## Help Understanding HSA Contribution Limit - Mid Year Insurance Change

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Topic Author
BarDownHockey
Posts: 19
Joined: Sat Jun 15, 2019 3:58 pm

### Help Understanding HSA Contribution Limit - Mid Year Insurance Change

Hi all, I've done some reading on this subject and I'm looking for help understanding the HSA contribution limit for our family this year. The scenario is that our family was under my wife's health insurance plan from Jan 1 2019 - July 30, 2019. That plan was not a HDHP (so not HSA eligible). Prior to 2019, we did not have any HSA eligible plans or any HSA accounts. We are all under 55 years old.

On July 31, 2019, my wife started a new job with a HDHP + HSA option. We decided to enroll in that plan with family coverage. Her employer contributed \$4,000 as a lump sum to the HSA in August and asked her to elect how much she wanted to contribute over the remainder of the year. We chose \$3,000 so that we could contribute up to the \$7,000 Family Coverage limit for 2019. However, tonight I was reading that because of our mid year insurance change and that we were only eligible for an HSA for part of the year, the our contribution limit is actually lower than \$7,000.

My questions are:
1. Is it correct that our contribution limit for 2019 is lower the \$7,000? *
2. Assuming we stay HSA eligible for the rest of 2019, I'm calculating our 2019 contribution limit to be \$2,916.66. This is based on being HSA eligible for 5 months (August - December) x \$7,000 per month, divided by 12. Is this the correct contribution limit?
3. Assuming our contribution limit is lower than \$7,000, is the limit just on the amount we contribute after any employer amount? Or is it a limit on the total employer + employee contribution. For example, if I've calculated our 2019 limit correctly as \$2,916.66, even if we elected not to contribute anything, since the employer deposited \$4,000, would that have put us over the limit?

* Note, I am ignoring the IRS "Last Month" rule that says if we are eligible on Dec 1, you can claim to be eligible for the entirety of 2019, provided we maintain HSA eligibility for all of 2020.

Thanks in advance for your help and let me know if there is any other information I need to provide.

Spirit Rider
Posts: 11178
Joined: Fri Mar 02, 2007 2:39 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

BarDownHockey wrote:
Fri Sep 06, 2019 8:02 pm
My questions are:
1. Is it correct that our contribution limit for 2019 is lower the \$7,000? *
Your prorated contribution limit will be < \$7,000.
2. Assuming we stay HSA eligible for the rest of 2019, I'm calculating our 2019 contribution limit to be \$2,916.66. This is based on being HSA eligible for 5 months (August - December) x \$7,000 per month, divided by 12. Is this the correct contribution limit?
Maybe. When did your wife's HDHP coverage begin? HSA eligibility is for any month with coverage on the 1st of the month. Your calculation is correct if your wife's coverage is effective anytime in August. If it was effective on 7/31, she will be eligible for July. The maximum pro-rated contribution amount would be 6 / 12 * \$7,000 = \$3,500.
3. Assuming our contribution limit is lower than \$7,000, is the limit just on the amount we contribute after any employer amount? Or is it a limit on the total employer + employee contribution. For example, if I've calculated our 2019 limit correctly as \$2,916.66, even if we elected not to contribute anything, since the employer deposited \$4,000, would that have put us over the limit?
It is on the total contributions from you, your employer and any friends or family. You are already over your prorated contribution limit just with the employer's contribution. Since that is true, any contributions she makes at this point are deemed to be made under the last month rule. She should not make any further contributions unless you have decided that she is likely to have an HDHP for all of 2020.
* Note, I am ignoring the IRS "Last Month" rule that says if we are eligible on Dec 1, you can claim to be eligible for the entirety of 2019, provided we maintain HSA eligibility for all of 2020.
You should not consider the last month rule when calculating the pro-rated contribution limit. However, if you have a reasonable certainty that she will have an HDHP plan for all of 2020. You should take advantage of the last month rule.

P.S. You can only make tax-free distributions from an HSA for qualified medical expenses with service dates on or after the establishment date of the HSA. In most states this is the date of the first contribution by you or the employer. For this reason, I suggest you open an HSA and make a nominal contribution at Fidelity or another HSA custodian that have no minimums and no administrative and/or investment fees. This gives maximum flexibility if you at some future date are the one with the HDHP/HSA.

