Tag Archives: Change in Coverage

HSA Contribution If Changing Coverage Next Year

This question was submitted by an HSA Edge reader. Feel free to send in your question today to evan@hsaedge.com.

My current insurance plan is HSA compatible, which I’ve had since January 1st, 2017. On January 1st of 2018 I am changing to a plan that is not HSA compatible. If I contribute this year and not in 2018, will I be penalized on the money contributed in 2017?

People are often concerned about over contributing to their HSA, likely on account of how easy it is to use (and abuse) the Last Month Rule. Its use allows you contribute more to your HSA in the current year, but binds you to the Testing Period, which requires you to maintain additional coverage into the following year. If you fail to do that, taxes and penalties await you.

The point to remember is you can never be penalized for contributing for months where you actually had coverage (see: Not Using the Last Month Rule when Coverage Changes). So in your case, you had coverage for 12 months in 2017 and are allowed to contribute for 12 months in 2017, which is 100% of the HSA contribution limit. In fact, the Last Month Rule doesn’t apply to you since you had coverage all year – you can’t possibly contribute more. But consider the scenario where you had coverage for only 7 months, say from June – December. You would have “earned” those 7 months and could contribute 7/12 of the contribution limit for the year without risk. However, you would also have the option to use the Last Month Rule and contribute the full year contribution limit, effectively contributing for those 5 months you weren’t covered.

This then puts you at risk since you are using the Last Month Rule to contribute more than you otherwise could have. This is allowed, and often a good idea, but if you fail to continue HSA coverage for the following 12 months (through next December), you will fail the Testing Period. This is where extra taxes and penalties come to bite you. In the prior example, those 5 months you didn’t have coverage would be added back to income (so they are taxed), plus a 10% penalty would be applied.

So using the Last Month Rule has a risk, but know that you can always play it safe and only contribute for the actual months you had coverage. If you know you are losing HSA coverage due to insurance/job/Medicare changes, do not use the Last Month Rule.

Note: if you need help with Last Month Rule calculations, or just need to file your Form 8889, please consider using my service EasyForm8889.com. It asks simple questions in a straightforward way and will generate your completed HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.

Can I Use My HSA to Pay for Spouse’s COBRA Premiums?

This question was submitted by an HSA Edge reader. Feel free to send in your question today to evan@hsaedge.com.

I will be going on Medicare soon however my spouse will not be eligible until 7 months later. She will continue on COBRA coverage on my old plan. Can I use my HSA account to pay premiums entirely for her COBRA plan? Several sites I have searched on state only the amount over 10% of income like a medical deduction.

Being on Medicare does not affect how money in your HSA can be spent. One of the great things about HSA’s is that your contributions remain yours forever, so you can keep them and spend them how you like. This is true whether you change insurance, employers, or even retire and go on Medicare. The real question here is whether you can treat your spouse’s COBRA continuation coverage as a qualified expense and pay it from your HSA.

We know that HSA contributions can be a great safety net, as they can be used to pay for insurance premiums when you are receiving unemployment benefits or are on COBRA coverage. We also know that all of the benefits of your HSA extend to your spouse and dependent’s qualified medical expenses. Luckily, these two uses combine such that you are allowed to pay for COBRA coverage for your wife or dependents.

More explicitly, IRS Form 969 calls out the COBRA coverage for spouses in the “Insurance Premiums” section:

HSA-pay-COBRA-coverage-for-spouse

Thus, I see no problem with using HSA funds to pay for your spouse’s or dependent’s COBRA continuation coverage. This is another great benefit of HSA’s in that they can be used to provide for your family when they are in need or need care. As an aside, that 10% rule you mention generally applies to deducting large scale medical expenses compared to your income, which is separate (and not as useful) as an HSA.

Note: to help track your spending on eligible COBRA insurance premiums, please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.

Do I Have Self-Only or Family Coverage for my HSA?

Overview

The contribution limit for your Health Savings Account is based on the type of insurance you have, in addition to your age and the tax year. For most people, determining if their insurance coverage is “self-only” or “family” is pretty straightforward: if their insurance plan only covers them, they have “self-only” coverage. On the other hand, if their insurance covers both them and a spouse, child, or dependent, they have “family” coverage. This determination is important for determining both your contribution limit and filling out line 1 on Form 8889.

Line 1 of 2017’s Form 8889 marked as “Self-only” provided by EasyForm8889.com.

However, there are some situations where this coverage determination is not so simple. For example:

Both my spouse and I have individual insurance plans
I had both self-only and family HSA coverage at the same time
I had self-only and family coverage at different times during the year
I had self only coverage for 6 months and family coverage for 6 months

In this article we will review the methodology for determining if your HSA insurance is self-only or family and address each of the scenarios listed above.

Rules to determine your HSA coverage

There are a few rules to follow to determine your HSA coverage type for the year. Form 969 provides blanket guidance with this paragraph:

HSA-self-only-or-family-coverage-rules

Note that going forward, coverage type means the “general” coverage you had for the year. This determination is important as it drives the answer to Line 1 on Form 8889 and not necessarily determining your contribution limit (more later). The following rules are listed in order of precedence, with the most important ones first:

If you had family coverage on December 1st, check the “family” box on Form 8889. This is because, regardless of the number of months covered, you will be eligible for the Last Month Rule at the higher family contribution limit.
If you had both self-only and family coverage during the year, choose the one that was in effect longest.
In a given month, if you had both self-only and family HSA coverage, that month counts as “family” coverage. This makes sense because the family coverage has a higher contribution limit. This may apply to you if you are calculating your coverage by month.

Special cases for determining HDHP coverage

We can apply the above rules to the coverage questions posed earlier to help you determine what type of coverage you should mark on Line 1:

1) Both my spouse and I have individual insurance plans

Even if both you and your spouse have separate self-only plans, you cannot “combine” them to be qualified for family coverage. Instead, you both need to open your own HSA and contribute the self-only amount to that respective HSA. You will need to file a separate Form 8889 for each HSA.

2) I had both self-only and family HSA coverage at the same time

Per the Form 8889 instructions, if you are covered by two HSA plans at once, and one of them is family coverage, you are considered family coverage. This may happen if you are transitioning from one plan to another.

3) I had self-only and family coverage at different times during the year

If you had different coverage during the year, your Form 8889 line 1 will be whichever was in effect the longest. So if you had family coverage from January – April, then self-only coverage from May – November, you would be considered “self-only” for the year. Although notice in this scenario that your contribution limit will actually be higher than the self-only contribution limit, on account of your 4 months at the higher family coverage rate.

4) I had self-only coverage for 6 months and family coverage for 6 months

This is really a toss up, but I would mark “Family” since that has the higher contribution limit. Won’t affect your contribution limit calculation but to me it looks cleaner to have “Family” on Line 1 followed by a higher-than-self-only contribution limit further down the page.

5) I have self-only coverage and my son/daughter has separate self-only coverage

This occurs when a parent has HSA coverage (say, through work) but their child (or other dependent) is on another self-only HSA eligible plan. In this case, the parent can only claim self-only coverage since their insurance only has 1 person on it – themselves. They would have to add the child to their insurance to claim Family. However, the child can also claim self-only coverage (and contribute to their own HSA) if they are not a dependent. See the article Your Adult Children Can Open an HSA for more information.

Note: if you need help with Line 1 or any Line in Form 8889, please consider using my service EasyForm8889.com to complete Form 8889. It asks simple questions in a straightforward way and will generate your HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.