HSA limits when HDHP eligible only first half year?

[teen persuasion]

We have a HDHP and HSA thru DH's employer.  DH is looking at leaving this employer at the end of the school year, and at this point we don't know what our health insurance will be afterwards.  I am trying to figure out how the IRS rules work re failure to maintain HDHP.  If I am reading it properly, next tax year we could have to include excess HSA contributions in income, and owe 20% tax, and our limit is not the family $6550 but some pro-rated amount, correct?

We have a mix of an employer lump sum, employer bi-weekly, and employee bi-weekly contributions.  We are not currently contributing to the max, but I was considering trying to max it out before the end.  Now I'm rethinking.

The thing that has me confused is the last-month rule.

[mwcpa]

Does this help, from IRS publication 969

"Example 1.

Chris, age 53, becomes an eligible individual on December 1, 2013. He has family HDHP coverage on that date. Under the last-month rule, he contributes $6,450 to his HSA.

Chris fails to be an eligible individual in June 2014. Because Chris did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), he must include in his 2014 income the contributions made in 2013 that would not have been made except for the last-month rule. Chris uses the worksheet in the Form 8889 instructions to determine this amount.



January -0-
February -0-
March -0-
April -0-
May -0-
June -0-
July -0-
August -0-
September -0-
October -0-
November -0-
December $6,450.00
Total for all months $6,450.00
Limitation. Divide the total by 12 $537.50

Chris would include $5,912.50 ($6,450.00 – $537.50) in his gross income on his 2014 tax return. Also, a 10% additional tax applies to this amount. "

So, in your case, it seems your deductible HSA would be limited to the months you are covered by a qualified plan... so, if he changes his job say on July 1 (6 months under a qualified plan) and insurance coverage to coverage that does not qualify for an HSA then only 6 months of HSA contributions can be made... meaning 1/2.... an excess is subject to a 10% penalty (fine), plus income tax (at your tax rate, not some arbitrary withholding tax number, so it could be as high as 39.6%)

[Deleted]

Teen, I got an HSA plan on the federal exchange. I'm not sure if you are planning on looking there, but they are available...

[teen persuasion]

Mwcpa, I looked at that example, but I'm unclear whether it applies to us.  It seems to be about someone who fully funded the HSA when they joined in the last month of the year, then lost eligibility in the next year.  We've had the HSA for a few years consecutively now, it it just the second half of this year we may not.  I am reading the "last month rule" as all about getting to contribute a full year's worth, even if you are only in an HDHP for one month, as long as you continue for the next year.  See the difference?

[teen persuasion]

May 3, 2014 7:13:26 GMT -5 oped said:

Teen, I got an HSA plan on the federal exchange. I'm not sure if you are planning on looking there, but they are available...

I would consider it, but given that we will be including the college kids on our health insurance, our income relative to family size puts us in the Medicaid range.   So we wouldn't be eligible for the subsidies.  I hate that part of the rules - let me purchase insurance with the subsidies if I want to, rather than force me to take Medicaid.

[Deleted]

I've got a related question and maybe it will help with teen persuasion's situation as well even though it's a little more complicated.

DH and I are both over 55 so the $1,000 extra on the max contribution applies. From 1/1/14 to 5/31/14 we were covered by my employer's HDHP plan (COBRA for the last 3 weeks of May but I don't think that matters- it was still HDHP). As of 6/1, DH went on Medicare, thus no longer an HDHP and I took out a private policy, not from the exchanges, with an HDHP because I'm too young for Medicare. I'd contributed only $2,831 into the HSA when I left the company. My guess as to what I can put in for all of 2014 is (5/12)*$7,450 for the 5 months when we both had the HDHP plus (7/12)*4,250 for the remainder of the year, when I'm the only one on the HDHP. That comes out to $5,583, meaning I can throw in another $2,700 or so. Correct? Thanks.

[mwcpa]

Athena...

using the examples in pub 969 you are on the right path....

[Deleted]

Thanks! I know I need to do the actual calculation. Sadly, after screwing up our state taxes last year (got cheap and tried to do State B by hand after downloading State A software since we live in State B but I had wages from A), I've concluded that the whole thing is just too da*n complicated and got a CPA to straighten out last year's mess and will probably use him for 2014, so I'll run it by him. It infuriates me that the forms are so complicated that an Excel guru who's been doing her own taxes for decades can't reproduce them correctly (too many "mini-worksheets") and now it's going to cost me money to have someone else do them.