HEALTH SAVINGS ACCOUNT (HSA) PROCEDURE MANUAL

Transcription

1 HEALTH SAVINGS ACCOUNT (HSA) PROCEDURE MANUAL January 1, 2018 JM Consultants 6930 Glory Road Baxter, MN

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3 Introduction This manual on Health Savings Accounts (HSAs) is offered by JM Consultants. The material covered is believed to be accurate, but due to the nature of changes in the rules, regulations and procedures governing HSAs and the release of information by the Internal Revenue Service (IRS), JM Consultants cannot guarantee the accuracy of this material. This Procedures Manual reflects the rules regarding HSAs as of January 1, If you have any questions about the material in this Manual or as to the accuracy or timeliness of the materials please be sure to contact JM Consultants. This Procedures Manual only reflects the rules, regulations and procedures of the Federal Government regarding HSAs and does not any part of any particular state rules, regulations or procedures. No part of this manual may be reproduced in any form by any means without the written permission of JM Consultants. Published by: JM Consultants 6930 Glory Road Baxter, MN jmcmnelson.com PLEASE NOTE: JM Consultants does NOT provide legal, accounting, investment or tax advice. In important matters like this you must rely on your own legal, accounting, investment or tax professionals before making any decision. JM Consultants, Baxter, MN

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5 Table of Contents Page Introduction 2 Background of Health Savings Accounts ABEL 529A Accounts Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Appendix A Appendix B Establishing HSAs Amending HSAs High Deductible Health Plans (HDHP) HSA Contributions HSA Rollovers and Transfers...42 HSA Investments...48 HSA Distributions..50 Excess HSA Contributions 59 HSA Beneficiary Options...67 HSA Reporting Requirements...69 Mistaken Distributions...79 HSAs and Regulation E and FDIC/NCUA 82 HSAs and Fiduciary Responsibility 85 HSA Questions and Answers and 2017(DRAFT) Form HSA Resources.. 98 JM Consultants, Baxter, MN

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7 Background of Health Savings Accounts Health Savings Accounts (HSAs) were created by the Medicare Prescription Drug, Improvement, and Modernization Act of 203 and became available to eligible individuals in It is a tax advantaged financial account, similar to Individual Retirement Arrangements (IRAs), established by an individual to help pay for qualified medical expenses.one of the key features of the HSA is for HSA Owners to use pre-tax dollars to pay for their qualified medical expenses as well as the qualified medical expenses of his or her spouse and dependents. Prior to HSAs being created, Congress had created, in 1996, its predecessor know as Medical Savings Accounts (MSAs). These MSAs were subsequently renamed Archer MSAs honoring Texas Congressman Bill Archer who was instrumental in getting the legislation passed. The MSA was originally intended to be a pilot program that would run from 1997 through After gathering and reviewing data from the MSA/Archer MSA program Congress decided to make the program permanent but with significant improvements. It was due, in part, to this Congressional MSA analysis that the HSA legislation was written. Archer MSAs are till operational today. Archer MSAs are also discussed in this Procedures Manual. With the tax benefits associated with HSAs, HSAs have proven to be a very popular program and knowing the rules, regulations and procedures about HSAs can the financial institution have a successful HSA program for its own employees and for their customers and the customers employee. The Affordable Care Act (ACA), also known as Obamacare can indirectly affect HSAs. Full implementation of ACA has still not taken affect, and there is some doubt now, that it ever will. AND, the new Trump Administration seems intent on improving HSAs as it modifies the ACA. Certain ACA limits may now affect existing medical plans. Individuals must rely on their insurance provider to make sure they are eligible to make HSA Contributions. HSA Custodian/Trustees are NOT RESPONSIBLE for making this determination! While some ACA limits and requirements mat be different than those for HSAs, the ACA does NOT change the HSA limits and requirements discussed in this procedure manual. For instance, the 2017 ACA out-of-pocket limits for HDHPs were $7,150 for Individual Policies and $14,300 family Policies. The HSA limits for 2017 were $6,550 and $13,100 respectively. The 2018 the ACA limits are $7,350 and $14,700. The HSA 2018 limits are $6,650 and $13,300. REMEMBER: It is the HSA Owner s responsibility to determine HSA Eligibility, NOT THE RESPONSIBILITY OF THE HSA CUSTODIAN/TRUSTEE! Growth of HSAs JM Consultants, Baxter, MN

8 Because of the rising costs of Medical Insurance Premiums and because of the uncertainty of ACA, HSAs have seen a growth to an estimated 20,000,000 account with an estimated $37 billion in They have recently seen 20% annual increases. Future of HSAs No one can really know for sure but as of this publication date the future looks promising. Both major political parties and the Trump Administration like HSAs and actually talk about improving them. 529A ABLE ACCOUNTS (Achieving a Better Life Experience) PLEASE NOTE: ABEL Accounts are NOT fully discussed in this HSA Manual. Internal Revenue Code (IRC) 529A ABLE Accounts were created by the Tax Increase Prevention of They are designed to accumulate financial resources to assist individuals with special needs. Contributions are NOT deductible, have tax-free growth and have special distribution purposes. Distributions for qualified medical expenses are tax-free. ABLE Accounts can be established through an individual s state, state agency or instrumentality. They are NOT ESTABLISHED like HSAs, IRAs or Coverdell Education Savings Accounts (CESAs). Annual contributions can be as much as $14,000 for an individual who is blind or disabled by age 26. A rollover of an ABEL Account is an amount from another ABEL Account for the same individual, OR from an ABEL Account for a family member of the individual. Like IRAs, the 60-Day Rule applies and there can only be one such rollover per year, per person. However, remember, ABEL Accounts ARE NOT HSAs, IRAs or CESAs! JM Consultants, Baxter, MN

9 Chapter 1 Establishing HSAs Who is Eligible to Establish HSAs? While many individuals are eligible to establish HSAs, NOT EVERYONE is! Nothing in the ACA has changed these requirements. However, as noted earlier, some ACA requirements may affect HSAs in the future. In order to be eligible to establish an HSA, an individual must meet ALL of the following four requirements: Requirement #1 The individual MUST BE covered by an HSA-Eligible High Deductible Health (HDHP). To be eligible the individual must be covered by the HSA-Eligible HDHP on the first day of the month for which a contribution is made. (Limited exceptions will be discussed later in this manual, Chapter 3).AND Requirement #2 The individual MUST NOT be covered by another health plan that is NOT an HDHP (Limited exceptions will be discussed later in this manual, Chapter 3). AND Requirement 3 The individual CANNOT be enrolled in Medicare. CAUTION: When applying for Medicare, HSA Owners must be sure to ask the Social Security Administration Office about HSAs. There are certain situations that cause a sixmonth retroactive activation of Medicare which could disqualify an individual from making HSA Contributions and could cause an excess contribution situation for contributions already made. AND Requirement #4 The individual CANNOT be claimed or be eligible to be claimed as a dependent on another individual s Personal Federal Income Tax Return. For instance, an HSA Owner could be claimed on her son s tax return, but is not. Even though she is not claimed by her son, she is NOT HSA-ELIGIBLE! It is based on the tax status of the individual. Example: John does NOT have his 23 year old daughter on his HDHP through his employer. Jill is working part-time and wants to make HSA contributions. Since her father is still the near-sole source of Jill s income, she can be claimed by her father on his personal tax return. Even though John does NOT claim her, allowing Jill to claim herself on her personal tax return, Jill is NOT HSA-ELIGIBLE! IMPORTANT NOTE: There is no compensation or earned income requirement for HSAs as there is for IRA contribution eligibility. JM Consultants, Baxter, MN

10 Caution: When applying for Medicare, HSA Owners must be sure to ask the Social Security Administration about HSAs. There are certain situations that cause a six month retroactive activation of Medicare which could disqualify an individual from making HSA contributions, and could cause an excess contribution situation for any contributions already made. Example: An HSA Owner attains age 65 on July 10, Whether or not he can contribute for 6 or 7 months will be determined by the SSA as to when he is eligible for Medicare. If he is eligible as of July 1, then he can contribute 6/12ths of the annual amount. If he is not eligible until August 1, then he can contribute 7/2ths. If however he is retroactively active to January 1, he cannot contribute anything for HSAs as Individual Accounts It should be noted that HSAs are individually-owned accounts. There is no such thing as a joint HSA even though the HSA Owner may have Family Coverage under the HDHP and even though the HSA Owner may, according to the HSA Custodian s or Trustee s policies and according to a signed POA, allow an additional authorized signer or signers to withdraw funds from the HSA. HSAs must always be an individual account! While an HSA contribution based on a Family HDHP can be split between the spouses HSAs, the contributions cannot be adjusted if either or both spouses have self-only coverage. In that case, the one spouse s contribution must go into his/her HSA and the other spouse contribution must go into that spouse s HSA. Catch-up contributions can also not be adjusted. Each spouse s catch-up contribution must go into their own, personal HSA. Self-Only HDHP Policy and Self-only Non-HDHP Policy If one spouse has self-only HDHP coverage and the other spouse has a self-only non-hdhp policy, the HSA contribution is limited to the statutory limit for self-only coverage and must be contributed into the HSA of the spouse owning that HSA-eligible policy, as long as otherwise he or she is HSA-eligible. Self-Only HDHP Policy and Self-Only HDHP Policy If both spouses have self-only HDHP coverage, each spouse can have their own HSA and contribute each self-only contribution. They can NOT contribute into each other s HSA, putting more than the self-only limit in one of the HSAs. An HSA Custodian or Trustee is not required to verify that the customer is an HSA-eligible individual but may choose to use a form designed for such a purpose. Family HDHP Policy and Family HDHP Policy With both spouses having Family HDHP coverage, the contribution limitation for both spouses follows the rules for just one Family HDHP coverage amount. JM Consultants, Baxter, MN

11 Self-Only HDHP Policy and Family HDHP Policy With both spouses having HDHP coverage, the contribution limitation for both spouses follows the rules for just one Family HDHP coverage amount. Titling HSAs And even if the HSA Owner has a family HDHP, the HSA is still an individual account, NOT A JOINT ACCOUNT OR CO-OWNED ACCOUNT. An HSA cannot be a joint account. The investments cannot be joint investments. The checking accounts, debit cards, stored value cards, etc. cannot be joint accounts. While the definition for qualified medical expenses remains the same, the HSA must be an individual account with individually titled investments. Any additional signers names cannot even be on the account in any manner. PLEASE NOTE: None of the HSA accounts/investments can have multiple names or different names than the HSA Owner, which must be only one individual. It makes no difference what the financial institution s policy is for other account. It is no different than the rules governing IRAs. IRAs cannot have multiple names on them either. You don t and can t add a Power of Attorney s name to the IRA Investment. Let s look at it from another perspective. When a business has multiple signatures for its accounts, you do not put all of their names on the business accounts, checking accounts or investments. They cannot be set up as joint accounts! When the HSA Owner wants to have multiple signatures, for instance a spouse, the account must be set up individually with multiple signatures allowed. They can NOT be set up as joint accounts. This also means the additional signers CANNOT be named/listed on any part of the checks, debit cards or any other investment and cannot be issued in the name of the additional signers. The additional signers are named in the financial institution files but the checks and/or debit cards are issued ONLY in the name of the HSA Owner. While this can cause problems at times, the HSA cannot appear to have multiple owners. It is also recommended that since an HSA is a legal trust (as is an IRA) even if it is a custodial account, that the HSA Owner supplies the HSA Custodian/Trustee with a Power of Attorney (POA) allowing the additional, authorized signers. Just having an internal Signature Card is not sufficient. (Many forms vendors have POA forms for this specific purpose. If your forms vendor does not have such a form the HSA Custodian/Trustee should review this matter with their legal counsel to design a Single-Purpose POA for the HSA. JM Consultants has seen simple, single-purpose POAs designed for this situation. The POA should be clear as to what authority is being given. A copy of any POA should be part of the permanent file for the HSA Owner. And of course, it must comply with all state laws. JM Consultants, Baxter, MN

12 HSA Eligibility and Medicare Medicare affects the eligibility of HSA Owners. When an individual reaches the age of 65, Medicare Part A automatically starts once enrolled for Social Security benefits. If the HSA Owner allows it to begin, the individual is no longer eligible to make HSA contributions. However, individuals are allowed to opt out of Medicare Part A. If they do, they will remain eligible to make HSA contributions. Opting out may also cause some problems of eligibility. Opting out is accomplished by NOT signing up for Medicare at the Social Security Administration. An HSA Owner should review their situation with their personal tax and legal counsel before doing anything that might affect their HSA eligibility. THEN they must review with their local SSA office. CAUTION: The procedures with the SSA change frequently. Medicare Parts B, C, and D are all opt-in, not automatic or required, and also make the HSA Owner ineligible to make HSA contributions. It s important to remember that it is NOT age 65, as is sometimes stated, that disqualifies an individual from making HSA contributions, it is the enrollment in Medicare that disqualifies them. Example 1 An HSA Owner with a Family HDHP attains age 65 on May 1, That means he is only allowed 4/12ths of the annual contribution AND the 4/12ths of the catch-up. Therefore the maximum 2018 HSA contribution is $2, [($6,900 x.333 = $2,299.97) + ($1,000 x.333 = $333.33)] Example 2 The wife, age 63, has a Family HDHP with her spouse who attains age 65 on June 30, 2018 and applies for Medicare. Scenario 1: The husband is no longer on the wife s HDHP. Therefore the wife must prorate six months for the family contribution limitation and six months for the single contribution calculation. The family portion can go into either her or his HSA. The single portion can only be contributed into her HSA. Scenario 2: The husband stays on the wife s Family HDHP. He just is no longer eligible to contribute to the HSA. The six month portion of the family contribution can go into either HSA. The second portion of the family limit can only go into her HSA since although the husband is on the HDHP he is no longer eligible to contribute the extra $1,000. Example 3 Tarzan has a family HDHP. Upon attaining age 65 he applies for Medicare, but continues the family HDHP for himself and Jane who is only age 60. While Tarzan is no longer eligible to make HSA contributions, Jane still is. And because it is a family HDHP, the family contribution limits apply and her extra $1,000. NOTE: The rule does NOT say the family HDHP members have to be HSA-eligible individuals. JM Consultants, Baxter, MN

13 How to Establish a Health Savings Account If administered correctly, an HSA is a tax-exempt custodial or trust account, much like an IRA, that is established for the intended purpose of paying for qualified medical expenses for the HSA Owner, his or her spouse, as well as for his or her dependents. The IRS has the Model Documents for HSAs, Form 5305-C Health Savings Custodial Account and Form 5305B Health Savings Trust Account. These forms are comprised of eleven articles that address the basic rules of HSAs. It should be noted that the language in the Model Documents is technical language, using references to the IRC, the source of the law on HSAs. The most current version of both documents is October Earlier versions SHOULD NOT BE USED to establish HSAs. Forms vendors use these Model documents as a basis for their forms. Language must be added to their forms and older versions can no longer be used for establishing HSAs. IRS Form 5305B Trust and 5305C Custodial Model Documents follow. JM Consultants, Baxter, MN

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18 What is the difference between the Custodial and Trust version? First, to act as a Trustee the financial organization must have the authority to act as a Trustee. All financial organizations do NOT have such authority. Second, the Trust Document usually allows for a broader array of IRS approved investments. They can include stocks, bonds, mutual funds, real estate and partnerships. Trustees also usually take a more active part in the investing of the account funds. Usually, Custodian Documents limit the investments to savings accounts, and savings instruments of the financial organizations. For HSAs they can include checking accounts, stored value cards and debit cards. This means non-cash investments like stocks, bonds, etc. would NOT be allowed. A financial organization that has Trust Authority can act as Trustee or Custodian. A financial organization that does NOT have Trust Authority can ONLY act as a Custodian. HSA Disclosure Statement There is no IRS Model Disclosure Statement. In addition to the above mentioned documents that create the HSA, a financial organization that wants to as the Custodian or Trustee of an HSA must also give the HSA Owner an explanation of the HSA rules in non-technical language. As with IRAs, this is often referred to as a Disclosure Statement and usually includes a Financial Disclosure. This disclosure statement can be written by the financial organization acting as the HSA Custodian/Trustee. Most HSA Custodians/Trustees, however, use documents prepared by their forms vendor. Those forms usually include a Disclosure Statement, a Financial Disclosure and other contractual language. They must however, comply with the language in the Model Document. The HSA Disclosure Statement should include; All Contributions must be in cash. However after the cash contributions are made in cash they can be invested in anything allowed by the IRS and the HSA Custodian/Trustee. (See Chapter 6 Investments.) It should be noted that while the HSA documents described strongly resemble the forms that are required for establishing IRAs, the two sets of forms are NOT identical. One of the more notable differences between the required HSA and IRA documents is that the documentation for IRAs, as part of the Disclosure Statement, MUST, when applicable, provide a growth projection known as the Financial Projection. HSAs do NOT have such a requirement. Disclosures concerning investments, TISA, FDIC/NCUA, etc. are, of course, still required. The 7-Day Right of revocation that is required for IRAs is NOT required for HSAs. However, many forms vendors have added this provision to their documents. The HSA Custodian/Trustee could also use a longer or shorter revocation period. Although state law requirements may dictate the length. If one is used it must be disclosed in the Disclosure Statement. HSA Custodians/Trustees must be familiar all the terms of their documentation. Terms and conditions can vary greatly from one forms vendor to another. JM Consultants, Baxter, MN

