HSA: I went on Medicare mid-year but wife still had HDHP plan

[friscomiller]

I have an HSA account (my name). I went on Medicare mid-year, but wife remained on an HDHP plan. (Family plan changed to an individual plan for her). We used the HSA all year to cover her expenses. TurboTax tells me I over funded because I am only entitled to 3/12 of HSA contribution limit. If my wife was on an HDHP plan all year, why can't the HSA be used for her expenses? How do I get TurboTax to recognize this?

[Opus 17]

You are confusing two different things.

You are allowed to spend HSA funds for qualified expenses, for yourself and your spouse, regardless of the kind of coverage you have. 

Overfunded means you contributed too much.  HSA accounts are owned by individuals.  If you went on Medicare in April, then you can only contribute 3/12 the limit to your account.  But if your spouse is also covered by an HDHP and has no other disqualifying coverage, then she could contribute to a separate HSA in her own name up to her contribution limit.

[friscomiller]

So basically, I lost out in 2023 by continuing to contribute to an HSA in my name and using it for my wife. I should have opened an HSA in her name. Good lesson learned, but for 2023 I lost out on the tax deduction plus have to pay the 6% extra tax.

[Opus 17 · Accepted solution]

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@friscomiller wrote:

So basically, I lost out in 2023 by continuing to contribute to an HSA in my name and using it for my wife. I should have opened an HSA in her name. Good lesson learned, but for 2023 I lost out on the tax deduction plus have to pay the 6% extra tax.

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No, the situation is not lost.

As to your HSA, you lose the tax deduction either way, but you can avoid the penalty by removing the excess contributions before the tax filing deadline (April 15, 2024).  Contact the HSA and ask for a "removal of excess contributions", this is a special procedure, not a normal withdrawal.   If you were covered by a family HDHP for 3 months, your basic contribution limit was $1937, plus $250 of a personal catch-up amount for over age 55, for a total of $2187.  If you contributed more than that, you can remove the excess before April 15 to avoid the 6% penalty.  (If you have less than $2187 in the account, remove whatever there is.  The 6% penalty is calculated on the excess contribution or the remaining balance, whichever is less, so if the account is empty, there is no actual penalty even if you made excess contributions and then withdrew them.)

Separately, as long as your wife is covered by an HSA-eligible HDHP and has no other insurance, your wife can open an HSA in her own name.  Many banks and brokers will allow you to open an HSA if you don't have an employer option.  She can then make a contribution toward the 2023 tax year, as long as the contribution is made before April 15.  That contribution will be tax-deductible on her 2023 tax return.  Again, she will need to make sure it is recorded as a 2023 contribution, not 2024.  

If your wife was covered by a family HDHP for 3 months and a single HDHP for 9 months, her basic contribution limit for 2023 will be $4824, plus a $1000 catch-up contribution if she is age 55 or older. However, her basic contribution limit is reduced by contributions you made under your basic limit.  If you withdraw the excess from your account, so that your 2023 contributions were $1937 basic plus $250 catch-up, then your wife's 2023 contribution limit will be $2887 (basic) plus $1000 catch-up, for a total of $3887. 

Assuming your wife remains covered by a HSA-eligible HDHP for all of 2024, she could contribute up to $5150 for 2024. She does not have to be the named policyholder (such as if it your workplace insurance), she just has to be covered by the policy.