HSA

[fr_10]

Hello all,

I have a situation regarding the last month rule ineligibility

1. I was in an HSA eligible HDHP plan by employer 1 from Sept 2023- July 30 2024. Employer 2 didnt offer an HDHP plan and hence was forced to switch out.

2. For 2023 tax year, I used the last month rule to contribute the full amount i.e. 3850$ to the HSA and claimed the benefits. Due to switching to a non HDHP plan, I was no longer an eligible individual during my testing period of Dec 2023-24. How should I approach the situation?

3. From what I understand, the prorated amount (Jan -Aug 2023) i.e.8/12*3850 = 2566.67 should be counted as an income in my tax year of 2024. Plus 10% penalty on it right? But do I need to withdraw that amount from my HSA account?

4. I should be able to contribute for prorated amounts from Jan to July 2024 in HSA i.e. 7/12*4150 = 2420. So can i just withdraw the difference 2566-2420 from HSA?

5. Also, the 2023 HSA contribution grew by 15-20%, how should I deal with that?

6. Ive read about the excise 6% tax for keeping the excess contirbution, does that apply to my case

[BillM223 · Accepted solution]

Please, don't do anything. Let TurboTax most of the things you have mentioned for you.

First , TurboTax will discover that your HDHP coverage ended in 2024. As you noted, if you had HDHP coverage on December 1, 2023, not only were you allowed to use the full annual HSA contribution limit for 2023, but you were also required to maintain HDHP coverage for the next year (2024). But, things happen, and your HDHP coverage ended in the middle of 2024.

To address your line items:

1. Yep, a common enough occurrence.

2. You will approach the situation of "failure to maintain HDHP coverage" (the technical phrase), but letting TurboTax walk you through it. Don't do anything first.

3. When TurboTax figures out that you failed to maintain HDHP coverage (because it (1) sees that you stopped HDHP coverage in August, 2024), and (2) when you answered "Self-only" to the question of "What type of HDHP coverage did you have on December 1, 2023?"), it will ask you a series of questions to calculate what you should have been able to contribute in 2023 if you would not have had the benefit of the last-month rule. But you don't withdraw the would-have-been excess - instead, the would-have-been excess is taxed at 10% in Part III of the 8889. No withdrawal is necessary (or even possible under the IRS protocols).

4. Yes, you will be able to contribute a prorated amount to your HSA for 2024. Don't pay attention to the "Calculate Max" button in the middle of the HSA interview - it is often mistaken (usually for taxpayers with Family coverage). But instead of proactively withdrawing the excess from your HSA, let TurboTax calculate the excess for you. Then, withdraw the amount that TurboTax tells you to.

   I say this not for you so much, since you seem to have a better handle on HSAs than many, but for the many taxpayers who are unable to correctly calculate their excess HSA contributions. 

   When you actually withdraw the amount that TurboTax tells you is in excess (and assuming that you have the cash in the HSA to do it), be sure to contact your HSA administrator and ask to "withdraw an excess contribution". It is important that you use this phrase, so that the HSA custodian will record the action correctly. Note that some (many?) HSA custodians will have forms on their website to be able to do this request online.

5. When you ask to withdraw the excess contributions for 2024 (which you must do by April 15, 2025), the HSA custodian should (sadly, not all do) calculate the amount of earnings attributable to the excess contributions while they were in the HSA. Then, when they send you a check for the excess, they should add the earnings to it. Please do not do anything on your own with the earnings.

   At some point, you will receive a 1099-SA in the mail (probably with a copy to your account on their website) for the excess and the earnings. You will add this to your 2025 return that you will do in early 2026. Note that the excess for 2024 - if contributed through your employer - was automatically added back to your income for tax year 2024, so you do not have to do anything about that.

6. The 6% excise tax (often called a "penalty") is levied only on excess contributions that are carried over to the next year (because they were not withdrawn). If you withdraw the entire 2024 excess, then you will not carry over the excess and so not be "penalized". If you have the cash in the HSA to withdraw the excess from 2024, do so, it is the easiest way of dealing with this.

OK, so the lesson is - let TurboTax do all the calculation for you, and let it tell you what to do next. This will be simpler and more accurate for you.

[fr_10]

Awesome, that is exactly how it went for 2023. 8 months of HSA contributions for 2023 were added to my income of 2024 as gross income from what I understand.

My employer did not max out 2024 contributions but instead had contributed lesser than the prorated amount of 2024 so I'm planning to add that difference to the account. That would make sense right? I need not withdraw anything as you had said in point 4. Completed the tax return upto review stage.

[BrittanyS]

Correct, you will complete the entries in TurboTax and let TurboTax calculate any excess for you.  Once you have completed this step in TurboTax, contact your HSA plan (either online or by phone) and request an "excess withdrawal contribution".  As BillM223 states above, it is very important to use the wordage "excess withdrawal contribution".  TurboTax will do all the calculations for you if you follow the interview questions.

@fr_10 

[fr_10]

Agreed. Although my question more precisely was that would my 2023 contributions be "excess" or not?

2024 contributions by the employer was 500$ and max prorated amount that I can contribute is 2400+. So would I even have to withdraw anything? If at all, I feel I can contribute for the difference in 2024.

[BrittanyS]

No, if your coverage stopped in 2024, the 2023 would not be considered excess and you would not add that to 2024.  You will only make adjustments to 2023 if your coverage was changed in 2023 and you did not have the HDHP at the end of December 2023.  

@fr_10 

[fr_10]

I feel there has been some miscommunication.

I was in a HDHP plan Aug/sept 2023 to July 2024. I used last month rule to contribute fully for 2023. Now I am ineligible.

The question was will I withdraw anything for 2023 now? Employer contribution for 2024 is 500$. Or can i contribute the prorated difference in 2024. The prorated amount when I did not have HDHP coverage has been added to 2024 income.

[BillM223]

"The question was will I withdraw anything for 2023 now?"

The HSA is persistent, that is, it is not like FSAs that expire at the end of the year, rather an HSA is like an IRA in that dollars can be taken years later if desired. So if you meant to ask if you can spend dollars contributed in 2023 on medical expenses in 2025, the answer is "yes".

However, if you meant "withdraw" in the sense of "withdraw excess contributions", no, it is no longer possible to withdraw (penalty free) excess contributions for tax year 2023, because this needed to be done by April 15, 2024.

"Employer contribution for 2024 is 500$. Or can i contribute the prorated difference in 2024."

The annual HSA contribution limit is calculated on, among other things, the number of months that you have HDHP coverage. The maximum amount of HSA contributions that you can make for 2024 is your HDHP coverage (Family or Self) times 5 divided by 12. So you can add whatever will be less than that limit when added to the employer's $500.

 "The prorated amount when I did not have HDHP coverage has been added to 2024 income."

I'm sorry, I don't know what this means. Are you talking about HSA contributions declared to be in excess?