19 ALL HSA FORMS MUST BE CAREFULLY READ! Most HSA Custodians/Trustees will have the HSA Owner complete an HSA Application form. This form will capture all of the relevant and required HSA Owner information such as Name, Address, Social Security Number, Date of Birth, Telephone Numbers, Address, etc. as required on IRS Form 5305-B or 5305-C. Many HSA Applications can also obtain information about the initial HSA Contribution, saving the need for a separate HSA Deposit or Contribution Form. In addition, HSA Applications can allow the HSA Owner to designate primary and contingent beneficiaries. Because the HSA Documentation is a legal, binding contract, it must be signed and dated by both parties, the HSA Owner AND a representative of the HSA Custodian/Trustee. NOTE: The HSA must be established prior to the HSA Owner incurring an HSA-Qualified medical Expense! By IRS definition an HSA is a Legal Trust even if it is a Custodian Account. Therefore it is NOT considered established: until a deposit is made into the account even if it is only for $1.00! Because of this, many HSA Custodians/Trustees have a minimum balance requirement, which is allowable. However, it MUST BE DISCLOSED. Simply completing the documentation, even if signed and dated by both parties, is not sufficient. A trust is generally NOT considered established until a contribution is made into it. To have an HSA, three things must occur: 1. It must be eligible under an HDHP, AND 2. The HSA Application must be complete, AND 3. A qualified deposit/contribution must be made. The HSA documentation, including the Plan Agreement and Disclosure can certainly be completed ahead of time, which can be helpful when signing a new client s employees. But remember, the date the HSA is established for IRS qualified medical expense purposes is the date of the first contribution, NOT the date the documents were signed. It does not make any difference who makes the first contribution, the HSA Owner or the HSA Owner s employer. That means the HSA Custodian/Trustee cannot report it as an HSA until a contribution has been made. That likely means, depending on your software, it can NOT be put into the financial institution s reporting system until that first contribution is made. IMPORTANT NOTE: Remember, an HSA is not considered by the IRS to be established until all HSA documents are properly completed (signed and dated) AND an HSA contribution is made. Example: Our client, a new start-up company ABC, Inc. starts an HDHP effective January 1, Their first payroll will not be paid until January 31, Employees have started to complete their HSA paperwork, including Plan Agreement, etc. in December They want to JM Consultants, Baxter, MN

20 make a deposit in December but date it January 1, We are closed January 1, The first date we can process the deposit in 2018 is January 2. Is there any exception as to when Qualified Medical Expenses can start, or are they stuck with January 3? There are no exceptions. The date for Qualified Medical Expenses is the day of the first HSA deposit. AND on January 2, 2018 the HSA Custodian/Trustee can NOT back date the contribution to January 1. And of course a 2018 HSA Contribution can NOT be made in December 2017 under any circumstance. So in this case they are stuck with January 2, 2017 as the starting date for Qualified Medical Expenses. HSAs and Customer Identification Program (CIP) Like IRAs and most other accounts, HSAs are subject to the CIP rules. The HSA Custodian/Trustee must make sure they follow its own CIP procedures. There are no exceptions for HSAs. HSAs and Community/Marital Property States Although it is true that a spouse does not need permission to name someone other than his or her spouse as primary beneficiary of his or her HSA, in a non-community/marital property state, this does not mean that a spouse who is not named as a beneficiary of an HSA may not be able to lay claim to a portion of those HSA assets under state laws, which often specify a minimum percentage of a deceased spouse s estate to which a surviving spouse is entitled. Therefore, if a surviving spouse has been shorted by his or her deceased spouse, he or she may file a court ordered request with the financial organization to freeze the account until the court has determined how to divide the assets therein. NOTE: Spousal consent requirements, technically, only apply to community and marital property states. However, it is not always clear which state has jurisdiction over an HSA, since a person may establish an HSA in a non-community/marital property state, but now is a resident of a community or marital property state. If a person may be subject to community or marital property laws, and they want to name a person or entity other than their spouse, they should have their spouse sign a spousal waiver. Regardless of whether a person lives in a community/marital property state or not, spousal consent is never required if a spouse is the sole, primary beneficiary of an HSA; however, it may provide future coverage in the event that the HSA Owner and spouse become subject to the jurisdiction of a community/marital property state in the future due to a move. IMPORTANT NOTE: It is advisable that an HSA Custodian/Trustee consult their HSA Consultants and their own legal counsel before distributing Inherited HSAs. Likewise, this is a good idea for the HSA Owner before naming beneficiaries. JM Consultants, Baxter, MN

21 ****************************************************************** Same-Sex Marriages: US Treasury and IRS Issue Important Ruling and Clarification on Federal Definitions of Marriage and Spouse ****************************************************************** On August 29, 2013 the US Treasury and the IRS issued Revenue Ruling (Rev. Rul ) clarifying the terms of the 2013 Supreme Court decision concerning same sex marriages. In what is described by many experts in the industry as a broader definition than was expected, the clarifications include: Legal marriages between same-sex partners performed in any state of the US, Washington DC, any US Territory or any Foreign Country will be recognized for all Federal tax purposes and other Federal administrative purposes where marriage is a factor. These marriages will be recognized by the Federal Government regardless of the state of residency. (It was first thought that these same-sex marriages would only be recognized by the Federal Government if the individuals resided in a state allowing such marriages, known as the state-of-domicile rule.) The US Treasury and the IRS explained that they thought such a ruling (residency requirement) would be too difficult for the employers to administer with multiple state offices, employees living in different states, employees moving from state to state, etc. Where spousal rules apply, that means contribution rules for IRAs and HSAs are affected. It also means that some IRA and QRP Required Minimum Distribution (RMD) calculation rules are also affected. Rules for 401(k)s are also affected. Any area of IRAs, HSAs, CESAs and QRPs that uses marriage/spouse as a determining factor in administration must now follow this new definition of marriage. Although the official effective date was September 16, 2013, there were even provisions in this ruling that allows those affected by the previous rulings/definition to amend their previous tax returns. Those wanting to do so should seek their tax and legal counsel because there are special rules and limitations that must be followed. In addition, the IRS continues to make other adjustments available through amending tax returns. This Revenue Ruling, however, does NOT apply to registered domestic partnerships, civil unions or similar formal, legal relationships between same-sex partners, under any state law. However, it appears those couples could go to a state that does allow same-sex marriages and then be eligible for any Federal marriage/spousal rules in their state of residency. They would NOT be eligible for the amending of previous tax returns however. JM Consultants, Baxter, MN

22 It should be noted that this just applies to the Federal definition of marriage and spouse. How individual states rule will be determined by state law and the Courts. After this Revenue Ruling, there were still a number of unanswered questions. US Attorney General, Eric Holder, further clarified the government s position. On February 8, 2014, Mr. Holder said that under this policy, same-sex couples will enjoy these privileges even in states that do not recognize such marriages. All Federal departments must now abide by this ruling in all matters. (There was some confusion about this before this announcement.) So, this means that any tax, IRA, HSA CESA or QRP related matter will abide by these marriages as long as the marriage was performed in a state locale allowing them. They do NOT have to be residents of that state. They can live in any state as long as they were married in a state allowing such marriages. NOTE: The June 2015 US Supreme Court ruling did NOT affect any of the previous Federal interpretations for same sex marriages. Only some state laws were more broadly defined. There are continuing court challenges. HSA Custodians/Trustees should always review this complex situation with their own legal counsel. JM Consultants, Baxter, MN

23 Chapter 2 Amending HSAs Responsibility of the HSA Custodian/Trustee Not only is the HSA Custodian/Trustee responsible for the HSA Owner receiving the most current plan agreement, disclosure statement and financial disclosure (no IRA-like projection), they are also responsible to make sure the HSA Owner ALWAYS has the most current rules, regulations and procedures. This entails an amendment process. Each part of the HSA documentation may need amending. Plan Agreement The most common reason is when legislative action requires it or the IRS amends its Model Document. Some sections of the plan agreement can only be changed by the legislature and the IRS. The language and timing of this amendment is usually clarified in an IRS Revenue Procedure (Rev. Proc.). In addition, portions of the plan agreement can also need amending when the forms vendor and/or the HSA Custodian/Trustee changes or updates the terms of the document. It might also be necessary for such events as mergers, acquisitions, and name changes. Disclosure Statement The disclosure statement usually needs to be amended more often. Whenever any of the rules, regulations, or procedures change, the HSA Owner must be given the most current document, both for existing accounts as well as for newly established HSAs. Consequently disclosure statement amendments are frequently necessary. Financial Disclosure Statement Financial disclosures only need to be amended if they were incorrect or not prepared to begin with or if the terms of the HSA investment changed within your disclosed revocation period, if the Revocation Right is part of the HSA documents. So, amending financial disclosures is rare. And remember, financial projections are not required for HSAs even if they are a part of your vendor s form. Amending Procedure This requirement is accomplished by sending periodic amendments. Sometimes they reflect IRS changes. In addition, the HSA Custodian/Trustee must be able to prove that the required amendments were sent and sent timely. Even though the IRS HSA Model Documents were updated in 2011 there was no required amendment. However newly established HSAs must have been opened with the most current document. Types of Amendments What type of amendment you send depends on the changes being made. The HSA Custodian/Trustee must first review the language of their plan agreement and disclosure. Usually an IRA Owner s signature is not required for an amendment. You will need to consult with your legal counsel on this. It is usually permissible to send just the changes. However after a few amendments of this type we recommend sending what is called a comprehensive amendment that includes a complete, JM Consultants, Baxter, MN

24 new plan agreement and disclosure statement. In this way the HSA Owner will have all of the current rules in one document. And of course be sure to document/archive your amendment process. The HSA Custodian/Trustee must be able to prove the procedure was accomplished in a complying and timely manner. CAUTION: We have one caution in any amending procedure. Since forms vendors have their own contractual language for HSA documents, amending them with another company s form is usually legal and in compliance. However, please remember an HSA document is a legal contract. Any amendment to it means the HSA is now under the terms of that amendment, not those of the original document. So if you established the HSA with a document from Vendor A and amended it with a document from Vendor B, document B is now the document of record. If you are still establishing HSAs with documents from Vendor A, you now have two DIFFERENT HSA contracts that must be followed separately. And they can be very different as to certain procedures and defaults. JM Consultants Recommendation Because the new Federal definition for marriage and spouse is so important, JM Consultants recommends that the HSA Disclosure be amended to include this important Federal policy, depending on the language used in your Plan Agreements and Disclosure Statements. HSA Custodians/Trustees should rely on their forms vendor and legal counsel for the need to amend HSAs. The new one-per-year IRA rollover rule DOES NOT affect HSAs because the HSA rollover rule from the onset has been the same as the IRA rule now is starting in HSAs should NOT need to be amended for this IRA rule change. JM Consultants, Baxter, MN

25 RECOMMENDED AMENDMENT PROCEDURES RECAP Deadline Plan Agreement Must be amended by the date directed by the IRS or by the later of 30 days after the amendment is adopted or becomes effective Disclosure Statement Same as for plan agreement amendment if sent with it. Otherwise send as soon as possible after the changes become effective. HSA Owner s Signature Signatures are not required for legislative changes per the IRS Model Plan Agreements. Other changes to the plan agreement and disclosure statement may require signatures depending on the language in your plan agreement and disclosure statement. Cover Letter Including a cover letter generally explaining the changes is an excellent idea and is recommended by JM Consultants. Mailing Instructions HSA Custodians/Trustees should send the amendment with a cover letter to the last known address of the HSA Owner. Any returned envelopes should be saved in the customer s HSA file for proof that the amendment was properly mailed. A master file could be used for this also. (See below) Documenting the Amendment Each amendment must be properly documented to prove that an amendment was timely sent. This should be done in one of the following methods: Keep a copy in each HSA file. This can become cumbersome, but is the best method. Keep a Master File with a copy of the amendment, a dated cover letter and a list of HSA Owners who received the amendment. JM Consultants, Baxter, MN

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27 Chapter 3 High Deductible Health Plans (HDHP) High Deductible Health Plans (HDHP) Defined An HSA-eligible HDHP is a health plan that meets certain IRS requirements. These health plan requirements include having a deductible amount that cannot be less than a certain minimum limits AND having out-of-pocket expenses that cannot exceed certain maximums. NOTE: The insurance industry has a number of HDHPs but here we are describing HSA Eligible HDHPs. There are two types of HDHPs: Self-Only Coverage and Family Coverage Self-Only HDHP The term self-only means exactly what the name implies. It covers the medical expenses of only one individual. Sometimes this term is used incorrectly as in Single-Coverage which to some may imply that the individual is not married. Having Self-Only Coverage in no way denotes marital status. In fact, in some cases it will be to the advantage for a married individual to have Self-Only Coverage because his or her spouse has a separate Health Care Plan elsewhere. Likewise, a single parent may want family coverage to include his or her dependents. Family HDHP The term Family Coverage means coverage of more than one person. It does NOT require that all family members are covered by the Family Coverage or that individuals must be married. The covered individuals do not even have to be related. As long as two people are covered by the same HDHP, the policy is considered a Family HDHP. Since marriage has nothing to do with an HDHP s HSA-Eligibility, the Supreme Court ruling on same-sex marriages has NO AFFECT on HSAs or HDHPs IMPORTANT NOTE: Determining eligibility of the individuals or whether or not a medical plan is HSA-Eligible is the full responsibility of the HSA Owner! The HSA Custodian or Trustee has no responsibility in this determination. This then makes getting proper, verifying documentation from the HSA Owner an important part of HSA Administration for the HSA Custodian/Trustee. The HSA Custodian/Trustee wants to be sure the HSA Owner is eligible because no one enjoys correcting excess contributions. The following list illustrates the requirements that a health plan must meet to be considered an HSA-Eligible HDHP. JM Consultants, Baxter, MN

28 Maximum Minimum Out-of- Pocket Year Type of Coverage Deductible* Expenses* 2014 Self-Only $1,250 $6,350 Family $2,500 $12, Self-Only $1,300 $6,450 Family $2,600 $12, Self-Only $1,300 $6,550 Family $2,600 $13, Self-Only $1,300 $6,550 Family $2,600 $13, Self-Only $1,350 $6,650 Family $2,700 $13,300 *These amounts are subject to possible Annual Cost-of-Living Adjustments It should be noted that in order for an HDHP to remain an HSA-Eligible HDHP the Minimum Deductible Amounts as well as the Maximum Out-of-Pocket limits of the HDHP may need to be adjusted periodically, even annually, to meet the changing statutory limits. If they are NOT updated as needed the plan will no longer be an HSA-Eligible HDHP. The HSA could still be what the insurance might call an HDHP, it just would NOT be an HSA-Eligible HDHP. Out-of-Pocket Expenses is just another term for the insurance copays/deductibles. There is an HSA HDHP Required Minimum and Maximum. NOTE: The insurance industry has many different types of HDHPs. All HDHPs are NOT HSA- Eligible HDHPs. This is especially true now after the enactment of the ACA. It is a good idea for the HSA Owner to get written confirmation from his insurance provider that the policy is HSA-Eligible. Again, it is NOT the responsibility of the HSA Custodian/Trustee to determine eligibility. While not required, the HSA Custodian/Trustee requesting written proof from the HSA Owner is a good idea and one that JM Consultants highly recommends. Some forms vendors have eligibility forms requesting the HSA Owner to re-verify their HSA eligibility with the insurance provider, documenting the HSA Custodian/Trustee due diligence. HDHPs A Closer Look When determining whether or not a health plan is an HSA-Eligible HDHP it is important to remember that BOTH requirements MUST BE MET. The HDHP must not pay out any benefits JM Consultants, Baxter, MN

29 until the minimum deductible limit has been met AND cannot require that out-of-pocket expenses exceed the maximum limit. Some health plans have embedded deductibles. This means that the health plan can have a deductible limit that applies to each person covered by the plan in addition to an overall umbrella deductible limit addressing an aggregate deductible. However, to remain HSA-Eligible, no benefits can be paid out of the HSA to anyone covered by the HDHP until the total statutory minimum deductible is covered. Deductible Example 1 A family coverage health plan, Plan A, has a 2017 $2,000 deductible limit for each of the family members. The plan pays 100% of covered benefits for each family member after the family member reaches the $2,000 deductible limit. Plan A also has a $10,000 out-of-pocket limit. This plan would NOT be considered an HSA-Eligible HDHP since it will pay out benefits before the 2017 minimum $2,600 deductible limit for family coverage is met. This is true even though the 2017 out-of-pocket limit of $13,100 for the five members is not exceeded. Deductible Example 2 A 2017 family coverage health plan, Plan B, has a $2,600 deductible limit for each of the five family members. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan B also has a $12,500 out-of-pocket limit. This plan would be considered an HDHP-Eligible HDHP since it will not pay out benefits before the 2017 minimum deductible limit of $2,600 for family coverage is met AND the out-ofpocket limit of $13,100 is not exceeded for However, the health plan would have to clarify that the out-of-pocket limit includes the deductible and will not exceed the statutory limits. Out-of-Pocket Example 1 A family coverage 2017 health plan, Plan C, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member the $2,600 minimum deductible limit. This plan would be considered an HDHP- Eligible HDHP for any family with two to five covered individuals since, in those scenarios it will not exceed the maximum deductible ($2,600 x 5 = $13,000) AND it will not pay out any benefits until the minimum deductible of $2,600 has been met. However Plan C would NOT be considered an HSA-Eligible HDHP with six or more covered individuals since that would require the out-of-pocket limit to be exceeded ($2,600 x 6 = $15,600) even though the minimum deductible would be met. In addition, because Plan C has no expressed out-of-pocket limit it is NOT HSA-Eligible regardless of the minimum deductible compliance. Out-of-Pocket Example 2 A family coverage 2017 health plan, Plan D, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan D has no expressed out-of-pocket limit. This plan would NOT be considered an HSA-Eligible HDHP because the maximum out-of-pocket expenses is not within the 2017 limits, even though the annual deductible limit is met. JM Consultants, Baxter, MN

