reasons to avoid indirect HSA rollover?

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Topic Author
exigent
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reasons to avoid indirect HSA rollover?

Post by exigent » Tue Dec 11, 2018 10:07 am

Hi all,

Aside from the slight hassle and the once-per-12-months limit on such transactions, are there any good reasons to avoid doing an indirect HSA rollover? For those of us with employer-based HSAs and a desire to hold the funds elsewhere, this will be an ongoing thing. My current plan is to sweep the funds over every 12 months (plus a day) using an indirect rollover instead of a direct transfer, thereby (hopefully) avoiding transfer fees.

More generally, how important is it for the custodian releasing the funds to code the distribution a certain way? Is it enough for the custodian receiving the rollover to code it as such? I ask because my particular custodian (Optum via my employer) specifies that online distribution requests will be coded as "normal" distributions and that you have to call to get them coded any other way. They also charge a $20 transfer fee, and this seems like a way for them to enforce/collect it. But if I can just request the distribution online and have it coded properly at the other end, I can avoid that hassle/fee.

Thanks, exigent
Last edited by exigent on Tue Dec 11, 2018 10:15 am, edited 1 time in total.

Spirit Rider
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Re: reasons to avoid indirect HSA rollover?

Post by Spirit Rider » Tue Dec 11, 2018 10:15 am

An indirect rollover by definition is a normal distribution followed by a rollover contribution.

No specific coding is required on the distribution. The contribution must be coded as a rollover or it will be treated as a normal contribution using up the contribution limit or be an excess contribution.

Topic Author
exigent
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Re: reasons to avoid indirect HSA rollover?

Post by exigent » Tue Dec 11, 2018 10:18 am

Spirit Rider wrote:
Tue Dec 11, 2018 10:15 am
An indirect rollover by definition is a normal distribution followed by a rollover contribution.

No specific coding is required on the distribution. The contribution must be coded as a rollover or it will be treated as a normal contribution using up the contribution limit or be an excess contribution.
Thanks. Maybe it's just funny wording on their end, as the website makes it sound like you need to contact them to specify that it's for a rollover. My plan was just to transfer to my bank and then send a check to Fidelity along with their rollover form. Sounds like that would work.

Spirit Rider
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Re: reasons to avoid indirect HSA rollover?

Post by Spirit Rider » Tue Dec 11, 2018 10:26 am

It would. Only a trustee -> trustee transfer requires special handling because it is not reported on a 1099-SA.

lstone19
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Re: reasons to avoid indirect HSA rollover?

Post by lstone19 » Tue Dec 11, 2018 2:02 pm

HSAbank does that same thing. Makes it sound like a rollover needs special coding. But it doesn't. And they want an explanation for the distribution (e.g. doctor visit, prescription). I just mark Other as it's really none of their business. I expect if pushed they'll just say that's to make record-keeping easier for me (I keep detailed records so I don't need their help).

Bigger pain is their $2,500 / day limit to on-line distribution requests. So it's taking seven days for me to get it all out after which I'll write a check to Fidelity (the once every 12 months is on rollover contributions, not distributions).

In the unlikely event they were to ask why we're taking it out like that, I'd just say my wife and I have our planned order of drawing down retirement funds and this is the point where we draw down the HSAs against all those saved receipts, bills, and EOBs. If they were to ask why everything is "Other", I'd just say I maintain my own records and the amount is multiple expenses so can't be put into one of their reason buckets. Recordkeeping is the taxpayer's responsibility, not the custodian's.

Topic Author
exigent
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Re: reasons to avoid indirect HSA rollover?

Post by exigent » Tue Dec 11, 2018 2:40 pm

Thankfully, Optum doesn’t have a similarly low limit. I was just able to pull out $33k in one shot. Otherwise it would have close to 2 weeks (or over two weeks, if limit it per business day) to get it done.

lstone19
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Re: reasons to avoid indirect HSA rollover?

