Health Savings Account and "Last Month Rule"

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Small Law Survivor
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Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Sun Jul 16, 2017 4:20 pm

I could not participate in my company's HSA for the first five months of this year because I had signed up for Medicare Part A, and I needed to unenroll. That didn't happen until May, so no HSA contributions were made for the first five months of the year.

I recently learned about the "last month rule," which states (IRS Pub. 969, p. 3):
Under the last-month rule, if you are an eligible individual on the first day of the last month of your
tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are
treated as having the same HDHP coverage for the entire year as you had on the first day of the last month.
https://www.irs.gov/pub/irs-pdf/p969.pdf

I read this to mean (and have now been told) that I can contribute the amounts I missed during Jan. - May. I could do this by check, lump-sum, any time until year-end.

This sounds great, and I'm glad I learned about it. However, it seems that there's a catch, in the form of a "testing period" that requires an employee utilizing this rule to remain eligible to participate in the HSA for the "last month" (for example, December 2017) plus 12 months following (in this example December 2018). This is discussed in the publication.

This presents a risk, since who knows that they'll be eligible (i.e., employed) for 12 months following the "last month"?

Am I understanding this correctly? Has anyone had experience with this rule? Is there someplace I can go to confirm my understanding of this rule?

Thanks, Small Law Survivor

jebmke
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Re: Health Savings Account and "Last Month Rule"

Post by jebmke » Sun Jul 16, 2017 4:24 pm

You understand the rule correctly. You need to stay enrolled through 2018. Keep in mind you have until April 2018 to make the contribution to top off the 2017 amount.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Sun Jul 16, 2017 4:46 pm

You understand the rule correctly. You need to stay enrolled through 2018. Keep in mind you have until April 2018 to make the contribution to top off the 2017 amount.
Thanks. This does make the decision harder.

rick0
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Re: Health Savings Account and "Last Month Rule"

Post by rick0 » Sun Jul 16, 2017 11:48 pm

Keep in mind that most (all?) HSA Administrators allow you to "Withdraw Contributions" after the fact. If something unexpected happens, leaving you with too much contributed for a specific tax year, you can withdraw it. I had to do this a couple of years ago..

I wouldn't PLAN on doing this. You'll spend some time on the phone with the HSA rep, they will have to calculate how much to withdraw based on gains/losses from your initial contribution, and and as I recall the tax reporting was a bit odd&confusing.

But, you CAN recover without a penalty.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Mon Jul 17, 2017 8:27 am

Yes, I withdrew money from my HSA in 2016 after I (a) signed for Medicare A in May (when I turned 65); and (b) realized in mid-September that that had been a mistake. I then withdrew the monies that had been contributed for May - September. So, I've done this, and it was not a big deal - just one conversation with the HSA rep.

Thanks for explaining that this is an option, and that it would fix any over-contribution under the circumstances that I described.

Spirit Rider
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Re: Health Savings Account and "Last Month Rule"

Post by Spirit Rider » Mon Jul 17, 2017 8:42 am

Small Law Survivor wrote:
You understand the rule correctly. You need to stay enrolled through 2018. Keep in mind you have until April 2018 to make the contribution to top off the 2017 amount.
Thanks. This does make the decision harder.
The consequences of a testing failure are that you must pay a 10% penalty on the amount contributed under the last month rule. If you have a family plan that would be $6,750 * 5 / 12 * 0.10 = $281.25. Plus your $1,000 catch-up contribution and another $1,000 for a spouse.

Probably not likely given your username, but if you make your HSA contributions by payroll deduction and to the degree your SS wages are < the SS max wage base (2017 = $127,200), you saved 7.65% on your contribution and the IRS has no way to recover that, so your penalty would effectively only be $6,750 * 5 / 12 * 0.0235 = $66.09.
rick0 wrote:But, you CAN recover without a penalty.
This is not correct. Yes, you can remove an excess contribution to avoid paying the 6% excise tax, but a testing failure is NOT an excess contribution and you can NOT avoid the 10% penalty. In fact if you remove the amount due to a testing failure, you will make it worse, this would be deemed a non-qualified distribution and thus subject to a 20% penalty.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Mon Jul 17, 2017 3:08 pm

Hmmm ... OK Spirit Rider. I am semi-retired, so my wages are under the SS max wage base.

I am 66, so my total HSA contribution this year (after the catch-up) would be $7,750.

However, note that I do not have to wait until December to make the catch-up contribution - I could do it via payroll deduction over the balance of the year (I would pro rate the amount), or I could do a lump sum catch up contribution now, in July. The lump sum catch-up would be the easiest thing for me to do, since I wouldn't have to deal with our payroll department.

