Author Topic: Issues with HSA (Health Savings Account) (Read 2053 times)

Adventine · « **on:** October 11, 2024, 09:22:49 AM »

I need some help fixing a mistake I made with an HSA.

I opened an HSA account earlier this year, thinking that I qualified to contribute.

Unfortunately, it turns out I do not qualify for an HSA, for two reasons:

1. Deductible is not high enough. My HDHP has an in-network annual deductible of $1,500, which is just $100 short of the minimum annual deductible specified in IRS Publication 969.

2. I have an HRA (Health Reimbursement Account). IRS Publication 969 clearly states that “An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses can’t generally make contributions to an HSA.” My HRA does not fall under one of the exceptions.

Unfortunately, I already contributed the max this year ($4,150) and the value of the account already grew to $4,489.80 as of today.

I feel a bit stupid for not having checked this before I opened the account in the first place, but here we are. The US tax and healthcare systems are still relatively new to me (moved to this country a few years ago) and family health issues have taken up most of my attention this year.

Anyway, it’s time to fix my mistake.

I think I can fix this with the following steps:

1. Before Dec. 31, 2024, I need to sell all my positions in my Fidelity HSA and go to cash
2. Contact Fidelity to make sure the withdrawal is classified as a removal of excess contributions
3. Move the cash out of my HSA but keep the HSA account open with a 0 balance, since my situation may change in the future and I may qualify for an HSA eventually
4. Park the money in my Vanguard money market account (joint brokerage account with my spouse)
5. When we file our 2024 taxes (MFJ), we need to follow the IRS Publication 969 and Form 8889 instructions on excess contributions.

From Publication 969:

Quote

“You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.
- You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
- You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.”

Since I was never qualified to open an HSA account in the first place, I understand that the entire $4,150 is an excess contribution, and all the growth on that amount ($339.80 as of today) will be included in my tax return as “Other income.”

I live in Tennessee, so no HSA state taxes to worry about.

My spouse has his own fully funded HSA but we believe he is in the clear and doesn’t need to do anything because his HDHP meets the requirements to contribute to an HSA.

Is my thinking correct or am I missing something?

MustacheAndaHalf · « **Reply #1 on:** October 11, 2024, 09:54:57 AM »

You should NOT perform the withdrawal on your own. After you sell the assets, leaving cash, contact Fidelity to close the account for you.

"If you opened an HSA while ineligible, call Fidelity to close your HSA. There are no taxes or penalties for opening an HSA while ineligible, as long as you don't make contributions to it. Any contributions you do make will be subject to federal income taxes and/or penalties. Keep in mind: Even if while ineligible, you can consolidate any old HSAs into one HSA using a direct custodian-to-custodian transfer."
https://www.fidelity.com/go/hsa/faqs
(under "Eligibility")

secondcor521 · « **Reply #2 on:** October 11, 2024, 02:44:12 PM »

I would just call Fidelity and tell them that all of your 2024 contributions are an excess contribution and ask them to return it to you. If they need to sell your investments in order to do so they'll probably tell you that and do it for you.

Also, you have until 10/15/2025 to get it done; it doesn't need to be by 12/31/2024. But doing it sooner is probably easier and better.

Fidelity will send you a 1099-SA in the spring after your distribution for you to report on your 8889.

I would not leave the HSA open. I would close it. Fidelity can always open another one for you later when/if you do qualify.

If you made the contributions via your employer (doesn't sound like it), the the HSA contributions will be reflected on your W-2, and if you enter or import your W-2 into your tax program it should take care of putting the HSA contributions on Form 8889. Don't double enter them.

For future years, you may consider dropping your health insurance coverage and going on your husband's coverage. Typically this would enable the two of you to contribute the family maximum in any proportion to both of your HSAs (with a minor exception regarding catch up contributions).

Adventine · « **Reply #3 on:** October 14, 2024, 09:43:20 AM »

Thanks @MustacheAndaHalf and @secondcor521

Just got off the phone with a Fidelity rep. Well, the rep told me that I could go ahead and do it myself, as follows:

1. I should sell all my holdings (VTI), leaving only cash in the HSA
2. Follow the steps in this guide "Return of Excess HSA Contributions"
3. Wait 1 business day for the funds to be credited to my linked bank account
4. Contact Fidelity again to close the HSA

It seems straightforward enough. Is there any reason I should insist that Fidelity should do it for me like I was advised to do in this thread?

secondcor521 · « **Reply #4 on:** October 14, 2024, 01:11:58 PM »

Quote from: Adventine on October 14, 2024, 09:43:20 AM

Thanks @MustacheAndaHalf and @secondcor521

Just got off the phone with a Fidelity rep. Well, the rep told me that I could go ahead and do it myself, as follows:

1. I should sell all my holdings (VTI), leaving only cash in the HSA
2. Follow the steps in this guide "Return of Excess HSA Contributions"
3. Wait 1 business day for the funds to be credited to my linked bank account
4. Contact Fidelity again to close the HSA

It seems straightforward enough. Is there any reason I should insist that Fidelity should do it for me like I was advised to do in this thread?

No, not really. The main reason is that you want to make sure the distribution is coded as a return of excess contribution, but the form they pointed you should take care of that. Another reason is so that they can calculate the appropriate earnings, but in your fairly straightforward case the appropriate earnings is all of the earnings.

It should be fine to go ahead and use their form and the process they recommended to you.

MustacheAndaHalf · « **Reply #5 on:** October 14, 2024, 08:11:30 PM »

Quote from: Adventine on October 14, 2024, 09:43:20 AM

Thanks @MustacheAndaHalf and @secondcor521

Just got off the phone with a Fidelity rep. Well, the rep told me that I could go ahead and do it myself, as follows:

1. I should sell all my holdings (VTI), leaving only cash in the HSA
2. Follow the steps in this guide "Return of Excess HSA Contributions"
3. Wait 1 business day for the funds to be credited to my linked bank account
4. Contact Fidelity again to close the HSA

It seems straightforward enough. Is there any reason I should insist that Fidelity should do it for me like I was advised to do in this thread?

It sounds like Fidelity only gets involved in the last step (which wasn't clear from the FAQ).

News:

Author Topic: Issues with HSA (Health Savings Account) (Read 2053 times)

Adventine

Issues with HSA (Health Savings Account)

MustacheAndaHalf

Re: Issues with HSA (Health Savings Account)

secondcor521

Re: Issues with HSA (Health Savings Account)

Adventine

Re: Issues with HSA (Health Savings Account)

secondcor521

Re: Issues with HSA (Health Savings Account)

MustacheAndaHalf

Re: Issues with HSA (Health Savings Account)