Post by lstone19 » Tue Dec 11, 2018 2:47 pm

b0B wrote:
Tue Dec 11, 2018 2:10 pm
lstone19 wrote:
Tue Dec 11, 2018 2:02 pm
Bigger pain is their $2,500 / day limit to on-line distribution requests. So it's taking seven days for me to get it all out after which I'll write a check to Fidelity (the once every 12 months is on rollover contributions, not distributions).
Could someone please confirm if this understanding is correct?

Can you combine multiple distributions, from one or multiple HSAs, into a single HSA rollover contribution?
From IRS publication 969:
You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period.

Spirit Rider
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Re: reasons to avoid indirect HSA rollover?

Post by Spirit Rider » Tue Dec 11, 2018 6:07 pm

b0B wrote:
Tue Dec 11, 2018 3:12 pm
lstone19 wrote:
Tue Dec 11, 2018 2:47 pm
b0B wrote:
Tue Dec 11, 2018 2:10 pm
lstone19 wrote:
Tue Dec 11, 2018 2:02 pm
Bigger pain is their $2,500 / day limit to on-line distribution requests. So it's taking seven days for me to get it all out after which I'll write a check to Fidelity (the once every 12 months is on rollover contributions, not distributions).
Could someone please confirm if this understanding is correct?

Can you combine multiple distributions, from one or multiple HSAs, into a single HSA rollover contribution?
From IRS publication 969:
You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period.
Thanks. I found a link now.
https://www.irs.gov/publications/p969#e ... 1000204068
https://www.irs.gov/publications/p969

I still find it unnervingly ambiguous e.g. "...amounts...amount..." Is it singular or plural?
You have it exactly backwards and are misinterpreting the Pub 969 quote. Yes, you can only make one rollover contribution per twelve-month period, but the period is based on the distribution and not the contribution. One distribution and one or more contributions, fine. Many distributions and one or more contributions, disaster.

I hate to be the bearer of extremely bad news. Only the first distribution amount of $2,500 is eligible for tax-free rollover. All the other distributions that exceed your unreimbursed qualified medical expenses are non-qualified distributions, subject to ordinary taxes and if < age 65, subject to a 20% excise tax penalty, are not eligible for rollover and constitute excess contributions if not removed.

If Alan S. sees this he can confirm.

Spirit Rider
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Re: reasons to avoid indirect HSA rollover?

Post by Spirit Rider » Tue Dec 11, 2018 6:54 pm

Hopefully Alan S. can confirm, but I have seen him make this exact point several times. I just wanted to get this out there to have anyone else pause before taking multiple distributions.

This should never be a problem if you are making one distribution for rollover purposes per twelve month period.

lstone19
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Re: reasons to avoid indirect HSA rollover?

Post by lstone19 » Tue Dec 11, 2018 10:25 pm

Spirit Rider wrote:
Tue Dec 11, 2018 6:07 pm
b0B wrote:
Tue Dec 11, 2018 3:12 pm
lstone19 wrote:
Tue Dec 11, 2018 2:47 pm
b0B wrote:
Tue Dec 11, 2018 2:10 pm
lstone19 wrote:
Tue Dec 11, 2018 2:02 pm
Bigger pain is their $2,500 / day limit to on-line distribution requests. So it's taking seven days for me to get it all out after which I'll write a check to Fidelity (the once every 12 months is on rollover contributions, not distributions).
Could someone please confirm if this understanding is correct?

Can you combine multiple distributions, from one or multiple HSAs, into a single HSA rollover contribution?
From IRS publication 969:
You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period.
Thanks. I found a link now.
https://www.irs.gov/publications/p969#e ... 1000204068
https://www.irs.gov/publications/p969

I still find it unnervingly ambiguous e.g. "...amounts...amount..." Is it singular or plural?
You have it exactly backwards and are misinterpreting the Pub 969 quote. Yes, you can only make one rollover contribution per twelve-month period, but the period is based on the distribution and not the contribution. One distribution and one or more contributions, fine. Many distributions and one or more contributions, disaster.