Topic Author
BarDownHockey
Posts: 19
Joined: Sat Jun 15, 2019 3:58 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

Spirit Rider wrote:
Fri Sep 06, 2019 8:53 pm
2. Assuming we stay HSA eligible for the rest of 2019, I'm calculating our 2019 contribution limit to be \$2,916.66. This is based on being HSA eligible for 5 months (August - December) x \$7,000 per month, divided by 12. Is this the correct contribution limit?
Maybe. When did your wife's HDHP coverage begin? HSA eligibility is for any month with coverage on the 1st of the month. Your calculation is correct if your wife's coverage is effective anytime in August. If it was effective on 7/31, she will be eligible for July. The maximum pro-rated contribution amount would be 6 / 12 * \$7,000 = \$3,500.
Thank you, that was a really helpful response! Can you help me understand your reply to question 2? My wife’s new coverage was effective on July 31, 2019. The first part of your reply said HSA eligibility is for any month with coverage on the 1st of the month. Wouldn’t that mean that in order for her to have been eligible for July that she would have needed the coverage to be effective on July 1st, 2019?

Also, I’d say it’s 50/50 at best that she’ll be at this job for all of next year, so we’re not banking on the “last month” rule bailing us out. I do have a follow up on our best option to undo this situation that I’ll add once I better understand the answer to question 2.

Spirit Rider
Posts: 11178
Joined: Fri Mar 02, 2007 2:39 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

BarDownHockey wrote:
Fri Sep 06, 2019 9:59 pm
Thank you, that was a really helpful response! Can you help me understand your reply to question 2? My wife’s new coverage was effective on July 31, 2019. The first part of your reply said HSA eligibility is for any month with coverage on the 1st of the month. Wouldn’t that mean that in order for her to have been eligible for July that she would have needed the coverage to be effective on July 1st, 2019?
Yes, my stating of the rule was correct, but my implementation was clearly a brain failure.
Also, I’d say it’s 50/50 at best that she’ll be at this job for all of next year, so we’re not banking on the “last month” rule bailing us out. I do have a follow up on our best option to undo this situation that I’ll add once I better understand the answer to question 2.
That makes sense.

Topic Author
BarDownHockey
Posts: 19
Joined: Sat Jun 15, 2019 3:58 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

Spirit Rider wrote:
Fri Sep 06, 2019 10:55 pm
Yes, my stating of the rule was correct, but my implementation was clearly a brain failure.
No worries, the fact that you were replying at 10pm EST means a ton, so you get a pass on that one!

Ok, so my last question is to confirm the steps to correct this. Our family is limited to contributing \$2,916.66 this year and since the employer contributed \$4,000, we have an excess contribution of \$1,083.34. Since we don't want to rely on the last month rule, to avoid making this problem worse, the first thing we'll do Monday is to stop all employee contributions for the remainder of 2019 (to date none of the employee contributions have been made).

Option 1: Gamble with the "last month" rule. Ignoring any decisions on insurance plan options and contributions in 2020, if we were to fail being HSA eligible for all of 2020, the worst case impact would be calculated as: (excess contribution + earned income on the excess contribution) x both our ordinary income tax rate and 6% excise tax each year until the excess is corrected. The HSA funds are sitting in a core account earning about \$0.02 a month right now, so a simplistic estimate of the impact would be \$412.20: (\$1,085 x 32% tax bracket)+(\$1,085 x 6%).

Option 2: This year, request an excess distribution of \$1,083.34 from the HSA provider to us. The excess would then be treated as ordinary income in 2019. At tax time, the HSA provider would report this on Form 1099-SA and I believe I would have to flow this through some combination of Forms 5329 and 8889 to get the amount correctly included in our 1040 and income tax calculation for FY 2019.

Option 3: Request the employer to "pull back" \$1,083.34 of their contribution. This seems the least desirable because we'd not only lose out on the \$1,083.34 (either as income or HSA funds) but it also seems like it'd create the most risk of either the HSA provider or employer incorrectly reporting this on the W-2, 1099-SA or other forms. My only question here is are we required to pursue this option because the excess was the employer's contribution?

Spirit Rider
Posts: 11178
Joined: Fri Mar 02, 2007 2:39 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

1. She is deemed to have already taken advantage of the last month rule. The total contributions made to your HSA that wouldn’t have been made except for the last-month rule will be \$1,083.34 + any HSA contributions your wife has made this year before contributions are stopped. This amount subject to the testing period. The only gamble would be on any additional contributions.