Is one better in any way to the other? If I did the catch-up in now, in July, would the 12 month testing period begin now, and run through next July?

Thanks very much.

Spirit Rider
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Re: Health Savings Account and "Last Month Rule"

Post by Spirit Rider » Mon Jul 17, 2017 3:52 pm

If you have a spouse over 55, that spouse can also make a $1,000 catch-up contribution, but it must be by direct contribution to their own account. So the total could be $8,750.

You would be better off making the contribution by payroll deduction, because such contributions would be exempt from the 7.65% FICA taxes, largely negating any risk due testing failure. Your ability to front load such contributions would be dependent on your net pay after other deductions and your company policies for HSA contributions.

If you take advantage of the last month rule for any year, the testing period is until 12/31 of following year, regardless of any other circumstances including the timing of contributions.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Mon Jul 17, 2017 4:08 pm

Spirit Rider -

Was thinking about setting up a separate HSA account for my wife. I think, based on a quick search, that I could do that at Vanguard. However, I'm not sure it's worth the hassle - I have at most four years left to make contributions to this HSA (I can't make any when I trigger SS at age 70, and I'm 66 now), and I'm not sure it's worth setting up an HSA at Vanguard for $4,000.

Related question: when I turn 70 and any contributions to the HSA cease, could I move the HSA to Vanguard and use it the same way there that I could at HSA Bank (where it currently resides)? HSA bank issues a debit card that can be used for medical purchases, and that sounds pretty convenient. Does anyone reading this have an HSA at Vanguard, and can comment?

Also, I assume that the entire HSA contribution (whether $7,750 or $8,850, if we do make spousal catch-up to a separate account), is deductible, whether it is made via payroll deductions or lump sum, correct? This deduction is worth real money, since I will be making a large Roth conversion this year, and possibly each year until I turn 70.

Thanks again.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Mon Jul 17, 2017 4:56 pm

I will add one further thought to my comments/questions above -

My wife will turn 66 in 2018. I believe she can take SS based on her earnings until I turn 70, and then receive (increased) SS in the form of spousal benefits at that time.

If she does take SS next year she will have to enroll in Medicare A, and therefore won't be able to contribute $1,000/year into her own HSA from that point forward.

Does this sound correct?

jalbert
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Re: Health Savings Account and "Last Month Rule"

Post by jalbert » Mon Jul 17, 2017 5:50 pm

This presents a risk, since who knows that they'll be eligible (i.e., employed) for 12 months following the "last month"?
I don't think you have to be employed at the given employer and/or enrolled in the same plan to meet this requirement, but just enrolled in some HSA-eligible plan. This could be COBRA continuation of the current plan or enrollment in some other HSA-eligible plan such as an individual plan or plan with a new employer.

I suppose if you switched to a new employer and it did not offer an HSA-eligible plan, that could be a problem.
Risk is not a guarantor of return.

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Artsdoctor
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Re: Health Savings Account and "Last Month Rule"

Post by Artsdoctor » Mon Jul 17, 2017 6:21 pm

Small Law Survivor,

I've reread your posts a few times and have to admit that I'm not following you. Are you enrolled in Medicare or not? Early on, you mentioned that you have enrolled in Medicare. Is this correct?

If you enroll in Medicare Part A, you can't contribute pre-tax dollars to your HSA. In order to contribute pre-tax dollars to an HSA, you cannot have any health insurance other than a HDHP. The month your Medicare begins, you must stop your HSA contributions.

Can you clarify this?

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Artsdoctor
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Re: Health Savings Account and "Last Month Rule"

Post by Artsdoctor » Mon Jul 17, 2017 6:36 pm

As far as the Last Month Rule, you have to realize that it is double-edged sword and not without risk.

On one hand, it is a potential gift. If you have a HDHP plan starting on December 1, 2016, you need to make a decision. You can either make a one-month contribution or a 12-month contribution. There is no risk in making a 1-month calculation; there is a risk making a 12-month contribution (for the whole year of 2016).

If you choose to make a 12-month contribution, the "gift" carries with it a risk. You must maintain a HDHP plan for 12 months. If you don't, you'll owe a tax and penalty.

So you need to make a decision. If you feel there is a high likelihood that you will be in a job which will offer a HDHP plan throughout the whole year (2017), then you can take the risk with a reasonable expectation of meeting the criteria (though changes happen and there's no guarantee). On the other hand, there would be some guaranteed no-nos which would make taking the risk pointless (for example, in the upcoming year you know you'll be moving away, you know you'll be retiring, you know you'll be on Medicare).