30 Out-of-Pocket Example 3 A family coverage 2017 health plan, Plan E, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan F has an umbrella out-of-pocket limit of $13,100 and will pay 100% of covered benefits if the family satisfies the $13,100 umbrella deductible even if no single member satisfies the $2,600 deductible. This plan would be considered an HSA-Eligible HDHP for 2017 no matter how many family members are covered since the $13,100 limit can never be exceeded and the plan would not pay out any benefits until the minimum deductible $2,600 (in this case per person) has been met. Out-of-Pocket Example 4 A family coverage 2017 health plan, Plan F, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan F has an umbrella out-of-pocket limit of $13,500 and will pay 100% of covered benefits in the family satisfies the $13,500 umbrella deductible even if no single family member satisfies the $2,600 deductible. This plan would NOT be considered an HSA-Eligible HDHP for 2017 no matter how many family members are covered since the $13,500 out-of-pocket limit exceeds the 2017 statutory limit even though the plan would not pay out any benefits until the 2017 minimum deductible (in this case per person) has been met. HSA vs. HDHP Many HSA Custodians/Trustees confuse the HSA with the HDHP. For example, it is common for an HSA Owner and/or HSA Custodian/Trustee to think that an HSA is a Family HSA that has more than one owner because the HDHP has family coverage. Or, conversely, it is commonly thought that is an HSA Owner is covered by an HDHP that has self-only coverage that his or her HSA can only be used for the HSA Owner s own qualified medical expenses. In both cases, this thinking is incorrect. While the HDHP may provide self-only coverage, the HSA funds can be used for the qualified medical expenses, incurred AFTER the establishment of the HSA, for the HSA Owner, his or her spouse, and any of the HSA Owner s dependents as well. IMPORTANT: It must be remembered that the HSA and HDHP are two separate agreements. The HDHP is an insurance plan, administered under the terms of the insurance provider and the insurance policy. The HSA is the investment account administered by the financial institution that is the HSA Custodian/Trustee. Their only connection is their relationship to HSA contribution limits. JM Consultants, Baxter, MN

31 More HDHP Details Expenses that are counted towards meeting the out-of-pocket limit: Deductibles Co-payments ( co-insurance payments) Expenses that are not counted towards meeting the out-of-pocket limit: HDHP Premiums Services that are not covered by the HDHP Penalties assessed by the HDHP or additional co-payment expenses for failing to pre-certify for a specific provider or for certain medical procedures Amounts paid by a covered individual in excess of the usual, customary, and reasonable ( UCR ) amount Amounts paid by a covered individual in excess of a lifetime limit, or other reasonable restrictions on other benefits HDHP QUESTIONS and ANSWERS Q-1 My health care plan provides for 2015 family coverage and has an embedded deductible of $2,000 per covered individual. The Plan also has an umbrella deductible of $6,000. The out-of-pocket limit for the plan is $11,000. Is this an HSA-Eligible plan? A-1 No, your plan is NOT an HSA-eligible HDHP because benefits could be paid out BEFORE the minimum 2015 deductible of $2,600 is covered, even though the out-of-pocket limit is complying. Q-2 I have a health care plan that provides for 2015 family coverage and has an embedded deductible of $2,600 per covered individual. The plan also has an umbrella deductible of $8,000. The out-of-pocket limit for the plan is $11,000. Is this plan HSA-eligible? A-2 Yes, This plan is an HSA-eligible HDHP because both the 2015 minimum deductible of $2,600 and maximum out-of-pocket expenses of $12,900 are complied with. Q-3 A health care plan provides for 2015 self-only coverage and has a deductible of $1,300. The out-of-pocket limit for the plan is $7,000. Is this plan HSA-eligible? A-3 No, the plan is NOT an HSA-eligible HDHP because although the minimum annual deductible is complying, the maximum out-of-pocket expenses do not comply with the 2015 limits of $6,450. Q-4 Will an HDHP continue to be an HDHP if covered individuals received discounted prices because of negotiations between the HDHP and health care providers? JM Consultants, Baxter, MN

32 A-4 Yes. The fact that an HDHP has negotiated lower prices from health care providers will not cause the health plan to fail to be an HDHP. Q-5 What if the HDHP coverage begins on a date other than the first day of the month? A-5 As a general rule the individual must wait until the first day of the following month to make an HSA contribution. Q-6 Are there any exceptions to the rule that states that in order to be an eligible individual, an individual may not be covered by any other health plan that is not an HDHP? A-6 Yes, per the IRS list, exceptions exist for plans providing limited coverage, such as insurance for: Workers compensation laws, Tort liabilities, Liabilities relating to ownership or use of property (automobile, home insurance), Insurance for a specified disease or illness, Insurance that pays a fixed amount per day (or other period) of hospitalization, A prescription drug plan that pays benefits before the HDHP deductible has been met, Insurance for accidents, Insurance for disability, Dental insurance, Vision insurance, Long-term Care insurance, VA coverage benefits provided more than three months earlier, and Employee Assistance Programs ( EAPs ), disease management programs, or wellness programs provided that these programs are not considered health plans because they do not provide significant benefits in the nature of medical care or treatment. Q-7 Can a health plan pay for preventive care with no (or a small amount of) deductible and still be considered a HDHP? A-7 Yes. Per the IRS list, acceptable preventive care includes, but is not limited to the following: periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals, routine prenatal and well-child care, child and adult immunizations, tobacco cessation programs, obesity weight-loss programs, certain drugs and medications, and screening services. In addition, the Affordable Care Act makes additional exceptions for certain policies. The HSA Owner must check with their insurance provider to make sure their HDHP is HSA-Qualified. JM Consultants, Baxter, MN

33 Q-8 What screening services are allowed? A-8 The following screenings are outlined by the IRS. Cancer Screening Breast Cancer (Mammogram) Cervical Cancer (Pap Smear) Colorectal Cancer Prostate Cancer (PSA Test) Skin Cancer Oral Cancer Ovarian Cancer Testicular Cancer Thyroid Cancer Heart and Vascular Diseases Screening Abdominal Aortic Aneurysm Carotid Artery Stenosis Coronary Heart Disease Hemoglobinopathies Hypertension Lipid Disorders Infectious Diseases Screening Bacteriuria Chlamydial Infection Gonorrhea Hepatitis B Virus Infection Hepatitis C Human Immunodeficiency Virus (HIV) Infection Syphilis Tuberculosis Infection Mental Health Conditions and Substance Abuse Screening Dementia Depression Drug Abuse Problem Drinking Suicide Risk Family Violence Metabolic, Nutritional, and Endocrine Conditions Screening Anemia, Iron Deficiency Dental and Periodontal Disease Diabetes Mellitus Obesity in Adults Thyroid Disease Musculoskeletal Disorders Screening JM Consultants, Baxter, MN

34 Osteoporosis Obstetric and Gynecologic Conditions Screening Bacterial Vaginosis in Pregnancy Gestational Diabetes Mellitus Home Uterine Activity Monitoring Neural Tube Defects Preeclampsia Rh Incompatibility Rubella Ultrasonography in Pregnancy Pediatric Conditions Screening Child Developmental Delay Congenital Hypothyroidism Lead Levels in Childhood and Pregnancy Phenylketonuria Scoliosis, Adolescent Idiopathic Vision and Hearing Disorders Screening Glaucoma Hearing impairment in Older Adults Newborn Hearing Q-9 Can preventive care service or screening ever include treatment? A-9 Yes. Preventive care service or screening can include treatment of a related condition during the preventive care service or screening procedure (before the HDHP deductible has been met) where it would be unreasonable or impracticable to perform another procedure to treat the condition. An example would be the removal of a polyp during a diagnostic colonoscopy. CAUTION: Again, it should be mentioned that determining HSA eligibility and qualified medical expenses is NOT the responsibility of the HSA Custodian/Trustee. In fact, there still is a difference between definitions of Preventive Care with the medical definition not agreeing with the IRS definition, and there is now yet a third ever-changing definition with the new national health care law (ACA) taking affect. Q-10 Are Medicare premiums a Qualified HSA Medical Expense? A-10 Although most other insurance premiums are NOT a Qualified HSA Medical Expense, Medicare Premiums are a Qualified HSA Medical Expense. This includes Parts A, B, C and D. Caution though, the HSA Owner is still NOT eligible to make HSA contributions once he is enrolled in Medicare. JM Consultants, Baxter, MN

35 NOTE: Health Insurance Premiums for those over age 65 are generally qualified. Premiums for Medicare Supplement policies, however are NOT qualified medical expenses for HSA purposes. Q-11 How should the Debit Card for our HSAs be titled with multiple signatures? A-11 One way would be John Smith HSA Owner, Mary Smith, Authorized Signer. It could NOT be John or Mary Smith, or just Mary Smith. JM Consultants, Baxter, MN

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37 Chapter 4 HSA Contributions Annual Contributions As referenced earlier under the section titled Who is Eligible to Establish a Health Savings Account, the ability to make or receive HSA contributions, unlike IRA contributions, is generally determined on a monthly basis. An eligible individual may make or receive HSA contributions for each month that he or she is covered by an HDHP on the first day of such month. The annual contribution limits for HSAs are determined by the IRS annually. Remember that the numbers in the chart that follows assumes eligibility for an entire year. Prior to 2007, there was an additional limitation on HSA contributions. No contribution could be made in excess of the deductible. This limitation no longer exists but would apply for correcting any excess contributions prior to Catch-up Contributions An individual may make or receive a catch-up contribution provided that he or she is an HSAeligible individual that is age 55 or older and not yet enrolled in Medicare. The individual becomes eligible for the entire catch-up contribution for the year they attain age 55, whether on January 1 or December 31 of that year. It is NOT prorated unless the HSA Owner is not otherwise eligible for part of a year. The catch-up contribution has been $1,000 since 2009 to the present. Example 1: The HSA Owner attained age 55 on July 4. He is eligible for the full $1,000 catchup contribution provided he stays eligible. Example 2: If the HSA Owner is in an HDHP for only eight months, 8/12ths of the $1,000 is allowed. It makes no difference why the coverage ended on September 1, for instance, change of employers, retirement or Medicare eligibility. Example 3: John is the HSA Owner and has a 2017 Family HDHP. Consequently $6,750 can be contributed for 2017 into any HSA of an individual covered by the HDHP. It is all contributed into the HSA Owner s spouse s HSA. The contribution does NOT need to be in the HSA of the individual who owns the HDHP. The HSA Owner attains age 55 in Again the annual contribution amount of $6,900 can be contributed into any eligible HSA. However, the $1,000 catch-up contribution must be contributed into John s HSA. NOTE 1: It is age 55 that is required for HSA catch-up contributions, NOT age 50 as it is for IRA catch-up contributions. JM Consultants, Baxter, MN

38 Annual HSA Contribution Limits The HSA limits set forth by the IRS are as follows: Type of Regular Catch-Up Year Coverage Limit Contribution Total 2014 Self-Only $3,300 $1,000 $4,300 Family $6,550 $1,000 $7, Self-Only $3,350 $1,000 $4,350 Family $6,650 $1,000 $7, Self-Only $3,350 $1,000 $4,350 Family $6,750 $1,000 $7, Self-Only $3,400 $1,000 $4,400 Family $6,750 $1,000 $7, Self-Only $3,450 $1,000 $4,450 Family $6,900 $1,000 $7,900 NOTE: The annual limit for HSA contributions is subject to annual cost-of-living- adjustments (COLAs). The catch-up contributions are not. Reduced or Increased Contribution Limits There are three reasons why an individual s annual limit may be lower than the statutory limits shown in the chart above: Partial-year eligibility, Archer MSA contributions are also made, or Special rule for married persons Partial-Year Eligibility - Reduced Contribution Example (General Rule) Jill is covered by a 2017 HDHP with self-only coverage that has a $1,300 deductible and an outof-pocket limit of $5,000. Jill leaves her job and starts working for a different employer on June 15. Jill s new employer does not maintain an HDHP. Jill would be an eligible individual for the months of January through June since she was covered by an HDHP on the first day of only those months. To determine Jill s 2017 contribution limit she would have to do a pro-rata calculation as follows: 12 months eligibility = $3,400, therefore six months (1/2) eligibility = $1,700. Ability to Make Entire Year s Contribution with Partial-Year Eligibility (Exception to the General Rule: Eligibility by December 1st) Since 2007, an individual that was not an eligible individual for the entire year but was covered by an HDHP during at least the entire last month (December) of the year can be treated as if he or she was an eligible individual for the entire year. JM Consultants, Baxter, MN

39 Testing Period: 13 months In order for an HSA Owner to take advantage of the full year s contribution limit, even though he or she was only an eligible individual for less than the entire year, he or she must remain an eligible individual from December 1 of the year under which he is taking advantage of this rule until December 31 of the following year. If the HSA Owner loses HDHP coverage or becomes otherwise ineligible before the end of this testing period, his or her HSA contributions, which had previously been allowed under this rule, will be subject to tax and an additional 10-percent penalty tax. Example 1 Mr. Smith, age 42, begins self-only coverage under his employer s HDHP on December 1, Mr. Smith s 2017 HSA contribution limit is $3,400, not $ (1/12th of $3,400). However, see the Testing Period limitation below. NOTE: In Example 1 above, that means Mr. Smith must remain HSA-eligible through December 31, Example 2 Zeke Anderson begins self-only coverage under an HDHP on November 1, Under the general rule this would only allow Zeke to contribute 2/12ths of the normal limit ($3,400 x 2/12 = $566.67). Instead, Zeke takes advantage of the rule which allows him to make a full 2017 contribution of $3,400. Zeke is taking a bit of a risk. As long as Zeke is an HSA-Eligible individual through December 31, 2018, his HSA contribution for 2017 will not be subject to any tax or penalty. The following example illustrates what would happen if Zeke does not maintain his eligible individual status throughout the entire testing period. Example 3 Same scenario as the previous example except Zeke loses his coverage in May of Since Zeke did not maintain eligible individual status throughout the entire testing period (until December 31, 2018) 10/12ths of his 2017 contribution will be subject to Federal income tax and a penalty tax of 10% (10/12ths x $3,400 = $2,833.33). Only $ of Zeke s 2017 contribution is not subject to tax or penalty. However, the contribution is NOT considered an excess and does NOT have to be removed. NOTE: If Zeke would have been eligible for a catch-up contribution, age 55 or older, the catchup contribution would also be prorated. Example 4 The HSA Owner is making contributions to his HSA based on a family HDHP. He turns 65 and applies for Medicare on October 1, He is therefore only eligible for nine months or 9/12 of the 2018 annual contribution limit and 9/12 of the annual catch-up contribution. (9/12 of $7,900 = $5,925) JM Consultants, Baxter, MN

40 Example 5 On October, 1, 2018 the HSA Owner s spouse establishes an HSA based on a Self-Only HDHP. She is eligible for 3/12 of the 2018 annual limitation plus the full catch-up contribution. 3/12 of $3,450 = $ $1,000 = $1, Exception to Meeting Testing Period for Disability or Death An HSA Owner who takes advantage of this rule but fails to maintain HSA-eligible individual status throughout the entire testing period due to death or disability will not have his or her contributions made under this rule subject to tax or penalty. Archer MSA Contribution Adjustment Per IRS Publication 969 An Archer MSA is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. The rules and limits are similar to, but different than HSAs. They are also administrated similarly but different. The annual HSA contribution limitation must be reduced by any contribution to the HSA Owner s Archer MSA account. This can be compared to the Traditional IRA and Roth IRA aggregate limits. For instance, if an IRA Owner makes a $2, contribution into his or her Roth IRA, the maximum Traditional IRA contribution is $3,500 ($5,500 - $2,000). Example Ricky, age 54 was covered by a self-only coverage 2017 HDHP with a $2,600 deductible and a $3,500 out-of-pocket limit. He also has an Archer MSA into which he has contributed $850 in and for Contributions to an Archer MSA directly reduce the amount that an HSA Owner can contribute to his or her HSA. Therefore his 2017 HSA contribution limit is $2,600 ($3,450 - $850 [Archer MSA contribution] = $2,600). Special HSA Rule for Married Persons There is a special HSA contribution calculation rule for married individuals who are BOTH covered by an HSA-Eligible HDHP. This can happen, for instance, when both spouses are covered by separate employer sponsored HDHP plans. If both plans are Self-Only HDHPs, each spouse gets his or her own self-only contribution that must be contributed into his or her HSA. They can NOT be combined into one HSA or allocated in any other manner. The special rule also comes into effect when one of the spouses has a Self-Only HDHP and the other spouse has a Family HDHP. In that case the maximum aggregate contribution allowed for both spouses is a contribution equal to the maximum contribution for one Family HDHP. It can be allocated between each spouse s HSA in any manner they choose. The same applies if both spouses have family HDHP coverage through their respective employers. JM Consultants, Baxter, MN

