Contribution Limit for HSA Plan Started Jan 5th, 2020

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MillennialFinance19
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Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by MillennialFinance19 »

My HSA plan began on Jan 4th of this year (switched from non-hdhp). Does this mean I can only contribute $6508 instead of $7100 (11 out of 12 months)? It seems like that is what I’m reading but cannot find a definite answer. Thanks.
Last edited by MillennialFinance19 on Thu Jan 23, 2020 8:41 am, edited 1 time in total.
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rterickson
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Re: Contribution Limit for HSA Plan Started Jan 4th, 2020

Post by rterickson »

Does the HDHP coverage begin on Jan. 1 or Feb. 1? That'll be your answer.
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MillennialFinance19
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Re: Contribution Limit for HSA Plan Started Jan 4th, 2020

Post by MillennialFinance19 »

rterickson wrote: Thu Jan 23, 2020 8:22 am Does the HDHP coverage begin on Jan. 1 or Feb. 1? That'll be your answer.
I just called GEHA, my actual coverage start date is 1/5/2020 (NOTE: I adjusted my post title to reflect). Am I correct in thinking I can only fund 11/12 months?
For the love of God, stick to your plan!!!
MotoTrojan
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Re: Contribution Limit for HSA Plan Started Jan 4th, 2020

Post by MotoTrojan »

MillennialFinance19 wrote: Thu Jan 23, 2020 8:42 am
rterickson wrote: Thu Jan 23, 2020 8:22 am Does the HDHP coverage begin on Jan. 1 or Feb. 1? That'll be your answer.
I just called GEHA, my actual coverage start date is 1/5/2020 (NOTE: I adjusted my post title to reflect). Am I correct in thinking I can only fund 11/12 months?
I thought there was a rule that if you’re covered the entire following year you can contribute in full this time.
nolesrule
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by nolesrule »

Yes and No. based on this year's coverage, you can only fund a maximum of 11/12, which assumes you are covered through the end of the year.

However there is a rule that says if you are covered on December 1st of one year in a year with partial coverage but are also covered for the entirety of the following year, you can fund the full amount in the year with the partial year coverage.
Flora
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by Flora »

Full year contribution if covered on December 1, 2020.

Since you mentioned GEHA, then you are a federal employee. If you are single and if your GEHA HDHP premium passthrough is $900, then you can contribute $2550 to your HSA (because GEHA will contribute $900).

You can open an HSA at Fidelity and then log into MyPay to enter the amount to go from your next paycheck to your Fidelity HSA.

I thought I read that you have to wait until February to do this since it's your first year with GEHA HDHP and your HSA is not established until February when your GEHA deposits the first premium passthrough amount into HSA Bank but I am not sure.

Maybe someone else can provide more info.
Spirit Rider
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by Spirit Rider »

Your HSA contribution limit is normally pro-rated based on HDHP coverage eligibility as of the 1st of each month, but there is a last-month rule. If you have coverage on 12/1, the HDHP plan's full contribution limit applies. It is your choice to contribute 11/12 or 12/12 of the full contribution limit*.

There will be a testing period for that additional month, where you must remain an HSA eligible individual for all of 2021. If you do not, the pro-rated additional month amount will be subject to ordinary income taxes and a 10% excise tax penalty.

Edited back to the correct excise tax percentage.

*Your employer's Section 125 plan may or may not limit your employee HSA contributions by salary reduction to 11/12 of the your full contribution limit. You will have to make the additional month's contribution directly to the HSA account.

Keep in mind that your contribution limit includes any HSA contributions by your employer. In some cases of federal government employment, the insurance company actually makes the contribution.
Last edited by Spirit Rider on Thu Jan 23, 2020 9:31 pm, edited 4 times in total.
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MillennialFinance19
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by MillennialFinance19 »

Thanks all. Looks like I’m all set. Appreciate the great feedback.
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deltaneutral83
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by deltaneutral83 »

Spirit Rider wrote: Thu Jan 23, 2020 9:16 am Your HSA contribution limit is normally pro-rated based on HDHP coverage eligibility as of the 1st of each month, but there is a last-month rule. If you have coverage on 12/1, the HDHP plan's full contribution limit applies. It is your choice to contribute 11/12 or 12/12 of the full contribution limit*.