There is no 6% excise tax penalty for 2019 as long as the total contributions are < her contribution limit (\$7,000 if full year with a family HDHP). If there is a testing period failure in 2020, all consequences happen for 2020. The total contributions made to your HSA that wouldn’t have been made except for the last-month rule are included in taxable income and subject to a 10% excise tax penalty.
2. Caution this option is extremely counter-productive. The amount is not an excess contribution and and removal will be treated as an ordinary distribution. If you don't have sufficient unreimbursed qualified medical expenses to cover this amount. It will be considered a non-qualified distribution subject to a 20% penalty. Not to mention, still subject to the taxation and penalty from the last paragraph from Option 1.
3. An employer can but is not required to request return of an employer contribution to the degree that an excess contribution contribution amount is solely caused by the employer. However, as you pointed out it would be counter-productive to do so. You would lose the the HSA funds. Even though you will lose the tax deduction no matter what. With the funds in the HSA they are almost certainly going to be tax-free so consider it like a Roth contribution. You most definitely are not required to ask them to do so. Don't ask, don't tell. Many employers consider this a benefit and will not ask for a claw back unless the themselves contributed more than the full year's contribution limit.
Finally, you should seriously consider using the last month rule for the full yearly contribution limit. Especially if your wife's W-2 Box 3 Social Security (SS) wages are < the SS maximum wage base. It will be exempt from FICA and there no recovery of that. That 7.65% offsets the 10% penalty, leaving on an effective penalty of 2.35%

Topic Author
BarDownHockey
Posts: 19
Joined: Sat Jun 15, 2019 3:58 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

Wow, I wish there was a better warning label on selecting a HDHP w/ HSA option mid year. The employer documents didn't quite explain enough. I think I understand most of what you're saying. Just for reference, my wife has not made any of her own contributions yet (there was a mixup in payroll).

Option 1a - Do not attempt to withdraw any part of the \$4,000 in the HSA (except for qualified medical expenses). Don't contribute anything else. No negative tax impact in 2019. If we pass the the testing period in 2020, no negative tax impact in 2020.
Option 1b - Same as above, and we also contribute \$3,000 to get up to the family max (only distributions are for qualified medical expenses). No negative tax impact in 2019. If we pass the testing period in 2020, no negative tax impact in 2020.
Option 1c - Same as 1a above, only we fail the testing period in 2020. No negative tax impact in 2019. In 2020, the \$1,083.34 would be subject to both ordinary income tax and a 10% excise tax (\$108).
Option 1d - Same as 1b above, only we fail the testing period in 2020. No negative tax impact in 2019. In 2020, \$4,083.34 would be subject to both ordinary income tax and a 10% excise tax (\$408). However, since my wife is below the SS minimum wage base, her \$3,000 contribution that's deducted from payroll is not subject to the 7.65% FICA (or \$229.50) in 2019. So the 2020 excise tax of \$408 is offset by the 2019 FICA savings of \$229.50, resulting in an effective penalty of \$178.50 across the two tax years.
Option 2 - This is the one I'm confused on. I thought I read that you can remove an excess contribution as long as you do it in accordance with the following rules:

IRS Form 8889 instructions:
EXCESS EMPLOYER CONTRIBUTIONS
[...] However, you can withdraw some or all of the excess employer contributions for 2018 and they will be treated as if they had not been contributed if:
• You make the withdrawal by the due date, including extensions, of your 2018 tax return (but see the following Note);
• You do not claim an exclusion from income for the amount of the withdrawn contributions; and
• You also withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

That's where I'm confused with what you wrote in your Comment #2 in your previous post. When I first read the form's instructions, I thought we could just have the \$1,083.34 withdrawn from the HSA and pay ordinary income tax on it. What do you mean when you said "the [\$1,083.34] is not an excess contribution"? Is that because, per your Comment #1, by taking the full \$4,000 employer contribution, we're already deemed to have used the "last month" rule and because the \$4,000 is still under the \$7,000 annual family limit, it's only any amount above \$7,000 that would be considered excess? My interpretation of the "last month" rule was that you're not locked into having used it until both the tax return due date and you haven't taken any corrective actions on excess before then. But I'm the first to admit I'm a novice here.