41 NOTE: Do not forget about the need to apply the Federal definition for marriage of same sex individuals as discussed earlier in this manual. Example 1 Al Malden and his wife Sue, both age 48, are each covered by an HDHP where they work. Al has chosen family coverage under his HDHP and his wife Sue has chosen self-only coverage. The deductible under Al s HDHP is $4,000. The deductible under Sue s HDHP is $3,000. In the case where a husband and wife are covered by different types of HDHP coverage, where one has family coverage and the other has self-only coverage, for contribution-limit purposes the law treats them both as being covered by the one family coverage HDHP. This means that the contribution limit will be determined according to the amount allowed under ONE family coverage ($6,150 for 2011, $6,250 for 2012, $6,450 for 2013, $6,550 for 2014, $6,650 for 2015, $6,750 for 2016, $6,750 for 2017 and $$6,900 for 2018). Note that there is a splitting of the contribution required: the law requires Al and Sue to evenly divide the contribution between them unless they agree on a different division. For instance, Sue could receive $5,000 and Al could receive $1,750 in 2017 if they so agreed, or any other agreed to combination. NOTE: However, catch-up contributions cannot be divided or given to another person; catch-up contributions are for specific individuals and must be contributed to that specific person s own HSA. Example 2 Tommy, age 56, and Lisa age 52, are both covered by an HDHP with family coverage. They have agreed to divide the 2017 contribution evenly. Tommy s HSA contribution will be $4,375 for 2017 ($6,750 2 = $3,375 + $1,000 catch-up contribution). Lisa s contribution will be $3,375 for Tommy cannot give Lisa any part of his catch-up contribution. NOTE: They could agree to divide the contribution with only the catch-up of $1,000 going into Tommy s HSA and the balance of $6,750 going into Lisa s HSA. Example 3 Kurt, age 56 and Robin, age 62 are both covered by an HDHP with family coverage. They have agreed to divide the 2017 contribution evenly. Kurt and Robin s HSA contribution will each be $4,375 in 2017 ($6,750 2 = $3,375 + $1,000 catch-up contribution). Kurt cannot give Robin his catch-up contribution nor can Robin give Kurt her catch-up contribution. Note that the aggregate contribution between Kurt and Robin is $8,750. This is acceptable since neither Kurt s nor Robin s HSA is receiving more than $7,750 individually. (The maximum annual contribution plus catch-up for 2017.) Contribution in the Year of HSA Owner s Death Earlier we saw how the death of the HSA Owner was an exception for the full-year contribution rule penalty. But notice that was the case when the HSA Owner was an eligible individual as of December 1. So what is the calculation when the HSA Owner dies prior to December 1? It s a simple pro rata formula for the contribution limit. JM Consultants, Baxter, MN

42 Example The HSA Owner age 62, with a self-only HDHP dies on September 15, His HSA Contribution limit is for nine months because he was eligible on the first day of nine months. The calculation is: $3,450 + $1,000 = $4,450 x 9/12 = $3, Any amount contributed over $3, would be an excess for 2017 needing to be corrected. Note that the catch-up contribution is also prorated. Qualified HSA Funding Distribution Testing Period In order for an IRA/HSA Owner to take advantage of this Qualified HSA Funding Distribution rule he or she must remain an HSA-Eligible individual beginning with the month that he or she made the Qualified HSA Funding Distribution until the last day of the 12th month following such month. If the HSA Owner loses HDHP eligibility before the end of this testing period his or her HSA contributions which had previously been allowed under this rule will be subject to income tax and an additional 10-percent penalty tax. Again, it is NOT considered an excess and does NOT need to be removed from the HSA. The penalty tax is due for the year that the HSA Owner becomes ineligible. Example 1 Patty makes a Qualified HSA Funding Distribution from her Traditional IRA into her HSA in June, Patty remains an eligible individual covered by an HDHP through July Patty s Qualified HSA Funding Distribution/HSA Contribution will not be subject to tax or penalty. The testing period was complied with. Example 2 Maria makes a Qualified HSA Funding Distribution from her IRA into her HSA in May, Maria has Self-Only coverage and her Qualified HSA Funding Distribution was $3,300. Maria loses her HDHP coverage in February 2017 and therefore fails to remain an eligible individual covered by an HDHP through the required May 31, Maria s entire Qualified HSA Funding Distribution/HSA Contribution will be subject to income tax and penalty tax. There is no prorating. But again, it does not need to be removed. If she removes it, it is subject to all regular HSA distribution rules. The penalty tax is due for 2017, the year she became ineligible. Exception to Meeting Testing Period for Disability or Death An HSA Owner who took advantage of this rule but failed to maintain individual HSA eligibility throughout the entire testing period due to death or disability did not have his or her contributions made under this rule subject to tax or penalty. Death and disability are exceptions to the income tax and penalty tax for not completing the testing period. Split HDHP Coverage Sometimes eligible individuals change their HDHP coverage during the year. When this happens, it affects the contribution limit by applying a pro-rata formula to each coverage category s contribution limit. JM Consultants, Baxter, MN

43 Example 1 Phil, age 53, has self-only coverage for six months of 2017 (January 1 through June 30. Phil marries Diane, age 52, and changes his coverage to family coverage effective July 1, In this scenario, Phil s 2017 contribution limit would be $5,075 ($3,400 x ½ = $1,700 plus $6,750 x ½ = $3,375). NOTE: Phil and Diane could instead take advantage of the full-year contribution rule since they were covered by an HSA-Eligible HDHP. They could contribute the total family contribution amount of $6,750. However, they would need to remain eligible through December 31, Example 2 Reversing the previous example, Phil and Diane change from Family HDHP coverage to a selfonly HDHP. However, before changing to self-only coverage they contributed the full 2017 family contribution in the amount of $6,750. Consequently they now have an excess contribution because the maximum allowable amount is again $5,075. In this case they could NOT use the full year contribution rule because they did not have family coverage on December 1, and the full self-only contribution is less than the $5,075 they are allowed. The excess amount needs to be removed. It is a true excess contribution. Documenting HSA Contributions Since it is the responsibility of the HSA Custodian/Trustee to be able to prove all HSA reporting to the IRS, JM Consultants highly recommends documenting all HSA contributions, regardless of the source. Whether it s the HSA Owner, HSA Owner s Employer, HSA Owner s spouse or other source, it should be documented. If it is someone other than the HSA Owner it would be a good idea to verify eligibility with the HSA Owner so that an excess contribution does not occur. While it is the ultimate responsibility of the HSA Owner, verifying these contributions could prevent an excess contribution. And everyone wants to avoid that, not to mention that that the HSA excess contributions can be even more difficult to correct! If the contributions are received from the employer, they usually are accomplished with one company check for all eligible employees. The HSA Custodian/Trustee should require a worksheet with the following information: Date, Employee Name, SSN, Self-only or Family Plan, Employer or Employee Contribution These documents should then be retained in the employee s HSA file AND an employer s file. A forms vendor s forms can be used for each HSA contribution, even if from one check from the employer. JM Consultants, Baxter, MN

44 It s always a good idea to retain the information from the employer, even putting a copy of the general note in each HSA Owner s file. And of course always retain a copy of the employee s contribution form. HSA Custodians/Trustees must remember they are responsible for having documentation to prove what they report to the HSA Owner AND THE IRS! Tax Benefits of Contributions Unlike IRA contributions, complying HSA contributions are always deductible. When an employer makes a contribution to the HSA of the eligible employee, the employer takes a deduction for the contribution on his or her business tax return and must report it to the IRS and the employee on Form W-2, Wage and Tax Statement. When the eligible employee (or anyone other than the employer) makes the contribution to an HSA of an eligible individual, the HSA Owner takes a deduction for the contribution on IRS Form 1040, U.S. Individual Income Tax Return, NOT the other contributor. The HSA Owner must also file an attachment to his or her Form 1040 known as IRS Form 8889, Health Savings Accounts (HSAs) to calculate the deduction of his or her HSA contributions. In other words, every dollar in an HSA, regardless of who contributed it, is a pre-tax dollar. And, also unlike IRAs, participating in an employer-sponsored retirement plan (such as a 401(k), for example) will not affect the deductibility of HSA contributions. HSA Custodians/Trustees are NOT required to separately account for Employer and Employee HSA contributions. If they are separately accounted for they MUST STILL BE REPORTED as an aggregate total on Form 5498-SA. Suggestion: The HSA Custodian/Trustee may want to keep track of the employer and employee contributions separately because excess contributions are administered differently and some HSA Owners might like that information. But, they MUST BE reported to the IRS as one total whether they are accounted for separately or not. HSA Custodian/Trustee Responsibilities Many HSA Custodians or Trustees can be overwhelmed with the detail of the contribution limit rules for HSAs. HSA Custodians and Trustees should note that of all of the numbers on the HSA contribution chart shown earlier (and the three rules where an individual s HSA contribution limit could be either reduced or increased), the only dollar amount, per the IRS, that the HSA Custodian or Trustee is responsible for monitoring is the maximum contribution based on family coverage with the catch-up contribution. The following chart provides those limitations. JM Consultants, Baxter, MN

45 Maximum HSA Contributions With With Year Family HDHP Catch-Up 2014 $6,550 $7, $6,650 $7, $6,750 $7, $6,750 $7, $6,900 $7,900 However, from a customer service standpoint and probably from a fiduciary responsibility standpoint it is a good idea to monitor the self-only amount if the HSA Custodian/Trustee knows that the self-only limits apply. Maximum HSA Contributions With With Year Self-only HDHP Catch-up 2014 $3,300 $4, $3,350 $4, $3,350 $4, $3,400 $4, $3,450 $4,450 NOTE: Because HSA contribution limits can change annually, HSA Custodians and Trustees, as well as the HSA Owners, must be careful when calculating annual contributions. In some years two self-only contribution limits will not exceed the family coverage limitation. In other years two self-only contributions can actually exceed the family HDHP coverage limitation. For instance, in 2015 two self-only maximums equaled $6,700 (2 x $3,350), while the family maximum contribution was only $6,650. In 2017 two self-only maximums equal $6,800 (2 x $3,400), while the family maximum contribution is $6,900. For 2018, two self-only maximums equal $6,900, the same as the family maximum. HSA Contribution Deadlines The deadline for making contributions to an HSA is the HSA Owner s Federal tax return due date, not including extensions. As with IRA contributions, weekends and holidays can change the deadline. Year Deadline 2014 April 15, April 18, April 18, April 17, April 15, 2019 JM Consultants, Baxter, MN

46 Example 1 Rita can make her entire 2017 HSA contribution on April 17, 2018 (assuming she is otherwise eligible to make an entire year s contribution for the 2017 tax-year). For 2018, she can make her contribution by April 15, Remember that the catch-up contribution is only allowed for those eligible individuals who are age 55 (not 50 as with IRAs) by December 31 of the year the contribution is for and have not enrolled in Medicare. They also have the same deadline. Example 2 Jim is 67 years old and covered by a self-only coverage HDHP with a $2,500 deductible and a $5,000 out-of-pocket limit. Jim is not enrolled in Medicare. Jim s 2017 contribution limit is the statutory limit ($3,400) plus Jim is allowed to add $1,000 as a catch-up contribution because he is age 55 or older and not yet enrolled in Medicare. This makes Jim s 2017 HSA contribution limit $4,400, ($3,400 + $1,000). JM Consultants, Baxter, MN

47 Chapter 5 HSA Rollovers and Transfers HSA Rollovers In addition to making/receiving annual contributions, an HSA Owner is allowed to roll over or transfer his or her HSA. However, the general rule is that this can only be done from one HSA to another HSA for the same HSA Owner. Prior to 2015 the HSA rollover rules were almost identical to those regarding IRAs, with one very important difference through ) The funds must be re-deposited within 60 calendar days following the date of receipt of the HSA distribution, as it is for IRAs. 2) Only one rollover is allowed per 1-year per person. 12 full months must pass before the HSA Owner can transact another HSA-to-HSA rollover. This is similar to the IRA rule. However, for HSAs, the rule is one rollover PER YEAR, PER PERSON, NOT PER HSA! For IRAs, through 2014, it was one rollover PER IRA, not per person, per year. This means regardless of how many HSAs an individual has, there can be only one HSA Distribution rolled over every twelve months, not calendar or fiscal year, but a full 365/366 days. NOTE: The IRA Rollover Rule changed in 2015 and is now the same as the HSA Rollover Rule. Effective January 1, 2015 IRA Owners will also be limited to One Rollover Per Year, Per Person, regardless of how many IRAs the IRA Owner has. 3) The check, draft or wire is made out to the HSA Owner not the financial organization that will ultimately receive the rollover. This is sometimes referred to as the HSA Owner receiving constructive receipt of the assets, because they are free to do with them what they want during the period they hold the assets. 4) The distribution may be taxable if assets are not rolled over within 60 days of receipt. 5) The distribution is reported to the IRS by the financial organization that issues the distribution check, draft, wire, usually as a Normal distribution using IRS Code 1 on Form 1099-SA, and by the financial organization receiving the assets as a rollover contribution reported in Box 4 of Form 5498-SA. The distribution can also be rolled back to the original HSA Custodian/Trustee within the 60-day period. NOTE: An individual can have one IRA-to-IRA rollover per year in addition to having one HSAto-HSA rollover in the same year. IRA and HSA rollover rules are NOT aggregated. JM Consultants, Baxter, MN

48 HSA Transfers The HSA transfer rules are identical to those regarding IRAs. 1) The transfer check, draft, or wire must be made out to the receiving financial organization, not the HSA Owner. 2) Transfers are not taxable, and therefore, not subject to withholding requirements. 3) Transfers are not reported by the financial organization to the IRS, and therefore, the HSA Owner does not have to report them when they file their personal Federal tax return. 4) Transfers are not limited in terms of how many transfers may be made from the same HSA. 5) Transfers are not limited in terms of the number of times the same HSA assets may be Transferred to another HSA. 6) Transfers are not limited in terms of how quickly the assets must be redeposited in the receiving HSA; there is no 60-day rule for transfers. 7) Transfers can only be made to HSAs for the same HSA Owner. Not even courts can change this. Local judges and attorneys can NOT change this. NOTE: Once contributions are made to the HSA, they CANNOT be transferred to anyone else, including a spouse s HSA, even if the contribution was made under a Family HDHP. Although transfers are often accomplished electronically through wire transactions, it is also possible to draft a transfer check to the financial organization receiving the transferred assets. In order to be treated as a transfer rather than a rollover, a transfer check must be titled in the following way or some similar method: ABC Financial Institution as Custodian FBO of John Doe s HSA As long as a transfer check, draft or wire is properly titled, it shouldn t matter whether the check is mailed directly to the receiving financial organization or the HSA Owner hand delivers it to the receiving financial organization. Proper titling should ensure the check is only negotiable by the trustee, and therefore is considered a trustee-to-trustee transfer no matter what means is used to get the transfer check from the sending to the receiving financial organization. However, since it cannot be guaranteed that all financial institutions will handle these transactions correctly, and we have seen a number that were not administered correctly, we recommend that the financial organization NOT give the transfer check or draft to the HSA Owner. This will avoid problems like incorrect cashing, depositing into the wrong HSA, depositing it into a non-hsa account, lost checks/drafts, and other errors. IRS Revenue Ruling , from 1978, written for IRA Transfers, clearly states that for the transaction to be a JM Consultants, Baxter, MN

49 complying transfer it must be transacted directly from one trustee to another trustee. Since the IRS is likely to use the same procedures for HSA Transfers, if something goes astray, the IRS could find fault with the HSA Custodian/Trustee for any problems. In cases where the titling of a check/draft for deposit into an HSA is unclear as to intent, it is important to contact the sending institution and the HSA Owner to find out whether they intended the check/draft to be sent as a rollover or as a transfer so that the reporting (or non-reporting) is appropriate at both the sending and receiving financial institution. Financial Organizations May Refuse to Directly Transfer HSA Assets Organizations may refuse to directly transfer HSA assets if the HSA Plan Document does not establish a contractual obligation allowing transfers. Whether a financial organization must directly transfer assets upon request by the HSA Owner is a matter of contract law, not tax law. Therefore, if the plan document allows a financial organization to reserve the right not to transfer assets, they are not legally obligated to do so. Of course, not offering direct transfers could ultimately put a financial organization at a competitive disadvantage even if it is not legally obligated to do so. If the Plan Document so states, JM Consultants highly recommends that the HSA Custodian/Trustee be sure to point this out when establishing an HSA. Additional rules are as follows: HSA-to-HSA Rollover is allowed. Archer MSA-to-HSA Rollover is also allowed. HSA-to-Archer MSA Rollover is NOT allowed. HSA-to-HSA Transfer is allowed. Archer MSA-to-HSA Transfer is also allowed. HSA-to-Archer MSA Transfer is NOT allowed. These transactions are also NOT acceptable: IRA-to-HSA Rollover is not allowed. HSA-to-IRA Rollover is not allowed. Qualified Retirement Plan-to-HSA Rollover is not allowed. HSA-to-Qualified Retirement Plan Rollover is not allowed. JM Consultants, Baxter, MN