There will be a testing period for that additional month, where you must remain an HSA eligible individual for all of 2021. If you do not, the pro-rated additional month amount will be subject to a 10% excise tax penalty.

*Your employer's Section 125 plan may or may not limit your employee HSA contributions by salary reduction to 11/12 of the your full contribution limit. You will have to make the additional month's contribution directly to the HSA account.

Keep in mind that your contribution limit includes any HSA contributions by your employer. In some cases of federal government employment, the insurance company actually makes the contribution.
Wouldn't this always be worth it if the funds went in tax deductible and before FICA (ignoring the SS bend points for this purpose)? 10% penalty seems to be outweighed ?
TropikThunder
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by TropikThunder »

deltaneutral83 wrote: Thu Jan 23, 2020 10:57 am
Spirit Rider wrote: Thu Jan 23, 2020 9:16 am Your HSA contribution limit is normally pro-rated based on HDHP coverage eligibility as of the 1st of each month, but there is a last-month rule. If you have coverage on 12/1, the HDHP plan's full contribution limit applies. It is your choice to contribute 11/12 or 12/12 of the full contribution limit*.

There will be a testing period for that additional month, where you must remain an HSA eligible individual for all of 2021. If you do not, the pro-rated additional month amount will be subject to a 10% excise tax penalty.

*Your employer's Section 125 plan may or may not limit your employee HSA contributions by salary reduction to 11/12 of the your full contribution limit. You will have to make the additional month's contribution directly to the HSA account.

Keep in mind that your contribution limit includes any HSA contributions by your employer. In some cases of federal government employment, the insurance company actually makes the contribution.
Wouldn't this always be worth it if the funds went in tax deductible and before FICA (ignoring the SS bend points for this purpose)? 10% penalty seems to be outweighed ?
It’s actually 6% but that’s per year until you remove it.
Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.
https://www.irs.gov/publications/p969#e ... 1000204077
Spirit Rider
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by Spirit Rider »

TropikThunder wrote: Thu Jan 23, 2020 1:01 pm
deltaneutral83 wrote: Thu Jan 23, 2020 10:57 am Wouldn't this always be worth it if the funds went in tax deductible and before FICA (ignoring the SS bend points for this purpose)? 10% penalty seems to be outweighed ?
It’s actually 6% but that’s per year until you remove it.
Thanks for catching that mistake. I also neglected to mention that the amount is also subject to ordinary income taxes/not deductible depending on contribution source. So @deltaneutral83 the funds do not go in pre-tax.

I will make a correction to my prior post.
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MillennialFinance19
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by MillennialFinance19 »

TropikThunder wrote: Thu Jan 23, 2020 1:01 pm
deltaneutral83 wrote: Thu Jan 23, 2020 10:57 am
Spirit Rider wrote: Thu Jan 23, 2020 9:16 am Your HSA contribution limit is normally pro-rated based on HDHP coverage eligibility as of the 1st of each month, but there is a last-month rule. If you have coverage on 12/1, the HDHP plan's full contribution limit applies. It is your choice to contribute 11/12 or 12/12 of the full contribution limit*.

There will be a testing period for that additional month, where you must remain an HSA eligible individual for all of 2021. If you do not, the pro-rated additional month amount will be subject to a 10% excise tax penalty.

*Your employer's Section 125 plan may or may not limit your employee HSA contributions by salary reduction to 11/12 of the your full contribution limit. You will have to make the additional month's contribution directly to the HSA account.