I hate to be the bearer of extremely bad news. Only the first distribution amount of $2,500 is eligible for tax-free rollover. All the other distributions that exceed your unreimbursed qualified medical expenses are non-qualified distributions, subject to ordinary taxes and if < age 65, subject to a 20% excise tax penalty, are not eligible for rollover and constitute excess contributions if not removed.

If Alan S. sees this he can confirm.
No, I don’t think I’m misinterpreting Pub. 969, I think, having done more research, that the IRS has it backwards in Pub. 969. Pub. 969 is very clear in saying one “contribution”, not one “distribution”. But now having seen the underlying federal code, it does indicate one distribution and is silent about contributions.

In my case, it is not extremely bad news at all as we have about $10,000 in medical expenses pending reimbursement from an HSA. Plus, I’m only on day 2 of the distributions so there’s only $2,500 caught up in this. While I’d prefer to have it in the HSA, our retirement accounts distribution plan looks to have us taking this out by mid-2019 anyway so not a serious error at this point.

Not that I want to go there, it would make an interesting Tax Court case - “I relied on the plain-language interpretation in an IRS publication which had it incorrect.”
Last edited by lstone19 on Mon Jan 14, 2019 9:09 am, edited 1 time in total.

lstone19
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Re: reasons to avoid indirect HSA rollover?

Post by lstone19 » Tue Dec 11, 2018 11:55 pm

Also, It appears, given that these distributions occurred yesterday and today, that I can just send them back as mistaken distributions. IRS rules allow a distribution to be returned if it is "the result of a mistake of fact due to reasonable cause". I relied on the facts presented in Pub. 969 which turned out to be inconsistent with law. Seems like "a mistake of fact due to reasonable cause".

I suspect Spirit Rider will disagree since he's stated I misinterpreted Pub. 969 but my view is it is written incorrectly (the website https://www.hsaedge.com/2016/10/08/how- ... hsa-funds/ puts forth a view the same as mine - in particular, they say "The IRS puts a limit on the number of HSA rollovers that can occur during a year, which is not necessarily a calendar year. But they note that this restriction is on the receiving HSA account, not the originating account").

Spirit Rider
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Re: reasons to avoid indirect HSA rollover?

Post by Spirit Rider » Wed Dec 12, 2018 1:01 am

You acknowledge that 26 U.S. Code § 223 - Health savings accounts, (f) Tax treatment of distributions, (5) Rollover contribution, A and B; is clear that the 1-year period limitation is on the distribution and not on the contribution and is entirely consistent with 26 U.S. Code § 408 - Individual retirement accounts, (d) Tax treatment of distributions, (3) Rollover contribution A and B. They both are unambiguous.

The IRA and HSA code sections are virtually identical and IRAs have 29 more years of established precedent. The fact that it is the distribution and not the contribution is well established. Here is the language from IRS Publication 590-A, which is far more precise than the language from Publication 969.

Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you can’t, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also can’t make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. Rules apply to the number of rollovers you can have with your traditional IRAs. See Application of one-rollover-per-year limitation below.

However, I agree with you that the language in Publication 969 is ambiguous if not downright misleading. I also 100% support your view that this is; "the result of a mistake of fact due to a reasonable cause." and eligible to be returned as mistaken distributions.

P.S. The quote from your link to the "HSA Edge" is totally false. I have no idea even who this is.

Topic Author
exigent
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Re: reasons to avoid indirect HSA rollover?

Post by exigent » Wed Dec 12, 2018 7:50 am

lstone19 wrote:
Tue Dec 11, 2018 11:55 pm
Also, It appears, given that these distributions occurred yesterday and today, that I can just send them back as mistaken distributions. IRS rules allow a distribution to be returned if it is "the result of a mistake of fact due to reasonable cause". I relied on the facts presented in Pub. 969 which turned out to be inconsistent with law. Seems like "a mistake of fact due to reasonable cause."
This would be my course of action. It seems pretty easily defensible if anyone ever asked.