50 Transfers Due to Divorce or Legal Separation A divorce decree or legal separation agreement should provide the information necessary to properly transfer HSA assets from one HSA Owner to the HSA of his or her former spouse or legally separated spouse. Information that is generally necessary to properly transfer HSA assets to a former spouse includes: How the assets should be divided (pro rata, a specified percentage, a particular asset held by the HSA, or a specific dollar amount), The date the decree was effective, particularly if the decree called for a pro rata division of the assets, since distributions to the HSA Owner after the effective date would have to be taken into consideration to determine the proper amount to be transferred, Whether assets are to be liquidated for the purpose of the transfer or if they are to be transferred in kind. Whether assets are to be distributed to the former spouse or transferred to the former spouse s HSA. A divorce decree could call for a transfer of all or part of a spouse s HSA to be transferred to the ex-spouse s HSA. It is a non-taxable transfer. The ex-spouse however could NOT get a distribution from the ex-spouse s HSA and then roll it over to his or her own HSA. Regular distribution rules apply in that case. Please note that there may be cases where a divorce decree does not provide enough information to transfer HSA assets to an ex-spouse s HSA. In such a case, you may need to refer the HSA Owner back to the courts for clarification, or, depending on the nature of the problem, request that the HSA Owner and/or the ex-spouse sign a hold harmless agreement, which states that the financial organization is not responsible for any adverse tax consequences associated with the transfer. In either case, be sure to review with your legal counsel before doing anything. In-Kind HSA Transfer or Rollover Although it is unusual to have a self-directed HSA, it is not impossible. Some individuals use the HSA as an investment vehicle rather than an account for medical expense reimbursement. In-kind transfers and rollovers of HSA assets are allowed. So that instead of liquidating the asset, for instance common stock, and transferring the cash, the common stock is transferred by reregistering the stock with the proper transfer agent. In order to roll over property from one HSA to another HSA, the receiving HSA must be able to take title of the property. If it cannot, it is not permitted for the HSA Owner to take a distribution of the property, sell it, and then roll over the proceeds of that sale to the new HSA. If a receiving HSA cannot properly receive the property, the current Trustee or Custodian must sell the property, not the HSA Owner, and the proceeds from the sale may then be distributed and rolled over to the second HSA. JM Consultants, Baxter, MN

51 One-time FSA-to-HSA and/or HRA-to-HSA Contribution Qualified HSA Funding Distribution NOTE: THIS IS NO LONGER AVAILABLE FOR 2012 OR LATER YEARS Health Reimbursement Accounts (HRAs) and Medical Flexible Spending Accounts (FSAs) HRAs and FSAs ARE NOT HSAs! HRAs and Medical FSAs are reimbursement accounts set up and administered through an individual s employer as part of the employer s employee benefit package, sometimes called a cafeteria plan. Although some HRAs and FSAs disqualify the individual from being HSA-eligible, it is possible to have an HRA or medical FSA and still be eligible to make HSA contributions. Because of the difficulty in determining this, the HSA Owner should check with their employer s HRA or Medical FSA administrator to make sure they are eligible for HSA contributions. Through December 31, 2011, an individual that was a participant in a medical Flexible Spending Account (FSA) and/or a Health Reimbursement Account (HRA) was, in certain circumstances, able to direct his or her employer to send assets from his/her medical FSA and/or HRA to his/her HSA. In other words, a participant could make one transfer of funds from their medical FSA and another transfer from their HRA. The participant, however, could not make two transfers from the medical FSA or HRA. AND, this was only able to be done if the medical FSA and/or HRA plan allows this transaction. In addition this was only allowed for medical FSAs and/or HRAs that had a balance as of September 21, The amount that was eligible for this transaction was the lesser of: * the balance in the FSA and/or HRA as of September 21, 2006, or * the amount in the FSA and/or HRA as of the date of the distribution. These transactions did not affect and did not count towards the annual HSA contribution or rollover limits. They were tax-free as long as the individual did not fail the testing period. The HSA Custodian or Trustee reported these as a rollover contribution to the HSA in box 4 of IRS Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information. However, they were accomplished as a transfer, meaning the Medical FSA or HRA administrator must have made the check out to the HSA Custodian/Trustee. It was not accomplished as a true rollover. It s IMPORTANT to REMEMBER that even though it was reported as a ROLLOVER, it too must have been administered and completed as a direct TRANSFER! HSA Funding Distribution Testing Period In order for an HSA Owner to have taken advantage of this Medical FSA and/or HRA-to-HSA contribution rule he or she must have remained an eligible individual beginning with the date that he or she authorized the FSA and/or HRA-to-HSA distribution/transfer until the last day of JM Consultants, Baxter, MN

52 the 12th month following such date. If the HSA Owner lost HDHP coverage before the end of this testing period, his or her HSA transfer/rollover which had previously been allowed under this rule will be subject to tax and a 10% additional tax ( penalty ). It is not considered an excess contribution however, and it is not required to be removed under the excess rules. Any distribution must be reported normally as any HSA distribution. Exception to Meeting Testing Period for Disability or Death An HSA Owner that took advantage of this rule but failed to maintain an HSA eligible individual status throughout the entire testing period due to death or disability will not have his or her contribution made under this rule subject to income tax or penalty tax. This is the same exception seen earlier in this manual for other testing period. In addition to the above mentioned rules, these Qualified HSA Distributions could only have been made if: The Medical FSA or HRA Plan is amended by the employer to allow for these transactions, The employee in the Medical FSA or HRA Plan elected the Qualified HSA Distribution by December 31 of the plan year, The yearend plan balance was frozen, and The assets are transferred within two and one-half months after the end of year and results in a zero balance in the FSA or HRA, AND The transaction took place BEFORE January 1, 2012! the plan NOTE: THE IRA-TO-HSA FUNDING DISTRIBUTIONS ARE STILL AVAILABLE! JM Consultants, Baxter, MN

53 Chapter 6 HSA Investments The investment products that are allowed in HSAs are almost identical to those which are allowed in IRAs. This includes CDs, Money Market Accounts, savings accounts, securities including stocks, bonds and mutual funds, even real estate, etc. However, usually noncash investments will only be used when the HSA Owner is looking at the HSA as an investment vehicle and not as an immediate account for medical expenses. A Self-Directed HSA would need to be established, using specific documentation with language allowing non-cash (self-directed) investments, in order to invest in anything but savings and cash accounts offered by the HSA Custodian/Trustee. Also, as with IRAs, always bear in mind that a particular investment may not be available to the HSA Owner if the HSA agreement does not allow for that type of investment product. Another limiting factor can be the policy and procedures of the HSA Custodian or Trustee. Several investments allowable for HSAs which are generally not used with IRAs are checking accounts and debit, credit, and stored-value cards. Because HSAs are not subject to the withholding rules that apply to IRAs these types of investment products are not only allowable but are also very popular within the industry. Bear in mind that all of the normal disclosure documents that are required for such accounts, like signature cards, truth-in-savings documents, APR disclosures, etc. will still be required under other banking rules that already existed prior to HSAs using such investments. Remember that all of the other issues associated with such investments remain when these investments are being used for HSAs. Issues such as overdrafts, prohibited transactions, obtaining proper signatures, disclosures to inform the HSA Owner that using these investment products will generate IRS reporting, etc., all need to be reviewed. Even in light of such issues the use of such investment products will free-up the HSA Custodian s or Trustee s time in light of the fact that the withdrawals need not be done via the use of an HSA withdrawal form, per se. It is a good idea, however, to have some type of Distribution/Withdrawal authorization signed by the HSA Owner at least annually. From the HSA Owner s perspective this also means ease of access to their HSA assets. This is true in several ways. JM Consultants highly recommends that some type of Withdrawal Form is authorized by the HSA Owner, at least annually. That is also a good time to review any procedures concerning the withdrawals. Whether it is obtained at the end of the year, or as JM Consultants recommends, at the beginning of the year, getting their authorization is a key piece of documentation. If your forms vendor does not have such a form, like a Periodic Distribution Form, you could easily prepare one for this use. JM Consultants, Baxter, MN

54 Example Bob Davis has an HSA with a checking account as the investment vehicle. Bob appreciates this as he doesn t need to go to his HSA Custodian every time he wants to withdraw HSA funds; he merely writes a check from his HSA checking account. The HSA Custodian also allows the use of multiple signatures on the HSA checking accounts. Bob has given the HSA Custodian a Power of Attorney naming his wife, Mary, as an additional signer and Mary has signed the HSA Custodian s signature card allowing her access to the HSA for medical expenses. NOTE: One important point here is that having more than one authorized signer on the HSA account does not and CANNOT make the HSA a joint account. Bob is still the sole Owner of the HSA. He has merely authorized his wife, Mary, to withdraw assets at her convenience. Documentation must be precise that it is NOT a joint account, merely an account with multiple signatures. This means the additional signers names cannot appear on the title of the account or on the HSA investments. Any appearance of a joint account could disqualify the HSA. There is no IRS restriction on who can be an additional signer, even to the point of naming a minor. However, state laws and financial institution policies and procedures can apply limitations. When investment products are allowed which are not typical depository investments, like stocks, mutual funds, real property, notes, etc., it is also important to insure that the HSA Owner is not engaged in a prohibited transaction. These types of transactions are sometimes referred to as selfdealing. The hallmark of such a transaction is that the HSA Owner is benefiting himself or herself personally outside the HSA, which is generally not allowed. If an HSA Custodian or Trustee has doubts about a particular investment product or investment arrangement and whether or not it is allowed or prohibited, the legal counsel of the HSA Custodian or Trustee should be asked to advise on the acceptability of the investment/transaction. HSA prohibited transactions follow the same rules as they do for IRAs, as found in Internal Revenue Code JM Consultants, Baxter, MN

55 Chapter 7 HSA Distributions As noted earlier, the main purpose of an HSA is to pay for medical expenses on a tax-free basis. Specifically these medical expenses are known as qualified medical expenses. The technical definition of what constitutes a qualified medical expense can be found in Internal Revenue Code 213(d). For a more understandable definition of the IRS explanation of qualified medical expenses the HSA Owner should refer to IRS Publication 502, Medical and Dental Expenses. The basic definition of the term medical expenses from the IRS Publication 502 is: the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists and other medical practitioners. They include the cost of equipment, supplies, and diagnostic devises needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation. Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract. Also, certain lodging expenses that were primarily for and essential to medical care is included as well. As a general rule cosmetic surgery is not a qualified medical expense unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. The term cosmetic surgery generally means any procedure which is directed at improving the patient s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. Keep in mind, both of these references refer to what is DEDUCTIBLE on your personal Federal Income Tax return. These references are almost exactly the same as for the HSA definition of Qualified Medical Expenses EXCEPT for one big area. Most medical insurance premiums are NOT a Qualified expense for HSA purposes even though they may be deductible on your tax return. JM Consultants, Baxter, MN

56 It s also important to remember, that this is really a personal tax matter. The HSA Custodian/Trustee should suggest that the HSA Owner seek their own tax advisor. However, an easy, working definition for HSA Qualified Expenses is those medical expenses that would qualify as an itemized deduction, they do not need to itemize, it s just a reference, except medical insurance premiums which includes Medicare premiums. In matters like this the HSA Owner should always seek their own tax advice. It is also important to note that the HSA Custodian or Trustee is not responsible for determining whether or not a medical expense is an HSA qualified medical expense or whether or not an HSA distribution was used to pay for such expenses. The policing of the HSA distribution is entirely up to the HSA Owner and the IRS. The HSA Owner validates that the distributions were used for qualified medical expenses on IRS Form 8889 (addressed earlier). Example 1 John first becomes eligible under a self-only HSA-eligible HDHP on June 1, He defers making his 2017 HSA contribution until April 15, He establishes his first HSA at that time. John s son, John Jr., needed surgery after a fall from his bicycle on October 1, John wanted to reimburse himself for the $700 qualified medical expenses incurred at that time. He, of course, wanted it to be a tax-free, qualified HSA distribution. While John could reimburse himself for the expenses, IT IS NOT A QUALIFIED MEDICAL EXPENSE FOR HSA PURPOSES. Why not? Qualified HSA medical expenses are only those that are incurred AFTER AN HSA IS ESTABLISHED, NOT, when the individual becomes eligible. The HSA must be established AND a contribution must be made for the HSA to be legally considered established. Completed plan agreements do NOT constitute the opening of an HSA. It is the contribution, even if only $1, that established the HSA, PER THE IRS! Since John delayed making an HSA contribution until April 15, 2018, medical expenses incurred prior to that date are not considered qualified expenses for HSA purposes. NOTE: Qualified medical expenses do not have to be paid by the HSA or reimbursed to the HSA Owner from the HSA in the same year that the expense was incurred, but they must be for expenses incurred on or after the date of the HSA establishment. Example 2 Mary paid $1,750 in qualified medical expenses in 2010 from her own personal, non-hsa funds. Her cash flow was good and she decided to save the HSA funds for any future medical expenses. She still made her HSA contributions for 2010 through Now, in 2018 however, she saw her cash flow come to a severe halt. She decided to reimburse herself for those 2010 medical JM Consultants, Baxter, MN

57 expenses. She took a qualified HSA distribution in the amount of $1,750 from the account in It was tax-free and penalty-free. HSAs are not like other medical reimbursement accounts. They are NOT on a year-to-year basis. If the funds are not used in one year, they can be used for qualified medical expenses from any year in the past or in the future as long as they were incurred AFTER the HSA was established. This applies even if the individual is no longer eligible to make HSA contributions. NOTE: Child of Divorced or Separated Parents: For purposes of the medical and dental deduction, a child of divorced or separated parents can be treated as a dependent of both parents. Each parent can include the medical expenses he or she pays for the child, even if the other parent claims the child s dependency exemption if: 1 The child is in the custody of one or both of the parents; 2 The child receives over half of his or her support during the year from or her parents, and 3 The child s parents are divorced or legally separated under a decree of divorce or separate maintenance. HSA Custodian/Trustee Limitations An HSA Custodian/Trustee can limit the use of the checking account, debit card, or other HSA distribution method. For instance, limiting where the debit card can be used or what can be purchased with it is allowed. However, if the usage is limited by the financial institution, the HSA Owner must be given another method to withdraw funds for any reason, for instance, requesting a check from the HSA Custodian/Trustee. Federal Income Tax Withholding on HSA Distributions Unlike IRA distributions, HSA distributions are NOT subject to Federal Income Tax Withholding. If the HSA Owner requests withholding, as unlikely as that may be, you should check with your financial institution s legal counsel before doing so. Withdrawals from an HSA that are not used for qualified medical expenses are not tax-free and will also be assessed an additional tax (usually known as the IRS penalty ) of 20 percent. Prior to 2011 the penalty was 10%! The tax will apply but the penalty will no longer apply, if the withdrawal was not used for qualified medical expenses, as long as the withdrawal was made due to: Death and paid to an HSA Beneficiary, Disability and paid to the HSA Owner, or Attainment of age 65 by the HSA Owner JM Consultants, Baxter, MN

58 Example 1 Amanda inherits her deceased father s HSA in Amanda is 22 years old. Amanda will owe income tax on the amount of the inherited HSA but she will not owe the additional tax of 20 percent since she received the money due to the death of the HSA Owner, her father. Example 2 Kurt has an HSA with a $60,000 balance. Kurt is 67 years old in Kurt decides to use part of his HSA for ordinary living expenses in his retirement, not for qualified medical expenses. Because Kurt is not using these distributions for qualified medical expenses he will owe taxes on the withdrawals. However, since Kurt is 65 or older he will not owe the additional 20 percent tax. NOTE: HSA Owners who have attained age 65 have another advantage with HSAs. Even if they are enrolled in Medicare and can no longer make HSA contributions, the funds accumulated in an HSA are always available on a tax free basis for qualified medical expenses. HSA funds are not a use-them-or-lose-them account. They remain available year-to-year. In addition, the funds can be used for any purpose after age 65 and not be penalized. Funds used for non-qualified expenses will be subject to tax but will NOT be penalized. Many compare this situation to an IRA. They got the deduction for the HSA contributions when contributed. The earnings accumulated tax-deferred while in the HSA, and the funds can be used for anything. AND, there are no required minimum distributions after age 70½, or any other age, as there are for IRAs. Example 3 George turned 65 in 2017 and enrolled in Medicare. He no longer was eligible to make HSA contributions. His HSA account had a balance of $12,500. Newly retired, he decided to take his wife, Martha on a long ago promised Hawaiian vacation. The cost was going be $6,000. He used funds from the HSA to purchase the vacation package. It was subject to tax but was not penalized even though it was not used for qualified medical expenses. NOTE: The ability to pay any qualified medical expense after the HSA Owner is no longer eligible to contribute to the HSA applies to all HSA Owners, regardless of age. Example 4 Bill, age 57, was no longer eligible in 2017 to make HSA contributions since his employer changed health care plans to a non-hdhp policy. His HSA has a balance $15,000. Even though he can no longer make contributions, the funds in the HSA can be used for any qualified medical expense incurred from the day of the HSA establishment until the HSA funds have been exhausted. In 2017, Bill decides to use his HSA funds for medical expenses for his wife Hillary. No problem. That distribution is a tax free, penalty-free distribution. JM Consultants, Baxter, MN

