This question was submitted by HSA reader Adam. Send yours in to firstname.lastname@example.org
I got a family HDHP medical plan from my employer in July of 2015. Currently, my contribution is directly cut from paycheck and funded to my HSA. At the end of the calendar year 2015, if I am still below the limit for the year, can I contribute the remaining by an ACH bank transfer as long as it is before April 15, 2016? Will the additonal amount be treated as tax deductible? How do I report this additional contribution on the HSA form?
Yes, what you are suggesting is a valid path for funding your account. You are just combining the two methods of how the HSA tax deduction works:
- Each pay period, your HSA contribution is pre-tax so you avoid paying income tax on it.
- If you make an additional contribution, that will be done with after-tax dollars. When you file your taxes, the form will separate out employer vs individual HSA contributions. It will subtract your individual contributions from your taxable income, so you end up not paying taxes on that contribution, albeit later in the process.
See the article about IRS Tax Form 8889 for how the form works. As you can see, there are two different sections for employer contributions and individual contributions.
One thing to note about this strategy is that you may contribute > 50% of the Contribution Limit while you were insured for 50% of the year. This is legal per the Last Month Rule and Testing Period, and only becomes a problem if you change insurance (move to non-HSA) within the next year. That could then be classified as over contributing (because the IRS thinks you are “abusing” the system) and risk a penalty. See the full article about how the Last Month Rule and Testing Period work.