As an aside, that $2500 distribution limit seems super shady in this context. They charge a fee for direct transfers, and then put limits in place that have the effect of preventing most indirect rollovers, thereby forcing you to pay a fee.

I’m glad that my employer’s preferred custodian doesn’t play games like this. Their investment options are trash, but at least I can access my money on my own terms.

SuzBanyan
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Re: reasons to avoid indirect HSA rollover?

Post by SuzBanyan » Wed Dec 12, 2018 11:58 am

exigent wrote:
Wed Dec 12, 2018 7:50 am

This would be my course of action. It seems pretty easily defensible if anyone ever asked.

As an aside, that $2500 distribution limit seems super shady in this context. They charge a fee for direct transfers, and then put limits in place that have the effect of preventing most indirect rollovers, thereby forcing you to pay a fee.

I’m glad that my employer’s preferred custodian doesn’t play games like this. Their investment options are trash, but at least I can access my money on my own terms.
Is there no other way to take a distribution other than by online request with the associated $2500 limit? Can you use a check?

When we set up our HSA, my employer’s preferred custodian required a payment of $25 for checks, but printed out 8 “courtesy” checks for free. I used the courtesy check to make an annual rollover for 6 years. Then the custodian sold to another bank and the account number changed. The new custodian wanted $5 to print a courtesy check but offered — as this was brick and mortar bank around the corner from my office — to give me cash. As I didn’t fancy carrying several thousand dollars down the street to my personal bank, they relented and printed a check for me. This year, they printed 4 checks with no drama.

lstone19
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Re: reasons to avoid indirect HSA rollover?

Post by lstone19 » Fri Dec 21, 2018 6:29 pm

exigent wrote:
Wed Dec 12, 2018 7:50 am
lstone19 wrote:
Tue Dec 11, 2018 11:55 pm
Also, It appears, given that these distributions occurred yesterday and today, that I can just send them back as mistaken distributions. IRS rules allow a distribution to be returned if it is "the result of a mistake of fact due to reasonable cause". I relied on the facts presented in Pub. 969 which turned out to be inconsistent with law. Seems like "a mistake of fact due to reasonable cause."
This would be my course of action. It seems pretty easily defensible if anyone ever asked.

As an aside, that $2500 distribution limit seems super shady in this context. They charge a fee for direct transfers, and then put limits in place that have the effect of preventing most indirect rollovers, thereby forcing you to pay a fee.

I’m glad that my employer’s preferred custodian doesn’t play games like this. Their investment options are trash, but at least I can access my money on my own terms.
It just gets crazier. I did send it back as a mistaken distribution but it's been eight days and it has not posted. Talked to them today and they said they post with in two business days of receipt but no explanation of why it hasn't (no notes on the account indicating anything). I'm only a couple hundred miles from their lockbox for mail so even allowing for holiday mail delays, they should have had it at least three days ago, probably four.

I can't wait to have HSAbank out of my life. Nothing happens quickly with them - everything takes at least a day longer than it should or in this case, several days longer.

lstone19
Posts: 554
Joined: Fri Nov 03, 2017 3:33 pm

Re: reasons to avoid indirect HSA rollover?

Post by lstone19 » Wed Dec 26, 2018 4:14 pm

And to close out my issue directly above, HSAbank finally posted the reversal of the distributions on Monday, seven business days after I mailed it to them. Now I just need to wait for Fidelity to process the request for a direct transfer. At this point, I'm probably better that it not make it to HSAbank until January so I can pick up another month of their anemic interest (but something is better than nothing).

Spirit Rider
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Re: reasons to avoid indirect HSA rollover?

Post by Spirit Rider » Wed Dec 26, 2018 5:03 pm

I'm glad it worked out

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