59 IMPORTANT CHANGES since 2011 Starting in 2011 the IRS Penalty for non-qualified HSA Distributions has increased from 10% to 20%. (Remember, HSA funds can be used for anything, but it comes at a price income tax and penalty tax! And NOW the penalty is 20%) Over-the-Counter Medications However, another change may have a much greater effect on the HSA Owner. Beginning in 2011, over-the-counter (OTC) medications are no longer considered a qualified medical expense unless they are purchased due to a doctor s written or electronic prescription. OTC medications will only be qualified medical expenses for HSA purposes if they are prescribed by a doctor. Any OTC medicines and drug expenses incurred prior to January 1, 2011 can still be reimbursed after December 31, (That means an expense in 2010 could even be reimbursed in 2017.) Medical equipment such as crutches, bandages, and diagnostic devises do not fall under the new definition, therefore prescriptions for items like this are not needed. IMPORTANT CHANGES for 2013 and 2014 The IRS Instructions for Forms 5498-SA and 1099-SA for 2013 and 2014 indicate the already mentioned elimination of the IRS Pilot Program of truncation of Social Security Numbers. Note the instructions for the 2014 forms. Per the IRS Instructions: Truncating recipient's identification number on paper payee statements. Pursuant to proposed regulations (REG ), all filers of these forms may truncate a recipient's (Form 1099-SA) or participant's (Form 5498-SA) identification number, such as their social security number (SSN), individual taxpayer identification number (ITIN), or adoption taxpayer identification number (ATIN), on payee statements. See part M in the 2014 General Instructions for Certain Information Returns. What this means is truncating is allowed but is NOT mandatory. THERE WERE NO CHANGES to the rules or procedures for ! HSA Overdrafts and NSF Checks/Drafts Whether using checks or debit cards, many reports have surfaced that overdrafts can and do occur. These must be handled differently within HSAs than your regular checking accounts or debit cards. HSA Overdrafts CAN NOT BE ALLOWED ON THE BOOKS of the HSA Custodian/Trustee, NOT EVEN FOR ONE DAY! The item or items must be returned unpaid on the first day they appear in the account. They cannot be held over for a future deposit, not even a day or two. Why? If the overdraft items are covered by the HSA Custodian/Trustee, they could be seen as lending funds (covering the overdraft) to the HSA which would be a prohibited transaction (PT), A PT CAUSED BY THE HSA CUSTODIAN or TRUSTEE, subjecting them to IRS penalties and potential legal issues with the HSA Owner! The HSA Owner caused the overdraft, but the financial institution caused the PT. JM Consultants, Baxter, MN

60 The IRS has also made it clear that services like Overdraft Protection are also not allowed. It makes no difference how the overdrawn account was caused, check, debit card, ATM charge, foreign ATM charge, HSA Custodian or Trustee fees or charges, or even an honest mistake by the HSA Owner. OVERDRAFTS ARE NOT ALLOWED! JM Consultants receives numerous consulting calls and s on this. We have been told that our software can t prevent them or our software won t allow us to do that. Usually, when push gets to shove, the software vendor can fix the problem, they are just choosing NOT to fix it. The IRS has written NO EXCEPTIONS! Regardless, overdrafts must always be handled in the proper manner. The HSA Custodian/Trustee could be deemed to be the cause of a Prohibited Transaction subjecting the HSA Owner and the financial institution to all PT penalties...not to mention potential legal liability. Example 1 Judy overdraws her HSA Checking Account by $150. It shows up on the daily exception report the morning of July 7, If Judy could cover that amount with a valid contribution by the time you need to correct your reports, remember it must be an eligible contribution otherwise an intentional excess is caused, then the item would not need to be returned. If, however, Judy says she can t come in until tomorrow or the next day, the item or items must be returned. There is NO EXCEPTION to this rule. There is no other method that can be used. It must be retuned like any other NSF check. Again, NO EXCEPTIONS! The account does NOT need to be closed however, just corrected. Example 2 Same situation as Example 1, except the customer service representative allows Judy to keep the overdraft on the books until she can come in later and cover it. Clearly against the rules but none the less, it was allowed. This is not good news for the HSA Custodian/Trustee. This is seen as the HSA Custodian/Trustee granting a loan to the HSA, a PROHIBITED TRANSACTION. The HSA is considered fully distributed as of January 1 of the year of the overdraft. AND the HSA Custodian/Trustee could be subject to IRS penalties in addition to the HSA Owner. The HSA Custodian/Trustee must now report the PT on Form 1099-SA! Reporting a Prohibited Transaction HSA Balance January 1, 2017 $5,575 Overdraft (PT) occurs July 7, 2017 $ Form 1099-SA, Box 1, Gross distribution $5,575 Box 3, Distribution code 5 In addition, since the PT rules state that the HSA ceases to be an HSA on January 1 of the year of the PT occurrence, any HSA transactions up until July 7 must be backed out, not reported and the HSA is fully distributed. JM Consultants, Baxter, MN

61 HSA Prohibited Transaction IRS Penalties HSA Owner*: Immediate tax on the distribution with additional 10% if under the age of 59½. Potential 15% to 100% penalty. HSA Custodian/Trustee*: Potential 15% to 100% penalty in addition to any HSA Owner penalties which could also become a liability issue for the HSA Custodian/Trustee. *There may also be state taxes and penalties. HSA Overdraft Fees or NSF Fees So what about the HSA Custodian/Trustee fees or charges for the overdraft or NSF check? They are certainly valid as long as they have been properly disclosed. HOWEVER, the HSA Custodian/Trustee may not cause an overdraft or a larger overdraft with the fees. The fees can certainly be held in abeyance for later processing, but they cannot cause an overdraft in the HSA account. While this may cause an internal problem, the IRS rule is the rule. The HSA Custodian/Trustee cannot state that by getting a deposit, after the fact, that the problem is solved. The argument that We can t stop certain charges is usually wrong, and can be fixed with the software company, IF they want to fix it. The IRS has been real clear on the necessity for this to be followed. The IRS will usually NOT accept that it can t be done! JM Consultants Recommendation: We often hear that an HSA Custodian s/trustee s software does NOT allow them to correct overdrafts caused by debit card. In most cases we have found that that just means the system programmers do not want to re-program, NOT that they can t reprogram. Consequently, since the IRS rules and procedures are real clear, we absolutely recommend that all such overdrafts, regardless of how caused, be treated as explained above. They must immediately be returned. There are NO EXCEPTIONS. You must follow the same procedure you use for returning NSF checks on a daily basis. But remember, unlike regular checking accounts, these overdrafts cause a PROHIBITED TRANSACTION if not immediately returned. Possible Alternative: Since overdrafts seems to be causing so many problems, especially with debit cards, here is a suggestion, however IT HAS NO IRS BASIS! Maybe the HSA debit, HSA credit card or HSA checking account can just list the HSA Owner as the owner, but then also list the additional authorized signers, as such an authorized signature. Again, BEFORE doing anything outside the discussion above, the HSA Custodian/Trustee should review it carefully with their compliance and legal counsel. Because, again, the IRS has NOT changed any of their policies or procedures concerning this. One final comment on this: It has been our experience at JM Consultants that when we hear the excuse/reason Our system won t let us do that, it usually means our system programmers don t want to allow it or don t want to make the necessary changes, NOT that it can t be done. JM Consultants, Baxter, MN

62 HSA Custodian/Trustee Fees When the topic of Withdrawals from HSAs is brought up, one of the issues that arises has to do with fees. Specifically, questions come up regarding how to report fees taken from HSAs, who can pay the fees, and how does the payment of these fees affect the contribution limit when taken from the HSA directly? The IRS has made this topic increasingly clear. Basically, the administration of HSA fees is handled in the same manner as they are for IRAs. Administrative fees can be charged to the HSA or they can be billed directly to the HSA Owner outside the HSA with the payment of said fees not processed through the HSA. The same types of fees allowed for IRAs are allowed for HSAs. And, of course, you must fully disclose any and all fees before any fee can be charged. The IRS has also made it clear that all fees, whether they are annual fees, transaction fees, debit card fees, per check fees, check writing fees, ATM fees, foreign ATM fees, transfer fees, termination fees ALL FEES, are NOT a reportable transaction. They MUST NOT get reported on a Form 1099-SA. Again they are administered like IRA fees, which also should never be reported on Form 1099-R. This also applies to all HSA Custodian/Trustee penalties. Also, it s important to remember that all HSA Custodian/Trustee fees and penalties must be properly disclosed. However, fees can be changed and/or added. They must be properly disclosed, even after an IRA was established. The existing HSA Owners must be given at least a 30 days notice before assessing those new fees or penalties. New HSA Owners can be assessed the new fees and penalties a soon as the HSA is established. (This could be affected by any revocation disclosure.) PENALTIES AND FEES ARE NOT REPORTABLE TRANSACTIONS The IRS has released the following guidance regarding HSA fees: Amounts withdrawn from an HSA for administration and account maintenance fees will not be treated as a taxable distribution and will not be included in the HSA Owner s gross income. Such withdrawals are not reported to the IRS on IRS Form 1099-SA Distributions from an HSA, Archer MSA, or Medicare Advantage MSA. The fees are reflected, at least indirectly in the balance, in the year-end FMV reported on IRS Form 5498-SA. If administration and account maintenance fees are withdrawn from the HSA directly, the withdrawn amount does not increase the maximum annual HSA contribution limit. JM Consultants, Baxter, MN

63 Example 1 If the maximum annual contribution limit is $6,650 (2015), and a $25 administration fee is withdrawn from the HSA, the annual contribution limit is still $6,650, not $6,675 or $6,625. When administration and account maintenance fees are paid by the HSA Owner or employer directly to the Trustee or Custodian, these payments do not count toward the annual maximum contribution limit for the HSA and are not reported on Form 1099-SA or Form 5498-SA. But they must not be accounted for through the HSA. Example 2 An individual contributes the maximum 2015 annual amount to his HSA of $6,650. The HSA Owner personally pays an annual administration fee of $25 directly to the HSA Trustee. The HSA Owner s maximum annual contribution limit is not increased by the payment of the administration fee. The main concept is that administrative fees that are ordinary, necessary, and recurring can be paid directly from the HSA or be paid out-of-pocket, whereas fees that are related to the purchase, maintenance, or sale of investments in the HSA can only be paid directly from the HSA. For any other areas that are not addressed about HSA fees it is likely that the IRS will treat HSA fee issues in a manner similar to how IRA fees have been treated. SUMMARY Penalty Taxes Tax plus 20% penalty Non-Qualified Medical Expenses, no exception applies (Death, Disability & Age 59½) Tax plus 10% penalty Failure to complete holding period for Full Year Contribution Failure to complete testing period for Qualified HSA Funding Rule Tax plus 6% penalty: True excess HSA Contribution not corrected by due date of the Federal Tax Return plus valid extension (Remember difference between IRA and HSA Excess Contributions) JM Consultants, Baxter, MN

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65 Chapter 8 Excess HSA Contributions It is possible for an HSA Owner to contribute more than the acceptable limit (much like it is possible for an IRA Holder to contribute an amount in excess of the annual limit). When this happens it is known as an excess contribution and unless the HSA Owner corrects the excess in a timely manner, the cost to the HSA Owner is an annual six-percent excise tax (usually called an IRS penalty ). NOTE: The penalty is the same penalty as when an IRA Owner has an excess contribution. Also note that the procedure to correct an excess contribution in an HSA is almost identical to that of how IRA excess contributions are corrected. The excesses are removed with Net Income Attributable (NIA) before the HSA Owner s tax filing date including extensions, usually the October 15 in the year after the tax year of the contribution. Example 1 Mike Arnold has a 2017 Self-only coverage HDHP with a $1,250 deductible and a $5,000 outof-pocket limit. Mike s coverage under the HDHP ended June 3, Since Mike was an eligible individual only six months during the year this makes his contribution limit one-half of the full $3,400 amount or $1,700. Due to Mike s lack of knowledge of how HSA contributions are determined he makes a full year s contributions ($3,400) in July Left uncorrected by October 15, 2018, Mike will owe an annual six-percent excise tax on the $1,700 excess contribution ($102). Mike discovers his excess contribution when he s preparing his 2017 tax paperwork and removes the $1,700 excess contribution along with $15 in earnings. By doing this before the due date of the tax return plus extensions, October 15, 2018, Mike avoids the six percent excise tax on excess contributions. NOTE: The method to calculate the net income attributable (NIA) that MUST BE REMOVED is the same method as that used for correcting IRA excess contributions. Unlike IRA excess contributions, HSA excess contributions cannot be carried forward to the next year s eligibility. All HSA excess contributions must be removed to eliminate the annual penalty. The NIA is taxed in the year the excess contribution was made. For instance: If the December 2017 excess contribution with NIA is withdrawn in 2018 by October 15, the earnings are taxed in If a January 2018 excess contribution for 2017 is removed with NIA in March 2018, the earnings are taxed in Example 2 Use the same information as above, only Mike does not correct the excess by the due date of his tax return including extensions. He must amend his 2017 tax return, if it was already filed, and JM Consultants, Baxter, MN

66 indicate the excess, paying the 6% penalty for 2017.The excess must still be removed. However, now no earnings are removed since it is past his tax return s due date plus extensions. This is the only option Mike has. He may not apply the excess to 2018 or later year s HSA contribution eligibility. (This is only allowed for IRA Excess Contributions.) The annual 6% penalty continues until the excess contribution is corrected. If it is NOT corrected between October 15 and December 31, 2018, another 6% is owed. If not corrected by December 31, 2019, another 6% is owed. The 6% annual penalty continues until the excess is corrected. The penalties are reported by the HSA Owner on Form 5329 for the appropriate tax year. Example 3 On October 1, 2017, Jane discovers she made a 2018 excess HSA contribution in the amount of $1,500, forgetting a previous employer s contribution. However, she has already depleted her HSA account to $25, taking distributions in 2017 for qualified medical expenses in the amount of $2,000. What can Jane and the HSA Custodian/Trustee do? IMPORTANT NOTE: There is no direct guidance from the IRS for this situation for HSAs or for IRAs for that matter. So we must come up with a reasonable procedure within the known rules. Therefore, JM Consultants recommends the following: Since we know the 2017 distributions have been made using regular HSA distribution IRS coding, Code 1, the HSA Custodian/Trustee must make internal changes of those distributions. Original 2017 Form 1099-SA 2016 Distributions made $2,000 Box 1 Box 3 Code 1 Final (Corrected) 2017 Form 1099-SAs FIRST FORM 1099-SA Change transactions $1,525 Box 1 Record NIA $25 Box 2 Box 3 Code 2 SECOND FORM 1099-SA Balance 2017 Distributions $475 Box 1 Box 3 Code 1 Explanation: The reporting for the excess contribution correction is accomplished first. The $1,500 excess amount and the $25 in NIA are reported per the first (Corrected) 1099-SA, as shown above. JM Consultants, Baxter, MN

67 Then the balance of the distribution is calculated by subtracting $1,525 from the original distribution of $2,000, as shown above in the second (Corrected) 1099-SA. You may find this worksheet helpful for determining the NIA. NOTE 1: The HSA Owner could wait until the next year so that the correction could be made after an eligible contribution was made. Of course the HSA Owner would have to eligible, contribute enough to correct the excess. However, the IRS Penalty 2017 and 2018 would have to be paid. NOTE 2: It makes no difference why the HSA has a smaller balance than needed to correct the excess contribution, or how the excess was caused. CAUTION: Again, remember, there is no clear guidance from the IRS for this situation. HSA Custodians/Trustees should review this with their own compliance and legal counsel before completing this. Example 4 HSA Owner makes a $1,500 contribution on January 5, 2017, adding it to his existing HSA. He discovers in June that he was no longer eligible for an HDHP. The $1,500 is an excess contribution that must be removed. The balance in the HSA is $25. There have been ten distributions totaling $1,800. Solution: The distributions in 2017 must be changed, the coding must be corrected to Code 2, starting with the latest and working backwards until the proper amount has be recoded. Re-code only the amount needed to correct the excess. Only part of a distribution can be used to get to the required amount. Excess HSA Contributions Net Income Attributable (NIA) Worksheet 1. Amount of excess contribution to be removed Ending balance just prior to removing excess contribution (add to actual ending balance any subtractions including distributions, transfers, recharacterizations, etc. that were removed from the account after the excess contribution was made but prior to the excess being removed). 3. Starting balance immediately before excess contribution was made (add to actual starting balance any addition including contributions, transfers, rollovers, recharacterizations, etc. made to the account from the time the excess contribution was made until the present, including the excess contribution, itself) JM Consultants, Baxter, MN

68 4. Subtract sum on line 3 from sum on line Divide line 4 by line 3. (Round to at least three places) Multiply line 1 by line 5. (This is the NIA) Add line 6 to line 1 (Excess contribution plus NIA to be removed) 7. Follow this procedure and this worksheet and formula should be easier: Step #1 Lookup or Calculate the needed data Excess Contribution amount being removed Calculation period 4 Starting Balance All additions to the IRA during the period Ending Balance All subtractions from the IRA during the period Step #2 Calculate the Adjusted Starting¹ and ending Balances³ Step #3 Calculate Total Net Earnings² Step #4 Calculate Percentage of Earnings Attributable to Excess Contribution Step #5 Calculate NIA for Excess Contribution Step #6 Remove Excess Contribution with NIA ¹This is the (FMV) balance in the IRA before the contribution being removed was received plus all additions including contributions, transfers, rollovers, recharacterizations, etc. from the time the contribution being removed was received until it is being removed. ²This is calculated by subtracting the Adjusted Starting Balance from the Adjusted Closing Balance ³This is the (FMV) balance in the IRA before the contribution is being removed plus all distributions and subtractions including transfers, recharacterizations, etc. from the time the contribution being removed was received until it is being removed. 4 The calculation period is the time from the date of the deposit of the contribution that is being removed until the day it is actually being removed. In addition some IRA manuals show the calculation in another manner, as a mathematical formula, which also works: (Excess) Contribution X Adjusted closing balance Adjusted opening balance = NIA JM Consultants, Baxter, MN

