Why is TT saying I failed the last month rule on 8889 when I didn't? HSA/HDHP.

[kenc295]

For the 2020 tax year I took an HSA contribution of $8100 for a family HSA.  I used 8889 and had a 1095A to verify medical coverage.

I had HDHP coverage for Oct-Dec in 2020 meeting the last month rule.

When I loaded  TT2021, it found my 2020 return and immediately gave me a $6750 income on 2021  form 8889 line 18 "last month rule", along with a 10% penalty.   I have filled in nothing for 2021 yet.

Why is TT doing this?

I wondered if TT assumed I wouldn't meet the last month rule so preloaded the worst case, but I tested this by doing the 8889 for 2021 showing  I had HDHP coverage for Jan through Dec this year so pass the last month rule.  It made no difference, I still get a penalty, and $6750 income.

Why?

[BillM223 · Accepted solution]

"immediately gave me a $6750 income on 2021  form 8889 line 18 "last month rule", along with a 10% penalty.   I have filled in nothing for 2021 yet."

You have answered you own question - TurboTax did this because you haven't filled in anything yet.

Please don't blame TurboTax. The IRS believes that you don't qualify for last-month rule treatment unless you show HDHP coverage for the entire year following. Of course, since you had not even started the HSA interview, you haven't shown any HDHP coverage, so you are penalized - UNTIL you show the coverage.

"I wondered if TT assumed I wouldn't meet the last month rule so preloaded the worst case, but I tested this by doing the 8889 for 2021 showing  I had HDHP coverage for Jan through Dec this year so pass the last month rule.  It made no difference, I still get a penalty, and $6750 income."

As you can see, this is a false assumption. The simple answer is that you will be penalized UNTIL you show HDHP coverage for 2021. The simple solution is to do the HSA interview all the way to the end (don't leave halfway), and DON'T dwell on the Refund Meter - TurboTax has to do things in the background that are not obvious. What matters is that your return is correct at the end, not at every single micro step along the way.

[kenc295]

Thanks for the reply.

Yes, I went on this premise, and as you say, once I went through the Q&A on HSA/HDHP the penalty and the income disappeared from form 8889.  It might be a good idea for TT to assume nothing up front though, rather than pre-filling with the assumption that the HDHP was not followed through with for the 12 month period. Might save a sleepless night mulling it over!