HSA Contribution timing

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
AnonJohn
Posts: 104
Joined: Wed Oct 07, 2015 2:45 pm

HSA Contribution timing

Post by AnonJohn » Wed Dec 06, 2017 9:52 pm

Hi all -

I'm a federal employee embarking on an HDHP / HSA health care option next year. Thanks to all the guidance on this forum, which helped me make what I hope is a good choice. I'm trying to figure out when I can make the first contribution to an HSA via payroll deduction. I know pass through contributions will arrive in February. My HSA account is already opened.

Coverage begins on January 7th, the beginning of the first full pay period of 2018. As I understand 26 U.S. Code § 223:

1. I cannot contribute, via payroll deduction (or otherwise), more than 1/12th of the allowable amount
2. Because I'm not covered on January 1, I cannot make HSA contributions until February 1.

Do I have this right? Or can I escalate deductions since the actual monthly limit is 1/12 of 6900-1500 = $450 but the statutory limit is $6900 / 12 = 575? Do I need to worry about the one month with three pay periods?

I think I lose the ability to do payroll deductions for one month, although I could make a deduction during the last pay period of January, which would result in contribution on February 9. But, under the last month rule, I can later make contributions up to the full amount, just not by payroll deduction.

Any clarifications welcome! It's sort of frustrating that I can just sign up for health care and an HSA and have everything start at the same time. Not a fan of pay periods that don't align with the boundaries of years!

John

User avatar
vinnydabody
Posts: 75
Joined: Sun Oct 18, 2015 7:25 am
Location: Chicagoland

Re: HSA Contribution timing

Post by vinnydabody » Thu Dec 07, 2017 12:03 am

I think you're making this more complicated than it is. I'm a Fed and in the same boat as you, but I'm just waiting for the plan to set up the HSA and pass through the first premium payment into the account in February. Then I'll set up payroll deductions for the rest of the calendar year. If I have an out of pocket payment before the account is funded I can reimburse myself or not.

Since our effective coverage date falls after 1/1 we would only be able to contribute (including the pass through amounts) a max of 11/12 of the limit, were it not for the last month rule. Because of the last month rule, we can max out our contributions provided we stay covered under the HDHP for twelve months following the last month of the year.

But it doesn't matter how you chunk up the contributions. You could contribute the entire amount in January if you like - the testing for excess contributions is done on an annual (aggregate) basis, not month-by-month (eligibility for calculating the contribution limit is done month-by-month). I'm just going to take my planned contribution and divide it up evenly through PP 24.

Spirit Rider
Posts: 6627
Joined: Fri Mar 02, 2007 2:39 pm

Re: HSA Contribution timing

Post by Spirit Rider » Thu Dec 07, 2017 12:08 am

Why do you think coverage begins on January 7th. That is not generally how employee benefit plans work. The plan year, HDHP coverage and HSA eligibility almost certainly begins on January 1st.

You misunderstand 26 U.S. Code § 223. The pay period is only applicable to when the first contribution by payroll deduction occurs. The beginning of the pay period has no bearing on anything:
  1. Your 2018 contribution limit will by default be based on the number of months you have HDHP coverage on the 1st of the month. What you can contribute by payroll deduction is subject to the employer's policies, but there is nothing in the regulations to prevent you from front loading the contributions.
  2. As I said, you are almost certainly covered by the HDHP on 1/1. You could contribute the full year's contribution limit on the first business day (1/2/2018) of the custodian by direct payment.
You may want to make a $1 contribution directly to the account on 1/2/2018, to ensure the HSA account is treated as established as early as possible in 2018. Based on the state of the custodian, an HSA account may only be considered established when there is a deposit made to the account.

The reason this could be important is because you may not use HSA funds to reimburse for qualified medical expenses with dates of service that occur before the HSA is treated as established. There is even a work around to get the establishment date to be first of the year.

AnonJohn
Posts: 104
Joined: Wed Oct 07, 2015 2:45 pm

Re: HSA Contribution timing

Post by AnonJohn » Thu Dec 07, 2017 10:38 am

Thanks for the helpful replies. I think I understand the aggregation and limit testing better. I'm torn between taking Vinny's approach and opting for easy / simplicy and trying to see if I can establish the HSA earlier. I expect some non-trivial expenses in January, and while I'll cash flow them I'd like the ability to take the associated HSA money out at a later date. I don't think I can do that unless there's money in the HSA?

I'm pretty sure I'm enrolled starting on 1/7 because, on enrollment, I got a letter in lieu of standard form 2809 saying I was "enrolled ... effective January 7". This is corroborated by language in the health plan brochure. Weird, I know ...

Writing this out I think I have no choice but to follow Vinny's plan. Not being covered on Jan 1 = no HSA contributions until February. But thanks for explaining how I can subsequently contribute the full amount.