69 When is an Excess HSA Contribution NOT an Excess HSA Contribution? On the surface this would seem like a riddle without an answer. However, when it comes to HSAs, the HSA Custodian/Trustee must forget what an IRA excess is, because there are a number of differences when it comes to HSAs. As already seen in this manual, in the earlier examples, if an HSA Owner makes a contribution in excess of what they are eligible for, it is corrected in generally the same manner as it would be in an IRA. But it must be corrected. It cannot be applied to a future year s eligibility as IRA excess contributions can. If, however, an apparent excess is caused by not fulfilling the testing period for the Qualified HSA Funding Distribution, there is a penalty, but the penalty is 10% plus any usual income tax. The 6% penalty for excess contributions does NOT apply here. But the amount that is still incorrectly in the HSA does NOT need to be removed. In fact, if it is removed without a qualified medical expense to cover it, there could be double tax and double penalty involved! Tax and penalty for not completing the testing period and another tax and penalty for the non-qualified distribution. Likewise, if the testing period for the full-year contribution rule is not complied with. Again, there is tax and 10% penalty on the amount that was contributed. But, again, the amount must stay in the HSA. Again, if it is removed without a qualified medical expense to cover it, double tax and double penalty is possible. In addition, any apparent excess caused by employer contributions must be assessed very carefully because they may not have caused an excess contribution and/or it may need to be corrected differently. Example 1 The HSA Owner contributed an HSA Funding Distribution from his IRA on July 15, The testing period was through July 31, The HSA Owner was no longer eligible under an HSA qualified HDHP in April 2018, not fulfilling the testing period. The HSA Owner does not realize the error until March This would seem to be an excess contribution. Not so! If the HSA Funding Distribution was completed when the HSA Owner was actually eligible, it is NOT considered an excess. The HSA Owner must report and pay the penalty on his or her 2018 Federal Income Tax return, but it is NOT an excess, is NOT penalized 6% AND does NOT need to be removed. Example 2 The HSA Owner uses the full contribution rule in December 2017 when his HDHP went into effect on the first of the month. He loses his HDHP eligibility in July 2018, well before the required December 31, Consequently income tax and a penalty tax of 10% is due on the amount that is over the allotted contribution amount. He contributed $6,750, the maximum family JM Consultants, Baxter, MN

70 coverage for Since he was only eligible for one month, or $562.50, $6, is in error and would seem to be an excess. Again, not so. Since the HSA Owner was eligible when making the contribution, it is NOT an excess contribution and does NOT need to be removed. However the HSA Owner does owe income tax and a 10% penalty tax on the excess amount on his 2017 Federal Income Tax return. SUMMARY Penalties Tax plus 20% penalty Non-Qualified Medical Expenses, no exception applies (Death, Disability & Age 59½) Tax plus 10% penalty Failure to complete holding period for Full Year Contribution Failure to complete testing period for Qualified HSA Funding Rule Tax plus 6% penalty: True excess HSA Contribution not corrected by due date of the Federal Tax Return plus valid extension (Remember difference between IRA and HSA Excess Contributions) CONCLUSION and CAUTION HSA Custodians and Trustees must be aware of what an HSA excess contribution is, and what is not an HSA excess contribution. The rules for determining are certainly different than they are for IRAs. Excess EMPLOYER HSA Contributions IRS Notice clarified, some might say further confused this issue. The entire Notice had 42 questions and answers. We will only address the three that have most to do with apparent HSA excess contributions. Q&A-23 of the IS Notice asks if an employer who contributes to the HSA of an employee WHO WAS NEVER AN ELIGIBLE INDIVIDUAL, can recoup the amounts. The IRS answered that the employer can ask for a reimbursement since the IRS surmises no official HSA ever existed since the employee was never eligible, even if an HSA was incorrectly established. In this case the employer may request the funds directly from the HSA Custodian/Trustee. However, the employer must do that before December 31 of the year of the contribution. If the employer fails to do so by December 31, it is considered additional income to the employee and the employer must correct the employee s Form W- 2 accordingly. The funds then stay in the HSA and are dealt with as an excess that must be corrected by the ineligible HSA Owner. If the employer timely requests the funds, the HSA Custodian/Trustee issues the check to the employer and corrects the contribution records. The incorrect amounts would not be reported. It is treated as a reversal of the transaction. JM Consultants recommends that the HSA JM Consultants, Baxter, MN

71 Custodian/Trustee corrects this in such a manner that the entries, the contribution and the reversal, both appear on the statement record, just NOT reported to the IRS. A clear audit trail should be left. If the employer does NOT timely request the funds, it must be reported as any other HSA contribution. And, of course, the individual has an excess contribution which is subject to the regular excess rules and must be corrected by the HSA Owner. Q&A-24 of the IRS Notice describes what must be done when an employer contributes an amount in excess of the maximum annual contribution allowed due to an error. One can ask how else would it be contributed than in error. But this seems to mean that if the employer contributed too much on purpose, for whatever reason, the employer can NOT ask for the money back from the HSA Custodian/Trustee. Again, if the incorrect amount is requested by December 31 of the applicable year, the employer may request the HSA Custodian/Trustee to return the funds directly to the employer. The incorrect amounts would not be reported. If not done by December 31, the same rule applies as above. This situation is reported in the same manner as described in Q&A-23 and any excesses must be corrected by the HSA Owner. When can t the employer request the excess from the HSA Custodian/Trustee? If, however, the amounts contributed by the employer are more than the employee was eligible for but less than the statutory maximum limit, the employer may not request the amounts from the HSA Custodian/Trustee. In this case, it is reported normally as a contribution and the HSA Owner must correct any excess contribution situation. This situation is also reported in the same manner as described in Q&A-23. NOTE: Whether the employer is allowed to request the direct return of the funds or not, it is highly recommended that the HSA Custodian/Trustee verify in writing all such disbursements with the HSA Owner. This applies to both situations above. Example The employer asks the HSA Custodian for a direct refund of the recent $1,000 excess contribution that was paid by the employer into John s HSA. We recommend that before doing anything the HSA Custodian should check with the HSA Owner to see if he is in agreement. If he is, ask him to sign a Distribution Form authorizing such a payment. In addition, of course, the Employer must prove to the HSA Custodian that he is eligible for such a direct refund. Written documentation should also be obtained from the Employer. Q&A-25 of the IRS Notice concerns an employer continuing to contribute to an employee s HSA who ceases to be an eligible individual. The employee was eligible to begin with but ceases to be eligible during the year. In this situation the IRS stated the JM Consultants, Baxter, MN

72 employer may not request that the funds be directly paid to the employer. It remains a contribution for reporting purposes. The employee must correct any excess. The employer must request any refund from the employee, NOT from the HSA Custodian or Trustee. All distribution and contribution reporting is done normally. Excess contributions must be corrected. A more detailed description can be found in JM Consultants A Guide to IRA Reporting and Compliance. Conclusion: There really doesn t seem to be any rhyme or reason as to how the IRS came up with these conclusions and procedures. Suffice it to say, the HSA Custodian/Trustee must review each situation carefully BEFORE correcting any HSA transaction. The wrong procedure could cost the HSA Owner income tax and penalty tax, even double tax and penalty in some cases. NOTE 1: Employer Contributions are NOT reported separately. However, since Excess Contribution rules differ, the HSA Custodian/Trustee might want to keep track of the Employer Contributions separately from all other HSA Contributions. They MUST NOT be reported separately but maintaining separate documentation for the employer may be a help if an Excess occurs. NOTE 2: Unlike IRAs, HSA contributions that are NOT true excesses, CANNOT be removed by the tax return due date plus extensions. There is no provision in the rules for such a transaction. JM Consultants, Baxter, MN

73 Chapter 9 HSA Beneficiary Options Perhaps no other area of HSA administration is clearer to understand, and generally easier to administer than is the area of HSA beneficiary options. First, unlike IRAs, there is no such entity as an Inherited HSA to administer. Then there are only three simple rules which apply: 1 Spouse Beneficiary When the HSA Owner dies having named a spouse as primary beneficiary of the HSA, it automatically becomes the surviving spouse s HSA. The HSA Custodian/Trustee must transfer the balance into an existing HSA for the spouse beneficiary or a new HSA must be established. Do not just change the name of the account even if your system allows that. There are still reports that must be done for the decedent. At that point all of the normal HSA rules will apply to the spouse as the new HSA Owner, even if the spouse was never eligible to have an HSA in the past. The spouse beneficiary has no choice or option as there is for an IRA. Since this is NOT considered a distribution, there is nothing to report. An internal transfer is used if the spouse s HSA is at the same financial institution. A transfer request from the other HSA Custodian/Trustee would be required if the spouse s HSA is at another financial institution. The reporting for the Spouse Beneficiary s personal HSA is done the same as any other HSA. The year-end statement and 5498-SA for the decedent is reported as zero! Example James has an HSA with his wife Cindy as the primary beneficiary of the HSA. James dies in a car accident. Cindy is the new HSA Owner as of the date of James death. If Cindy is no longer covered by an HDHP (due to James death, for example) she will no longer be allowed to make HSA contributions but she can preserve the HSA assets and use them for her qualified medical expenses or those of her dependents. The inherited HSA funds are NOW her HSA! It is an HSA. It is NOT an Inherited HSA. 2 Non-spouse Beneficiary - When the HSA Owner dies having named a non-spouse primary beneficiary, the HSA ceases to be an HSA as of the date of death. The person/entity who inherited the HSA is required to include the amount of the HSA as of the date of the HSA Owner s death in his/her/its taxable income for the year of the HSA Owner s death. The income tax liability may be able to be reduced if the person that inherited the HSA uses the HSA assets to pay for the qualified medical expenses of the deceased HSA Owner within one year after death. NOTE: Non-spouse beneficiary procedures include trusts but NOT estates. The inherited HSA funds must be distributed directly to the HSA Beneficiary. Then the HSA beneficiary takes care of any complying expenses personally. They should always review with their personal tax counsel. JM Consultants, Baxter, MN

74 Example 1 Steve has an HSA with a $3,000 balance. Steve has named his daughter Maggie as the primary beneficiary of his HSA. One day in 2018 Steve has a heart attack and an ambulance is called. He is pronounced dead-on-arrival at the hospital. The bill for the medical services provided by the ambulance company is $1,800. Maggie, as the non-spouse beneficiary of Steve s HSA is required to include the $3,000 balance of her father s HSA in her 2018 taxable income. Maggie may pay the $1,800 ambulance bill using the inherited HSA assets and in that way lower her taxable income (from her inherited HSA assets) to $1,200 for As it is in all cases like this, the beneficiary should always seek their own tax counsel before doing anything. 3 Estate beneficiary When the HSA Owner s estate is the primary beneficiary of the HSA, the fair market value of the HSA as of the date of the HSA Owner s death is includable as income in the deceased HSA Owner s final personal tax return. However, the balance of the HSA is paid to the estate as beneficiary of the HSA. The distribution to the estate must be reported using the estate s TIN, NOT the Social Security Number of the deceased HSA Owner. Example 2 Fred Singer has an HSA with a $1,500 balance at the time of his death in The beneficiary of Fred s HSA is his estate. Fred passed away. The taxable income of Mr. Singer s final 2018 personal Federal Income Tax Return is increased by the $1,500 HSA balance. The $1,500, however, is paid to Fred s estate. Even if the HSA funds are not paid to the estate until 2019, the $1,500 must be reported on Fred s final personal tax return for (Just regular HSA reporting, explained later, applies for the HSA Custodian/Trustee.) JM Consultants, Baxter, MN

75 Chapter 10 HSA Reporting Requirements Voluntary Truncation IRS Pilot Program From the IRS Instructions Truncating Recipient s Identification Number on Paper Payee Statements Pursuant to proposed regulations (b) and (REG ), filers of information returns in the Form 1098 series (with the exception of Form 1098-C), Form 1099 series, and Form 5498 series may truncate a recipient s identification number (social security number (SSN), individual taxpayer identification number (ITIN), or adoption taxpayer identification number (ATIN)) on payee statements. The program is no longer a Pilot Program. Until further notice it still is voluntary but now is permanent. Or at least it is permanent until the IRS decides to once again change the procedure. HSA Custodians/Trustees are to follow the original procedure requirement. HSA Custodians/Trustees may truncate an individual payee's nine-digit identifying number on paper 1099/5498 forms (including substitute and composite substitute statements). It does NOT apply to filings with the IRS, electronically furnished payee statements, or payee statements not in the Form 1098, 1099, or 5498 series. The requirements to participate in this program remain: The identifying number must be a Social Security Number, Taxpayer Identification Number, or adoption TIN; The identifying number is truncated by replacing the first five digits with asterisks or Xs (for instance, would be truncated as "***-**-6789" or "XXX-XX6789"); and The truncated identifying number appears on a paper payee statement (including substitute and composite substitute statements) in the Form 1098, 1099, or 5498 series for calendar year 2009 or If these requirements are satisfied, then the HSA Custodian/Trustee is deemed to have complied with any requirement in Treasury and IRS guidance, whether in regulation, form, or form instructions, to include a payee's identifying number on a payee statement. Reporting HSA Contributions Reporting of HSA contributions is generally very straightforward. The IRS Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information is used to report all HSA contributions. This form is also used to report contributions to Archer MSAs (mentioned earlier) and Medicare Advantage MSAs (a form of Archer MSA). JM Consultants, Baxter, MN

76 Account Number There seems to be some confusion on the use of this box. The box to the bottom left of the form is Account Number. Here are the instructions per the IRS: The account number is required if you have multiple accounts for a recipient for whom you are filing more than one Form 5498-SA. Additionally, the IRS encourages you to designate an account number for all Forms 5498-SA that you file. See part L in the General Instructions for Certain Information Returns, which is reproduced here. L. Account Number Box on Forms Use the account number box on Forms 1097, 1098, 1099, 3921, 3922, and 5498 for an account number designation. The account number is required if you have multiple accounts for a recipient for whom you are filing more than one information return of the same type. Additionally, the IRS encourages you to include the recipient's account number on paper forms if your system of records uses the account number rather than the name or TIN for identification purposes. Also, the IRS will include the account number in future notices to you about backup withholding. See Pub if you are filing electronically. The account number may be a checking account number, savings account number, serial number, or any other number you assign to the payee that is unique and will distinguish the specific account. This number must not appear anywhere else on the form, and this box may not be used for any other item unless the separate instructions indicate otherwise. Using unique account numbers ensures that corrected information returns will be processed accurately. If you are using window envelopes to mail statements to recipients and using reduced rate mail, be sure the account number does not appear in the window. The Postal Service may not accept these for reduced rate mail. Example John has an HSA and made a contribution for 2017 of $2,500. John is one of the last remaining individuals that have an Archer MSA. He also made a contribution into the MSA of $1,000. Two Forms 5498-SA would need to be produced; One showing the contribution and FMV of the HSA, and one showing the contribution and FMV of the MSA. Technically both types of contributions could be reported on the same 5498, but not the FMVs. So for ease in reporting, it would be good to show the MSA activity on one 5498-SA and the HSA activity on the other. Note that Box 1 of the form is only used for Archer MSAs and not HSAs. Also note that boxes 2 and 3 both show contributions made for a tax-year but do differ in one regard; the timing of the JM Consultants, Baxter, MN

77 HSA contribution(s); box 2 shows contributions made in the year, including for the prior tax year, while box 3 shows contributions made for the year, including those made in the following calendar year. This will cause some contributions to be reported twice. Here are the 2017 and 2018 IRS Form 5498-SA. Except for dates, they are identical. There have been no changes to the forms or reporting procedures. JM Consultants, Baxter, MN

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79 Box 1 Report employee or self-employed person s Archer MSA contributions made in current year and subsequent year for current tax year. This is only used for Archer MSA and MA MSA contributions. It is NOT used for HSAs. Leave this box blank when reporting an HSA. Box 2 Report total HSA contributions made in current calendar year including those made for prior tax year. All contributions regardless of source are reported as one total, whether from the HSA Owner, the HSA Owner s employer, or any other source, including the HSA Funding Distribution from an IRA. Box 3 Report total HSA or Archer MSA contributions made in current year for subsequent year, the prior year contributions. NOTE: Next year this amount will be included again in Box 2. Example Chris Adams makes a 2017 HSA contribution in March of This contribution will be reported in box 3 of the SA and in box 2 of the SA. NOTE 1: Prior year HSA Contributions are reported differently than for IRAs. Prior year HSA contributions are reported by tax-year and by calendar-year. In the example above the tax-year was 2017 and the calendar-year was NOTE 2: Employer contributions are NOT reported separately. They are aggregated with all other HSA Contributions received from all sources for the same HSA Owner. HSA Custodian/Trustee reporting is based on the year of receipt by the HSA Custodian/Trustee. Box 4 Report rollover contributions received during the calendar-year. Rollovers from FSAs and HRAs are no longer allowed starting in Box 5 Report the December 31 Fair Market Value of HSAs, Archer MSAs, or MA MSAs. Only one type of account can be used per form. NOTE: The FMV on December 31 of the year of the HSA Owner s death is reported based on the actual balance. If the beneficiary has not yet taken the inherited assets, the actual balance is reported. If the beneficiary has already taken the inherited HSA assets, the FMV for December 31 of the year of death would be zero. Remember, there is no Inherited HSA! Box 6 HSA Indicate what type of account is being reported, HSA, Archer MSA, or Medicare Advantage MSA. Only one box may be checked per form. JM Consultants, Baxter, MN