Option 3 - Ask the employer to remove the \$1,083.34. I had a hunch this wasn't required and agree with everything you said that we shouldn't even consider this.

Spirit Rider
Posts: 11178
Joined: Fri Mar 02, 2007 2:39 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

BarDownHockey wrote:
Sat Sep 07, 2019 2:03 pm
Option 2 - This is the one I'm confused on. I thought I read that you can remove an excess contribution as long as you do it in accordance with the following rules:
As I said previously, the total contributions made to your HSA that wouldn’t have been made except for the last-month rule are NOT an excess contribution. See IRS Publication 969, Health Savings Accounts (HSAs), Excess contributions, page 8:

CAUTION! 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.

The last bolded phrase means that the treatment of the distribution depends. If you have enough unreimbursed qualified medical expenses the distribution will be tax-free, but if not you will be subject to a 20% excise tax penalty for a non-qualified distribution.

Regardless of this distribution, you are still going to be subject to ordinary income taxes and the 10% excise tax penalty on the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. At best you have taken an unnecessary distribution. At worst you will get hit with a 20% excise tax penalty.

It gets worse. If you ask to remove this as an excess contribution. The custodian will remove the excess contribution and earnings and report this as such on a 1099-SA. They have no way to know that you are incorrectly requesting a removal of an excess contribution.

If you enter the 1099-SA into tax software or improperly completed Form 8899 (based on an incorrect Form 1099-SA) unknowingly, you have committed tax evasion. If done knowingly, you have completed tax fraud. The same is true if you don't report a testing period failure in tax software or fail to report as income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule.

I realize this is all very very complicated, but all the answers are in Publication 969 and the Form 8889 instructions.

Topic Author
BarDownHockey
Posts: 19
Joined: Sat Jun 15, 2019 3:58 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

That makes complete sense now. Publication 969 was the missing piece and I understand what you’ve been trying to explain now (thanks for posting the excerpt). I will read 969 in the morning in case I have any other questions. But it sounds like the best thing to do is leave everything alone, use the HSA for qualified medical expenses, and hope we meet the last month test throughout 2020. If not, in 2020 the excess will be treated as ordinary income and we’ll also have the 10% penalty. Our only other decision is whether or not to contribute the additional \$3,000 during 2019.

Truly, thank you for all the time and guidance you’ve spent here over the past few days. I can’t tell you how much I appreciate you helping us understand all of this.

Spirit Rider
Posts: 11178
Joined: Fri Mar 02, 2007 2:39 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

You are certainly welcome. I know how complex HSAs are. You can miss many of the complexities even diligently reading Publication 969. It is easy to miss some of these issues.

I personally was not aware of the Caution! I pointed out to you until many years ago. When a long time Boglehead forum member (Alan S.) pointed it out to me. Alan was an expert even then on IRAs, employer retirement plans (Pension, 401a, 401k, 403b, 457b, SARSEP and SIMPLE IRAs ) and HSAs.

It has been a hobby of mine to learn all of the nuances with references. I'm one of those people who likes to see the backing reference in the tax code, IRS regulations, IRS guidance and/or publications. Some things such as NUAs, 72t SEPP plans, etc... are too complex and I am happy to leave those to Alan and other more knowledgeable individuals

dh
Posts: 370
Joined: Sun Mar 13, 2011 8:01 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

I appreciate those of you who have expertise on HSA's. I switched my employer's coverage to a high deductible plan on July 1, 2019. I was over the age of 55 for all of 2019. Now that I am about to set up my HSA at Fidelity (independent of my employer), I understand that I can contribute \$4,500 for 2019.

Is that entirely tax deductible or is it prorated given my mid-year start?

Is this going to be nightmare come tax season?

Can I make a full 2020 HSA contribution on January 1, 2020?

I appreciate any and all replies!

