Question

Understanding HSA contributions taxation

Forum|Forum|4 years ago
February 13, 2022
1 reply
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Hi TurboTax experts! Trying to better understand HSA taxation.

In 2020, I switched employment and chose High-Deductible plan and was covered under it Jun-Dec. As part of 2021 enrollment, I switched back to PPO instead.

Doing my 2021 taxes, I see I am being taxed on HSA in the two following manners:

1. Excess of 2,924 since I was only covered 7 months out of 12, and hence exceeding by this amount when contributing $7,100 last year. Get it.

2. I am also getting penalty of 10% on this amount due to last month rule and failing to maintain HDHP coverage. Is this right? I switched to a different plan, and now need to pay also penalty on this amount?

Just trying to increase my understanding here, so I won't repeat my mistakes next time. The amount of not huge, but just annoying to realize some of these gatchas.

Thank you for your advice in advance!

Gery

TurboTax Deluxe Online

J

JillS56

Yes, this is correct that there is a penalty of 10% under the last-month rule and failing to maintain HDHP coverage. Publication 969 (2021), Health Savings Accounts, and Other Tax-Favored Health describe the last-month rule.

Last-month rule.
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 if you didn’t otherwise have coverage.

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, 2021, through December 31, 2022).
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.

Based on your facts your test period would be beginning December 1, 2020, and run through December 31, 2021. Being that you switched back to your PPO during 2021 enrollment this would have been during your test period and would cause the 10% penalty to be assessed.

HSA - IRS Publication 969

IRS Form 8889

@gerygutnik

Edited