back to you.

[confusedHSA41]

Yes, your summary appears to be correct. If we are speaking strictly about HDHP coverage. I was slightly confused because, as you mentioned, I had a separate HDHP Self-only policy until August.  But this makes sense.

[BillM223]

@confusedHSA41

OK, I now have the right numbers. It turns out that because you didn't know the strange rule about coverage on the first of the month, that you probably overestimated your actual allowed coverage for 2018.

This is the way it works is this:

The two of you had Self-only coverage for 6 months and Family coverage for 6 months. So, using the formula for line 3 on page 4 of the 8889 Instructions, you have 6 months at $3,450 and 6 months at $6,900 (remember that this is for 2018). This totals to $67,500, which, when you divide by 12 months is $5,175 for the two of you to share.

If you think about it, your total contributions in 2018 were 

Taxpayer contribution in 2018 - $3,450

Spouse contribution in 2018 - $2,465

Total contributions in 2018 - $5,915

So, clearly, no matter how you allocate the contribution limits for 2018, the two of you overcontributed by $740 ($5,915-$5,175).

The problem is that the TurboTax instructions told you to copy down what was on line Line 5 minus line 6 on your 8889s. But the 2018 tax return was done assuming that you could use the last month rule, so it didn't matter what TurboTax did on the 8889. 

As a result, TurboTax arbitrarily allocated $3,450 of the $6,900 to each spouse. That's why line 5 minus line 6 on your 8889s had $3,450.

But the net effect of entering it this way caused some of the $5,175 available contribution limit to not be allocated to either spouse, hence the added income on line 18 of the two 8889s is too high.

Instead - and I agree that the instructions do not tell you this - you need to enter different numbers for line 5 minus line 6.

Line 5 minus line 6 is the amount of the contribution limit you are giving to your spouse. So your contribution limit is the $5,175 less the amount you allocated to your spouse.

If you would enter $1,725 on line 5 minus line 6 on your part of the interview, then you are left with $3,450 as your contribution limit. Since this is what you contributed, you have zero additional income added to your line 18 on your 8889.

However, in order for your spouse to show only $1,725 as her contribution limit, she has to assign $3,450 of the $51,75 to you - hence, her line 5 minus line 6 should be $3,450 (which is what you probably entered anyway).

This leaves her the contribution limit of $1,725. And since she contributed $2,465, she went over the limit by $740, which is what we saw above.

Now, it makes absolutely no difference who "overcontributed", because you are filing a joint return. Change the entries so that you have the $740 on line 18; it makes no difference. 

But now, at least, you understand why you owe a penalty for "failure to maintain HDHP coverage", and why the TurboTax instructions misled you into owing more of a penalty than you actually should have.

I will raise this issue with the developers.

[confusedHSA41]

Okay, I understand all your logic. However, I am slightly confused as to the information you provided in this summary:

"The two of you had Self-only coverage for 6 months and Family coverage for 6 months. So, using the formula for line 3 on page 4 of the 8889 Instructions, you have 6 months at $3,450 and 6 months at $6,900 (remember that this is for 2018). This totals to $67,500, which, when you divide by 12 months is $5,175 for the two of you to share."

 Under the Specific Instructions for Form 8889, it gives the following instructions for completing line 3 in the form:

"When figuring the amount to enter on line 3, apply the following rules.

...

4. If you were, or were considered, an eligible individual for the entire year and you changed your type of coverage during the year, enter on line 3 (see (6) in this list) the great of:

a. The limitation shown on the last line of the Line 3 Limitiation Chart and Worksheet (in these instructions), or

b. The maximum amount that can be contributed based on the type of HDHP coverage you had on the first day of the last month of your tax year.

TIP: If you had family coverage on the first day of the last month, you do not need to use the worksheet; enter $6,900 on line 3."

To me, these instructions apply directly to our situation. We were both considered eligible employees for the entire year and we changed coverage during the year. We had HDHP family coverage on the first of the month so our limit should be $6,900. The last-month rule does not apply because we were eligible all year.

Furthermore, I think the logic behind your calculations on the Limitation Chart and Worksheet are incorrect because you only consider eligible contributions for my self-coverage plan in the first 6 months (Jan-June) to be $3,450 each month. Shouldn't my wife's plan also give her a contribution limit to her separate self-coverage plan of $3,450 for the first 6 months? I think this is the reason for the caveat in the aforementioned instructions under topic (4) for line 3 instructions.

[BillM223]

@confusedHSA41

I am not ignoring you; I have just encountered an issue in the HSA area related to yours that I need to solve first. It may be until tomorrow before I can get back to you.

Hold on; don't go away.

[confusedHSA41]

No worries, standing by for your follow-up. Let me know if you need additional information.