Spirit Rider
Posts: 11178
Joined: Fri Mar 02, 2007 2:39 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

dh wrote:
Wed Sep 11, 2019 12:56 pm
I appreciate those of you who have expertise on HSA's. I switched my employer's coverage to a high deductible plan on July 1, 2019. I was over the age of 55 for all of 2019. Now that I am about to set up my HSA at Fidelity (independent of my employer), I understand that I can contribute \$4,500 for 2019.
If you have a self-only HDHP, your prorated contribution limit = (\$3500 + \$1000 = \$4,500) * 6 / 12 = \$2,250. If you are covered by a self-only HDHP on 12/1/2019, you can contribute the full \$4,500 for 2019 under the last month rule. However, if you do not remain covered until the end of the 12/1/2020 testing period. The amount contributed under the last month rule (\$2,250) will be subject to ordinary income taxes and a 10% penalty.
Is that entirely tax deductible or is it prorated given my mid-year start?
Reference above.
Is this going to be nightmare come tax season?
Not a tax nightmare, but there will be tax consequences if you tax advantage of the last month rule and don't remain eligible for the entire testing period.
Can I make a full 2020 HSA contribution on January 1, 2020?
Well maybe not the first, but the first business day of the year. However, if you do not remain HSA eligible for the entire year. Any amount > your prorated contribution will be an excess contribution. That amount along with earnings must be removed. Excess contributions made directly can not be deducted. Excess contributions by payroll reduction and earnings must be reported as ordinary income.

dh
Posts: 370
Joined: Sun Mar 13, 2011 8:01 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

Spirit Rider wrote:
Wed Sep 11, 2019 2:58 pm

If you have a self-only HDHP, your prorated contribution limit = (\$3500 + \$1000 = \$4,500) * 6 / 12 = \$2,250. If you are covered by a self-only HDHP on 12/1/2019, you can contribute the full \$4,500 for 2019 under the last month rule. However, if you do not remain covered until the end of the 12/1/2020 testing period. The amount contributed under the last month rule (\$2,250) will be subject to ordinary income taxes and a 10% penalty.
Thank you, Spirit Rider. I feel uncertain about moving forward. The most important thing seems to be staying in my HDHP policy for all of 2020. I certainly intend to do so, and only if life throws me a huge twist will that change.

I apologize in advance for this naive question ... in your response, are you saying that I can only contribute the full amount (\$4,500) on December 1, 2019? I was hoping to do it now and still take advantage of the last month rule from this point (Sept 2019) forward. I apologize if I am misinterpreting what you are saying in your response. Believe me, this helps a great deal!

Spirit Rider
Posts: 11178
Joined: Fri Mar 02, 2007 2:39 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

dh wrote:
Wed Sep 11, 2019 8:58 pm
are you saying that I can only contribute the full amount (\$4,500) on December 1, 2019? I was hoping to do it now and still take advantage of the last month rule from this point (Sept 2019) forward.
No, while the last month rule only becomes available when you are an HSA eligible individual on 12/1. You can make a contribution in excess of the prorated amount now. If you become ineligible prior to 12/1, it just becomes an excess contribution that must be returned.

This is same if you make the full year's contribution at the beginning of the year and fail to remain eligible for the whole year. The prorated excess contribution must be removed. While eligibility is determined monthly. Your contributions can be made at any time from 1/1 until 4/15 of the following year.

dh
Posts: 370
Joined: Sun Mar 13, 2011 8:01 pm

### Re: Help Understanding HSA Contribution Limit - Mid Year Insurance Change

Spirit Rider wrote:
Wed Sep 11, 2019 9:55 pm
dh wrote:
Wed Sep 11, 2019 8:58 pm
are you saying that I can only contribute the full amount (\$4,500) on December 1, 2019? I was hoping to do it now and still take advantage of the last month rule from this point (Sept 2019) forward.
No, while the last month rule only becomes available when you are an HSA eligible individual on 12/1. You can make a contribution in excess of the prorated amount now. If you become ineligible prior to 12/1, it just becomes an excess contribution that must be returned.

This is same if you make the full year's contribution at the beginning of the year and fail to remain eligible for the whole year. The prorated excess contribution must be removed. While eligibility is determined monthly. Your contributions can be made at any time from 1/1 until 4/15 of the following year.
Thank you! My insurance runs from July 1, 2019 - June 30, 2020. Additionally, I will not change from my current high deductible plan during next year's open enrollment period (spring of 2020). I really appreciate your comments. I will be making my 2019 full contribution (\$4,500) on Friday, and making my 2020 contribution (possibly bumped up for the new year) on the first business day in January 2020. I fully intend to remain in the high deductible plan for the long run. So, from what I understand I should be good to go for the full tax deduction.