User avatar
vinnydabody
Posts: 75
Joined: Sun Oct 18, 2015 7:25 am
Location: Chicagoland

Re: HSA Contribution timing

Post by vinnydabody » Thu Dec 07, 2017 10:49 am

Spirit Rider wrote:
Thu Dec 07, 2017 12:08 am
Why do you think coverage begins on January 7th. That is not generally how employee benefit plans work. The plan year, HDHP coverage and HSA eligibility almost certainly begins on January 1st.

You misunderstand 26 U.S. Code § 223. The pay period is only applicable to when the first contribution by payroll deduction occurs. The beginning of the pay period has no bearing on anything:
  1. Your 2018 contribution limit will by default be based on the number of months you have HDHP coverage on the 1st of the month. What you can contribute by payroll deduction is subject to the employer's policies, but there is nothing in the regulations to prevent you from front loading the contributions.
  2. As I said, you are almost certainly covered by the HDHP on 1/1. You could contribute the full year's contribution limit on the first business day (1/2/2018) of the custodian by direct payment.
You may want to make a $1 contribution directly to the account on 1/2/2018, to ensure the HSA account is treated as established as early as possible in 2018. Based on the state of the custodian, an HSA account may only be considered established when there is a deposit made to the account.

The reason this could be important is because you may not use HSA funds to reimburse for qualified medical expenses with dates of service that occur before the HSA is treated as established. There is even a work around to get the establishment date to be first of the year.
Just FYI, this is Federal Government. It's a different world. Because we're paid bi-weekly, when an employee changes plans during open season, the change is effective with the beginning of the first full pay period in January. For 2018, that is January 7. It's just a fact of life.

Spirit Rider
Posts: 6627
Joined: Fri Mar 02, 2007 2:39 pm

Re: HSA Contribution timing

Post by Spirit Rider » Thu Dec 07, 2017 11:02 am

Two very important points:
  1. If coverage begins on 1/7, make a direct contribution to the HSA account on that date. You most definitely do not need to wait until 2/1.
  2. You do not need to have the full amount of money in the HSA on the date of service. You can can fund at any future time and take distributions at any future time for qualified medical expenses that occur after the HSA is established. This why you want to do 1. above.

ChrisC
Posts: 565
Joined: Tue Jun 19, 2012 9:10 am
Location: North Carolina

Re: HSA Contribution timing

Post by ChrisC » Thu Dec 07, 2017 2:29 pm

AnonJohn wrote:
Wed Dec 06, 2017 9:52 pm
Hi all -

I'm a federal employee embarking on an HDHP / HSA health care option next year. Thanks to all the guidance on this forum, which helped me make what I hope is a good choice. I'm trying to figure out when I can make the first contribution to an HSA via payroll deduction. I know pass through contributions will arrive in February. My HSA account is already opened.

Coverage begins on January 7th, the beginning of the first full pay period of 2018. As I understand 26 U.S. Code § 223:

1. I cannot contribute, via payroll deduction (or otherwise), more than 1/12th of the allowable amount
2. Because I'm not covered on January 1, I cannot make HSA contributions until February 1.

Do I have this right? Or can I escalate deductions since the actual monthly limit is 1/12 of 6900-1500 = $450 but the statutory limit is $6900 / 12 = 575? Do I need to worry about the one month with three pay periods?

I think I lose the ability to do payroll deductions for one month, although I could make a deduction during the last pay period of January, which would result in contribution on February 9. But, under the last month rule, I can later make contributions up to the full amount, just not by payroll deduction.

Any clarifications welcome! It's sort of frustrating that I can just sign up for health care and an HSA and have everything start at the same time. Not a fan of pay periods that don't align with the boundaries of years!

John
Hmmmm, I never had this problem with front-loading my HSA payroll contributions when I was a Fed. I used to have payroll deductions (allowable allotments going to my HSA) that had me maxing out on my family and catch-up contributions around PP24 every year that I was a Fed and had an HDHP/HSA. In fact, in my last year of service, I maxed out on my HSA contributions in June 2013 and a pay period before I left Federal service. In fact, I even front-loaded maximum retirement contributions from January to June from payroll right before I retired the last PP in June -- that exceeded whatever 1/12 rule you mentioned above. Have the rules changed here?

AnonJohn
Posts: 104
Joined: Wed Oct 07, 2015 2:45 pm

Re: HSA Contribution timing

Post by AnonJohn » Thu Dec 07, 2017 3:51 pm

Spirit Rider wrote:
Thu Dec 07, 2017 11:02 am
Two very important points:
  1. If coverage begins on 1/7, make a direct contribution to the HSA account on that date. You most definitely do not need to wait until 2/1.
  2. You do not need to have the full amount of money in the HSA on the date of service. You can can fund at any future time and take distributions at any future time for qualified medical expenses that occur after the HSA is established. This why you want to do 1. above.
Thank you!

Post Reply