Atgard
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Re: Health Savings Account and "Last Month Rule"

Post by Atgard » Mon Jul 17, 2017 6:37 pm

Yes, I dealt with this. Since you have until April 2018 to make the contribution, just see if you will have an HSA in 2018 or not (you should know by Dec 2017 or Jan 2018 at the latest). If yes, contribute the full amount for 2 years. If not, don't contribute anything.

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Artsdoctor
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Re: Health Savings Account and "Last Month Rule"

Post by Artsdoctor » Mon Jul 17, 2017 6:42 pm

Atgard wrote:Yes, I dealt with this. Since you have until April 2018 to make the contribution, just see if you will have an HSA in 2018 or not (you should know by Dec 2017 or Jan 2018 at the latest). If yes, contribute the full amount for 2 years. If not, don't contribute anything.
Maybe, maybe not. Employers don't always choose plans on December 1 or January 1. If your employer has a scheduled assessment of plans every July 1, and certainly if there's only one plan to choose plan, you may want to be cautious.

Things USED to be pretty stable and predictable. Things changed and I no longer take anything for granted.

Spirit Rider
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Re: Health Savings Account and "Last Month Rule"

Post by Spirit Rider » Mon Jul 17, 2017 7:13 pm

$4K is still $4K. Where else do you get a tax deduction and then likely free tax distributions.

Vanguard does not have an HSA account. They used to co-market a plan from Health Savings Administrators which uses Vanguard funds. I don't see it even mentioned on their site anymore, but Health Savings Admistrators definitely still exists.

Spirit Rider
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Re: Health Savings Account and "Last Month Rule"

Post by Spirit Rider » Mon Jul 17, 2017 7:22 pm

Artsdoctor wrote:If you choose to make a 12-month contribution, the "gift" carries with it a risk. You must maintain a HDHP plan for 12 months. If you don't, you'll owe a tax and penalty.
There is just a 10% penalty, the contributions stay in the account and there is no tax.
Atgard wrote:Yes, I dealt with this. Since you have until April 2018 to make the contribution, just see if you will have an HSA in 2018 or not (you should know by Dec 2017 or Jan 2018 at the latest). If yes, contribute the full amount for 2 years. If not, don't contribute anything.
I still maintain he is better off making the contributions in 2017 by payroll deduction, saving the 7.65% FICA, retaining the contributions and at worst subject to a 2.35% net penalty.

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tfb
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Re: Health Savings Account and "Last Month Rule"

Post by tfb » Mon Jul 17, 2017 9:19 pm

Spirit Rider wrote:
Artsdoctor wrote:If you choose to make a 12-month contribution, the "gift" carries with it a risk. You must maintain a HDHP plan for 12 months. If you don't, you'll owe a tax and penalty.
There is just a 10% penalty, the contributions stay in the account and there is no tax.
There is tax in the year you fail the test.
Publication 969, page 5 wrote:If you fail to remain an eligible individual during the testing
period, for reasons other than death or becoming disabled,
you will have to include in income the total contributions
made to your HSA that wouldn’t have been made
except for the last-month rule
. You include this amount in
your income in the year in which you fail to be an eligible
individual. This amount is also subject to a 10% additional
tax. The income and additional tax are calculated on Form
8889, Part III.
https://www.irs.gov/pub/irs-pdf/p969.pdf
Harry Sit, taking a break from the forums.

Spirit Rider
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Re: Health Savings Account and "Last Month Rule"

Post by Spirit Rider » Mon Jul 17, 2017 9:27 pm

tfb wrote:
Spirit Rider wrote:
Artsdoctor wrote:If you choose to make a 12-month contribution, the "gift" carries with it a risk. You must maintain a HDHP plan for 12 months. If you don't, you'll owe a tax and penalty.
There is just a 10% penalty, the contributions stay in the account and there is no tax.
There is tax in the year you fail the test.
Publication 969, page 5 wrote:If you fail to remain an eligible individual during the testing
period, for reasons other than death or becoming disabled,
you will have to include in income the total contributions
made to your HSA that wouldn’t have been made
except for the last-month rule
. You include this amount in
your income in the year in which you fail to be an eligible
individual. This amount is also subject to a 10% additional
tax. The income and additional tax are calculated on Form
8889, Part III.
https://www.irs.gov/pub/irs-pdf/p969.pdf
Oops, you are right. I got offtrack by the fact that the contributions stay in the account unlike excess contributions.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Tue Jul 18, 2017 5:15 pm

Artsdoctor - I was enrolled in Medicare until May of this year. That is the period (Jan - May 2017) for which I would make the catch-up contribution. So the "risk" is only part of the year - the first five months.

Atgard - thank you, I appreciate the timing of the decision. My law firm will have an HSA in 2018 (February 1 year, not calendar year), but whether I will decide to fully retire before year-end is an unknown. Maybe, maybe not ...

