HSA return of contribution penalty

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Topic Author
curryitr
Posts: 36
Joined: Fri Jan 04, 2019 8:29 am

HSA return of contribution penalty

Post by curryitr » Wed Sep 11, 2019 7:10 am

Good morning,

I recently posted a thread about my wife’s HSA with her employer but I now have a question about my own Fidelity HSA.

I opened my own HSA with fidelity a month or 2 ago and funded it immediately with $3,500. Shortly after i realized that my wife and I were not going to be on an HSA eligible plan for the month of December, and that would mean we would be over our contribution limit for the year (11/12 months instead of 12/12). I quickly filled out Fidelity’s return of excess contribution form and they returned $550 back to me.

Looking at some of the comments in other HSA threads it looks like this could have been a mistake because of the caution on page 8 of publication 969... My understanding is that failing the December test, and then using the return of excess contribution form was not appropriate. I read Fidelity is going to send me a 1099-SA for the $550 and I will pay a penalty of 10 or 20% in taxes for 2019?

I don’t know if having a medical expense paid out of pocket equal to this $550 would help in any way, but I just paid our new ACA premium for $592. I could use this receipt if necessary to prevent us from getting a 10 or 20% penalty on the $550 “excess contribution.”

Does someone understand what the repercussions are and if there is anything I can do at this point?

cas
Posts: 657
Joined: Wed Apr 26, 2017 8:41 am

Re: HSA return of contribution penalty

Post by cas » Wed Sep 11, 2019 10:38 am

curryitr wrote:
Wed Sep 11, 2019 7:10 am

[. . .]
Shortly after i realized that my wife and I were not going to be on an HSA eligible plan for the month of December, and that would mean we would be over our contribution limit for the year (11/12 months instead of 12/12). [ . . .]

Looking at some of the comments in other HSA threads it looks like this could have been a mistake because of the caution on page 8 of publication 969...
I was hoping that someone who knows what they are talking about (like SpiritRider) would answer, but since your post is disappearing down the list unanswered, I'll at least bounce it back up the list with my 2 cents.

The caution you mention says:
If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income isn’t an excess contribution. If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later.
Unhelpfully, it doesn't provide a link to the "discussed earlier" bit, so it isn't overly clear. But, the reference to the "testing period" makes me think they are talking ONLY about some special circumstances that *have* testing periods.
As far as I've read, neither of these situations apply to you:

- you made a full HSA contribution for *2018* even though you/your wife did not have an HSA-eligible HDHP every month of 2018, but you/your wife DID have an HSA-eligible HDHP on December 1, 2018. The "last-month rule" then kicked in, and you needed to remain eligible to contribute to an HSA all 12 months in *2019*. (This is the inverse of the issue you have now, where you were eligible Jan - Nov 2019, but will NOT be eligible on Dec 1, 2019, and are calculating how much you can contribute for 2019.)

or

- you funded your HSA with a distribution from your IRA

In your particular situation for 2019, I think you did do the right thing in having an excess contribution returned for 2019. (And that caution on page 8 doesn't apply to your situation.) Hopefully someone else will be inspired to answer if they think I'm wrong.
curryitr wrote:
Wed Sep 11, 2019 7:10 am
I don’t know if having a medical expense paid out of pocket equal to this $550 would help in any way, but I just paid our new ACA premium for $592. I could use this receipt if necessary to prevent us from getting a 10 or 20% penalty on the $550 “excess contribution.”
Hopefully this is a moot point because there isn't any problem with your return of excess contribution, but ...


I'm 99.9% sure that ACA premiums don't count as an eligible medical expense that can be reimbursed from an HSA. See Publication 969 p. 9 under "Insurance Premiums":
Insurance premiums. You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:
- Long-term care insurance.
- Health care continuation coverage (such as coverage under COBRA).
- Health care coverage while receiving unemployment compensation under federal or state law.
- Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

Spirit Rider
Posts: 11205
Joined: Fri Mar 02, 2007 2:39 pm

Re: HSA return of contribution penalty

Post by Spirit Rider » Wed Sep 11, 2019 11:37 am

This has nothing to with the last month rule. The last month rule only applies to a year where you are NOT an eligible individual at the beginning of the year and make greater than your pro-rated allowed contribution limit for the year. You simply contributed more than your eventual pro-rated limit.

Requesting the return of the excess contribution and earnings was the right thing to do. The earnings will be taxable, but there will be no penalties, because the last month rule never applied.

Topic Author
curryitr
Posts: 36
Joined: Fri Jan 04, 2019 8:29 am

Re: HSA return of contribution penalty

Post by curryitr » Wed Sep 11, 2019 2:25 pm

Well the good news is I caught this before any trades were initiated so I ended up not having any earnings. Thanks for your help!

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