Keep in mind that your contribution limit includes any HSA contributions by your employer. In some cases of federal government employment, the insurance company actually makes the contribution.
Wouldn't this always be worth it if the funds went in tax deductible and before FICA (ignoring the SS bend points for this purpose)? 10% penalty seems to be outweighed ?
It’s actually 6% but that’s per year until you remove it.
Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.
https://www.irs.gov/publications/p969#e ... 1000204077
So what I’m doing is contributing $7100 this year (this includes the match), and will ensure I’m in the HSA eligible plan next year. From all I’ve read here, I should be all set.
For the love of God, stick to your plan!!!
TropikThunder
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by TropikThunder »

MillennialFinance19 wrote: Thu Jan 23, 2020 6:11 pm So what I’m doing is contributing $7100 this year (this includes the match), and will ensure I’m in the HSA eligible plan next year. From all I’ve read here, I should be all set.
I would agree. Worst case scenario is you lose HSA-eligible coverage sometime in 2021 and fail the testing period for 2020 but that will only mean one month's overage [$7,100/12 = $591.67] which will only mean $36 in excise tax/penalty (ignoring potential investment gains for now). I would consider that an acceptable cost.
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MillennialFinance19
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by MillennialFinance19 »

TropikThunder wrote: Thu Jan 23, 2020 7:43 pm
MillennialFinance19 wrote: Thu Jan 23, 2020 6:11 pm So what I’m doing is contributing $7100 this year (this includes the match), and will ensure I’m in the HSA eligible plan next year. From all I’ve read here, I should be all set.
I would agree. Worst case scenario is you lose HSA-eligible coverage sometime in 2021 and fail the testing period for 2020 but that will only mean one month's overage [$7,100/12 = $591.67] which will only mean $36 in excise tax/penalty (ignoring potential investment gains for now). I would consider that an acceptable cost.
Good perspective. To clarify, that 6% penalty would only exist until I rectified the over contribution, correct?
For the love of God, stick to your plan!!!
TropikThunder
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by TropikThunder »

MillennialFinance19 wrote: Thu Jan 23, 2020 8:04 pm
TropikThunder wrote: Thu Jan 23, 2020 7:43 pm
MillennialFinance19 wrote: Thu Jan 23, 2020 6:11 pm So what I’m doing is contributing $7100 this year (this includes the match), and will ensure I’m in the HSA eligible plan next year. From all I’ve read here, I should be all set.
I would agree. Worst case scenario is you lose HSA-eligible coverage sometime in 2021 and fail the testing period for 2020 but that will only mean one month's overage [$7,100/12 = $591.67] which will only mean $36 in excise tax/penalty (ignoring potential investment gains for now). I would consider that an acceptable cost.
Good perspective. To clarify, that 6% penalty would only exist until I rectified the over contribution, correct?
Correct, as measured per tax year. I'm not sure if you would have to amend your 2020 return and report the overage of if you could wait until you file your 2021 taxes though, I haven't looked at that level. And when you remove the excess the custodian will return the accrued earnings as well but it's unlikely that will be a lot considering the amount of money and time we're talking about (<$600 and <12 months).
Spirit Rider
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Re: Contribution Limit for HSA Plan Started Jan 5th, 2020

Post by Spirit Rider »

Actually, this thread has gone a little sideways since my 9:16 post. The 10% excise tax penalty I originally referred to was correct and I have gone back and re-corrected that post.

Unfortunately, @TropikThunder's posts on the 6% excise tax and treatment as excess contributions were not correct for the circumstances being discussed.. I have been dealing with several HSA threads on multiple forums and got them confused myself.

The amount contributed under the last-month rule with a testing period failure is not an excess contribution. It can not be removed with earnings and it is not subject to the 6% excise tax.

There is a separate and distinct procedure for testing period failures. The testing period failure if any would occur in 2021. It would have no effect on the 2020 tax return. The amount subject to the testing period failure is not removed and would be included in ordinary income and subject to a one-time only 10% excise tax penalty on your 2021 tax return.. See Form 8889 and its instructions for section III.
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