Spiritrider - It's probably not $4,000, since my wife will be eligible for SS based on full retirement age in October 2018. I suppose she could defer until January 2019, but that would still only be two years - 2017/2018 - $2,000.

Spiritrider and TFB: fact that the contributions stay in the HSA is a factor favoring this, since that money would grow tax free.

All-in-all, not an easy decision, although the consequences if I choose incorrectly are not a huge deal.

Thank you all.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Tue Jul 25, 2017 6:36 pm

I consulted a person who is a Medicare professional advisor about the "last month rule". We had an email exchange.

I wrote to the consultant: "after studying this I see that the "last month" rule comes with a cost/risk. I need to remain eligible under the HSA (in other words, employed by my firm) for 12 months after the "last month." That would mean I'd have to remain employed until the end of 2018, and there's no guarantee that will happen."

Consultant responded: No. That means that folks who have an HDHP for the last month to the year are treated as if they had an HDHP and then eligible for an HSA for the entire year.

"Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month." p. 5.

I'd appreciate it if the people that commented on my original post -- Jebmke, Spirit Rider, others -- would help me evaluate this response.

Spirit Rider
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Re: Health Savings Account and "Last Month Rule"

Post by Spirit Rider » Tue Jul 25, 2017 7:27 pm

So much for the Medicare Professional Advisor and the title Consultant. This individual is totally wrong.

I refer you to IRS Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans, page 4.

Testing period. If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2016, through December 31, 2017).
If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are calculated on Form 8889, Part III.

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Artsdoctor
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Re: Health Savings Account and "Last Month Rule"

Post by Artsdoctor » Wed Jul 26, 2017 9:17 am

I agree with Spirit Rider. On one hand, I will freely admit that HSA rules can be a bit tricky and I have spent several hours over the past few years reading and re-reading Publication 969, talking to my old accountant, talking to my new accountant, and playing with tax software in order to make numbers fit properly. In fact, TurboTax even had a software glitch a couple of years ago which screwed up spousal contributions. I don't have a learning disability and neither do my accountants; I think the rules are relatively complex once you start making changes in coverage, take into consideration spouses, figure in catch-up contributions, etc.

On the other hand, if you're going to label yourself an expert, you'd better know the rules. A GOOD expert would have read your e-mail and went to the IRS publication in order to figure what the correct answer to your question is. Not only did he give you the wrong answer, but he was dismissive. This is someone you'd do better to walk away from.

Small Law Survivor
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Re: Health Savings Account and "Last Month Rule"

Post by Small Law Survivor » Wed Jul 26, 2017 12:32 pm

Thank you Artsdoctor and Spirit Rider.

I am a semi-retired lawyer, and I read the rule the same way you did. I'm surprised that this advisor (who claims to be Medicare expert and has a published book on Medicare), reads it differently.

Quite puzzling.

Spirit Rider
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Re: Health Savings Account and "Last Month Rule"

Post by Spirit Rider » Wed Jul 26, 2017 3:10 pm

Small Law Survivor wrote:Thank you Artsdoctor and Spirit Rider.

I am a semi-retired lawyer, and I read the rule the same way you did. I'm surprised that this advisor (who claims to be Medicare expert and has a published book on Medicare), reads it differently.

Quite puzzling.
Well, since being enrolled in Medicare makes you ineligible to make HSA contributions, maybe they just have very little experience with HSAs. However, as you so painfully have learned, with Medicare and HSAs, it is what you don't know that can really hurt.

CMS themselves only just added information about HSAs and the interaction between HSAs and the potential up to six-month mandatory retroactive Medicare enrollment on the Medicare.gov website within the last year. Likewise they only just added this information to the December 2016 revision of the "Enrolling in Medicare Part A & Part B" and the "Medicare &You 2017" documents.

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Artsdoctor
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Re: Health Savings Account and "Last Month Rule"

Post by Artsdoctor » Wed Jul 26, 2017 6:00 pm

http://www.investmentnews.com/article/2 ... d-medicare

I'm sorry, Spirit Rider. I think you're being too generous.

The 6-month retroactive Medicare enrollment is all over the internet and anyone can Google it. The above link describes what most people would need to know in very simple language.

If you're a "Medicare expert," you're going to be held to a higher standard than just someone who knows how to Google. As in most things related to social security and Medicare, the majority of questions are about timing. This "expert" noted above failed to understand a fundamental pitfall of Medicare and HSA co-existence, and I really can't give him much of a break here.

Anybody doing any reading on HSAs should know that as you approach Medicare, you need to be really careful. Likewise, anybody claiming to be an expert on Medicare has to understand the potential problems associated with HSA contributions right around the time of enrolling in Medicare. It's really a fundamental question that's not all that fancy.

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