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Level 2

Question

HSA last-month rule incorrectly applying

15 replies
118 views

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

Level 15

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.

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confusedHSA41Author

Level 2

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

Level 15

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...

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confusedHSA41Author

Level 2

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

Level 15

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

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BillM223

Level 15

@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!

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confusedHSA41Author

Level 2

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

Level 15

@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.

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