80 Reporting Deadline The IRS Form 5498-SA is due May 31 of the year following the year for which HSA contributions are made. The 2014 Form 5498-SA was due on Monday, June 1, The 2015 Form 5498-SA is due on May 31, The 2016 Form 5498-SA was due on May 31, The 2017 Form 5498-SA is due on May 31, The 2018 Form 5498-SA is due on May 31, Example The HSA Owner makes a deposit with a personal check in the amount of $500. It later is returned NSF. How is this reported? It may be hard to believe, but the IRS has never directly addressed this situation for IRAs or HSAs. It appears you must administer this as you would any other NSF check. Return it and cancel the contribution. The contribution would not be reported on Form 5498-SA. JM Consultants will keep you informed of any changes in IRS procedure. Reporting HSA Withdrawals HSA withdrawals are reported on IRS Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA. This IRS Form is due to the HSA Owner (or the beneficiary of a deceased HSA Owner) by January 31 of the year after the year of the distribution and to the IRS by February 28, or March 31 if filed electronically. Here are the 2017 and 2018 copies of Form 1099-SA. Except for dates, they are identical. No changes have been made to the forms or reporting procedures. JM Consultants, Baxter, MN

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82 Box 1, Gross distribution, reports the gross amount distributed from the HSA. It does NOT include any fees or penalties. Box 2, Earnings on excess cont., reports any net income attributable (NIA) that is distributed when correcting an excess contribution. Example Mary corrects a $500 excess contribution on June 15, $25 is calculated as the net income attributable (NIA). The gross distribution is reported in Box 1, $ The $25.00 in earnings is reported in Box 2 of the 2017 IRS Form 1099-SA. JM Consultants, Baxter, MN

83 Box 3, Distribution code, identifies each distribution. Note the following codes for box 3: 1 Normal Distribution Most HSA withdrawals will be code 1. Remember, the HSA Custodian/Trustee is not responsible for monitoring whether or not HSA distributions are used for Qualified Medical Expenses. 2 Excess Contributions This code is used when reporting a correction of an excess. In the example above, Box 1 is $525, Box 2 is $25, and Box 3 is code 2. 3 Disability, has the same exact definition as IRA disability, per IRC 75(m)(7). It should only be used when the HSA Owner verifies the disability to the HSA Custodian/Trustee with Form 1040 Schedule R or other doctor statement. There is no age restriction or limit on this reporting procedure. 4 Death distribution other than code 6 Note that there are two different codes for reporting the HSA Owner s death. Use code 4 to report any distribution to the estate of the HSA Owner. 5 Prohibited Transaction This code is used in the same way as it is used for IRA prohibited transactions. 6 Death distribution after year of death to a non-spouse beneficiary This is the second code for reporting a death. It is only used when the HSA balance is paid to a non-spouse beneficiary in a year other than the year of death. This includes trusts, charities, foundations, etc. It is NOT used if an estate is paid. IMPORTANT No IRS Form 1099-SA is generated when a spouse beneficiary automatically becomes the Owner of the HSA. This is done as an internal transfer or an HSA-to-HSA transfer. It is NOT a reportable distribution. If the spouse takes an HSA distribution after taking ownership from the deceased Owner s HSA, the HSA distributions are coded normally, NOT using either death code. It will be reported in the spouse s name and SSN as HSA Owner and CANNOT BE ROLLED OVER to his or her own HSA or any other account. It must be done as a direct transfer. Box 4, FMV on date of death If an HSA Owner has died, the FMV on the date of death is reported here. There is still some confusion about this box. It appears this box is completed for any distribution taken, by any beneficiary, after the HSA Owner s death. Box 5, HSA reported, HSA, Archer MSA, or Medicare Advantage MSA. Like the 5498-SA, only one box may be checked per form. JM Consultants, Baxter, MN

84 NOTE: If the HSA software does not allow a check to be issued to the beneficiaries the HSA Custodian/Trustee will need to issue manual checks. However, it still must be reported in the name and the SSN/TIN of the beneficiary NOT the HSA Decedent. HSA Distribution IN the Year of Death If you learn of the HSA Owner s death and make a distribution to a beneficiary other than the estate in the year of death complete the Form 1099-SA in this manner: Box 1 The gross distribution amount Box 3 Code 4, AND Box 4 The FMV on the date of the HSA Owner s death HSA Distribution in a Year AFTER the Year of Death If you learn of the death of the HSA Owner and make a distribution in a year after the year of death, complete a Form 1099-SA in the year you learned of the death. Enter in: Box 1 The gross distribution amount Box 3 One of the following codes: 1 if the beneficiary is the spouse, or 4 if the beneficiary is the estate, or 6 if the beneficiary is not the spouse or estate or Box 4 The FMV of the account on the date of death. NOTE: The IRS has given instructions for when the HSA Custodian/Trustee learns of the death and makes a distribution in the year of death and they have given instructions for when you learn of the death and make a distribution in a year after the death of the HSA Owner. The IRS has ignored the possibility that the HSA Custodian/Trustee could learn of the death in the year of death and the beneficiary does not take a distribution until the year after death. And the later in the year the death occurs, the more likely is this scenario. In fact they have ignored the possibility that you could learn of the death in any year with the beneficiary not taking a distribution until the following year. Our best recommendation is to issue a Form 1099-SA in the year of the distribution. Year End Fair Market Value Statements Unlike IRAs, a year-end Fair Market Value statement to the HSA Owners or Beneficiaries is NOT REQUIRED. It is allowed and many HSA Custodians/Trustees supply one, but it is not required. JM Consultants recommends issuing a FMV Statement so as not to further confuse the HSA and IRA Owners. JM Consultants, Baxter, MN

85 Chapter 11 Mistaken HSA Distributions Mistaken Distributions are amounts that were distributed during the year from an HSA because of a mistake of fact due to reasonable cause. The HSA Owner may repay the mistaken distribution to the HSA no later than April 15 following the first year the HSA Owner knew or should have known the distribution was a mistake. Note: Proof of reasonable cause is the responsibility of the HSA Owner. JM Consultants recommends the HSA Custodian or Trustee obtain written proof before accepting any re-deposit of a mistaken distribution. There really is very little to use as reference from the IRS, just the above definition. Example 1 The HSA Owner reasonably, but mistakenly, believed that an expense in 2014 was a qualified medical expense and was reimbursed in 2017 for that expense from the HSA. The HSA owner discovers the error on March 15, 2018 while doing his 2017 taxes. The HSA Owner has until April 15, 2019 to repay the mistaken distribution to the HSA. Under these circumstances, the distribution is PROBABLY not included in gross income, is not subject to the 10 or 20 percent additional tax, and is not subject to the excise tax on excess contributions. The HSA Owner should check with their tax counsel. After receiving adequate documentation from the HSA Owner, do not treat or report the repayment as a contribution on Form 5498-SA. It is a non-reportable addition to the HSA. As unusual as that seems, it is only an internal correction. It is highly recommended that the transaction is shown on all statements. It just is not reported to the IRS! A clear audit trail should also be left with a written explanation and statement from the HSA Owner. The 2017 Form 1099-SA must be corrected, less the mistaken distribution AND the 2018 Form 5498-SA must NOT include the repayment of the mistaken distribution. That may mean that an HSA Custodian/Trustee has to go back two years or more to make corrections, but that is what must be done. IMPORTANT: As the HSA Custodian/Trustee, you do not have to allow HSA Owners to return a mistaken distribution to the HSA. If you do not allow them you could be jeopardizing your HSA business as HSA Owners will likely transfer their HSA, and maybe other accounts, to the financial institution that accepts Mistaken Distributions. However, if you do allow the return of the mistaken distribution, as JM Consultants recommends, you may rely on the HSA Owner s statement that the distribution was in fact a mistake. This statement should, however, be in writing. Do not report the mistaken distribution on Form 1099-SA. The HSA Custodian/Trustee must correct any already filed Form 1099-SA with the IRS and sent to the HSA Owner as soon as you become aware of the error. These corrections must be done whether the HSA Custodian/Trustee accepts the redeposit of the mistaken distribution or not. JM Consultants, Baxter, MN

86 Care needs to be taken because there have been reported situations where the Mistaken Distribution rule was misused. A key part of the definition is the HSA Owner knew or should have known the distribution was a mistake. HSA Owner documentation of the Mistaken Distribution is essential! Example 2 Mary has a large medical expense that she knows will eventually be reimbursed by her health care insurance. She uses funds from her HSA for the expense expecting to redeposit the insurance reimbursement later as a mistaken distribution. This is NOT A MISTAKEN DISTRIBUTION! Expenses reimbursed by insurance are not an HSA qualified expense and therefore HSA funds can NOT be used for them before or after payment of them. NOTE: if Mary would receive the money or have enough money to make a rollover within 60 days of that distribution, she could, if eligible, make her one rollover per person, per year. She would, of course, limit future rollovers for 365/366 days. But any time after 60 days, this option would not be available or if she already had her one-per-year allowed rollover. The distribution would be subject to tax and penalty as an unqualified medical expense made for the year. Another possible method of correction would be to pay cash for subsequent qualified expenses and keep all the receipts. Example 3 Mary again has a large medical expense of $2,500 that she knows will eventually be reimbursed by her health care insurance in the amount of $2,200. She takes the balance of $300 from her HSA for the rest of the expense. She instead is reimbursed the full $2,500 by the insurance company. This IS A MISTAKEN DISTRIBUTION. The 1099-SA must be changed to zero and the $300 is added to the HSA as a non-reportable transaction. Example 4 The HSA Owner uses their HSA Debit Card or HSA Checking Account for a non-qualified expense not realizing they were using the HSA account instead of their regular personal account. This can ONLY be corrected if in fact it was a mistaken distribution as described earlier in this manual. It can NOT just be reversed. To re-contribute it the HSA Owner must be qualified to make the contribution which would be added to all other contributions for that year. To add it as a Mistaken Distribution he or she should certify in writing that it is a complying Mistaken Distribution. Assuming that this likely is NOT a Mistaken Distribution, the HSA Owner should consult with his personal tax counsel when completing his tax return. NOTE 1: Paying for a knowingly non-qualified expense is NOT a Mistaken Distribution. Using a debit card or HSA checking account for groceries or other personal expenses is NOT a Mistaken Distribution. JM Consultants, Baxter, MN

87 The Mistaken Distribution must have been made in good faith as a qualified expense. For instance: The medical expense was $1,800. Insurance covered $800. The HSA was used for the $1,000. When the insurance claim was resubmitted they received a $300 refund. This could be a Mistaken Distribution and could be redeposited to the HSA. NOTE 2: As with all potential mistaken distributions, it is the responsibility of the HSA Owner to document to the HSA Custodian/Trustee, in writing, that it qualifies as a mistaken distribution. Most vendors have such a form. Then it is up to the HSA Custodian/Trustee to accept or not and report or correct the reporting as needed. The HSA Custodian/Trustee should NOT determine if it is NOT a mistaken distribution. The IRS has given little information to go on, just "clear and convincing evidence that an HSA distribution was the result of a mistake of fact due to reasonable cause." Not much to go on. That s why documentation is so important. Example 5 An HSA Owner must purchase two hearing aids, paying for them before they can be ordered. He uses $7,000 from his HSA. When they arrive, it is determined that he only needs one hearing aid. He is refunded $3,500. This is a Mistaken Distribution. Form 1099SA must be changed to $3,500 and the $3,500 refund is added back to the HSA as a non-reportable transaction. NOTE: Just because Mistaken Distributions are NON-REPORTABLE, does NOT mean it should not be shown on the HSA Owner s statement. For internal audit purposes it should be shown, just not reported. Reporting Summary HSA Mistaken Distributions are NOT reported on the 1099-SA. If it has already been reported, the 1099-SA must be corrected! There is no time limit on when it must be corrected If the Mistaken Distribution is accepted by the HSA Custodian/Trustee it IS NOT reported on the 5498-SA. It is a rare NON-REPORTABLE transaction. NOTE: If your software is unable to handle this correctly, it still must be corrected, even if it must be done manually! JM Consultants, Baxter, MN

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89 Chapter 12 HSAs: Regulation E and FDIC/NCUA Regulation E Regulation E (Reg. E) addresses Electronic Funds Transfers (EFTs) and covers many, but not all types of accounts held at financial organizations. Whether or not Reg. E applies to HSAs is not clear. Some points to consider when trying to determine whether or not Reg. E applies to HSAs are that Reg. E specifically excludes IRAs under the definition of the word account. While IRAs and HSAs are not identical, they are more alike than not alike; their similarities are greater than their differences. In addition, in the supplementary information to the final Reg. E rules regarding prepaid cards it is stated that Reg. E does not apply to prepaid cards used to access an HSA. Some may interpret this to also mean that Reg. E does not include a debit card used to access HSA assets. If a financial organization takes the position that Reg. E does not apply it must then have a procedure for handling errors and unauthorized transactions. Since Reg. E already has a process for dealing with errors and unauthorized transactions and since most financial organizations are already following Reg. E it may make sense just to apply Reg. E to HSAs instead of creating, training on, and maintaining a new policy for errors and unauthorized transactions specifically for HSAs. HSA Custodians/Trustees should rely on their own legal and compliance counsel for this determination. FDIC/NCUA Coverage The Federal Deposit Insurance Company and National Credit Union Administration insure certain depository accounts against loss due to financial organization failure. On April 1, 2006, the maximum coverage for IRAs and specified self-directed retirement accounts rose from $100,000 to $250,000 as a result of the Deficit Reduction Act of On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, which, in part, permanently raises the current standard maximum deposit insurance amount (SMDIA) to $250,000 on other accounts, including HSAs. For the purpose of applying this insurance coverage to HSAs, an HSA Owner s HSA assets are usually considered to be a revocable trust. The HSA Custodian/Trustee should check with their forms provider and legal counsel to make sure there documents are revocable trusts. Therefore the HSA assets would be added to all other revocable trust assets held at the same financial institution by the same HSA Owner. They would be protected, if applicable, up to $250,000. If your HSAs do not qualify as a revocable trust, it must be considered a single account added together with all other single accounts. The only two options available are Revocable Trust or Single Account. Note that HSAs are NOT added to the IRA balances for this determination. JM Consultants, Baxter, MN

90 Example Mike has an HSA with a balance of $10,000. The balance must be added to all revocable trusts or single accounts, depending on the HSA document, held by Mike at the same financial institution. $10,000 will need to be added to the FDIC calculation for Revocable Trust Account or Single Account per this example from the FDIC website. Example from the FDIC website: Account Owner(s) Beneficiary Maximum Account Ownership (ies) Insurable Title Category Amount Single Husband Account Husband $ 250,000 Single Wife Account Wife $250,000 Certain Husband Retirement Husband $250,000 IRA Account Certain Wife Retirement Wife $250,000 IRA Account Husband & Joint Husband & $500,000 Wife Account Wife Husband Revocable POD Trust Account Husband Wife $250,000 Wife Revocable POD Trust Account Wife Husband $250,000 Husband & Revocable Husband Child 1 Wife Living Trust & Wife Child 2 $1,000,000 Trust Account Total $3,000,000 JM Consultants, Baxter, MN

91 Explanation Single Account Ownership Category The FDIC combines all single accounts owned by the same person at the same bank and insures the total up to $250,000. The Husband s single account deposits do not exceed $250,000 so his funds are fully insured. The same facts apply to the Wife s single account deposits. Both accounts are fully insured. Certain Retirement Account Ownership Category The FDIC adds together all certain retirement accounts owned by the same person at the same bank and insures the total up to $250,000. The Husband and Wife each have an IRA deposit at the bank with a balance of $250,000. Because each account is within the insurance limit, the funds are fully insured. Joint Account Ownership Category Husband and Wife have one joint account at the bank. The FDIC combines each co-owner s shares of all joint accounts at the bank and insures each co-owner's total up to $250,000. Husband s ownership share in all joint accounts at the bank equals ½ of the joint account or $250,000, so his share is fully insured. Wife s ownership share in all joint accounts at the bank equals ½ of the joint account or $250,000, so her share is fully insured. Revocable Trust Account Ownership Category To determine insurance coverage of revocable trust accounts, the FDIC first determines the amount of the trust s deposits belonging to each owner. In this example: Husband s share = $750,000 (100% of the Husband s POD account naming Wife as beneficiary and 50% of the Husband and Wife Living Trust account identifying Child 1 and Child 2 as beneficiaries) Wife s share = $750,000 (100% of the Wife s POD account naming Husband as beneficiary and 50% of the Husband and Wife Living Trust account identifying Child 1 and Child 2 as beneficiaries) Second, the FDIC determines the number of beneficiaries for each owner. In this example, each owner has three unique beneficiaries (Spouse, Child 1 and Child 2). When a revocable trust owner names five or fewer unique beneficiaries, the owner is insured up to $250,000 for each unique beneficiary. Husband s share of the revocable trust deposits is insured up to $750,000 ($250,000 times three beneficiaries = $750,000). Wife s share of the revocable trust deposits is insured up to $750,000 ($250,000 times three beneficiaries = $750,000). JM Consultants, Baxter, MN

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93 Chapter 13 HSAs and Fiduciary Responsibility DOL PUBLISHES FINAL DEFINITION of FIDUCIARY The much anticipated Fiduciary Regulation, all 1,000 plus pages, was released on April 6, The new rule applies to all employer sponsored retirement and benefit plans INCLUDING IRAs, SEP IRAs, SIMPLE IRAs, HSAs and CESAs. It redefines and expands the term Fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). However, indicating that Since its approval there have been almost as many that are NOT accepting the ruling as there are accepting it. There have been a number of lawsuits filed challenging various aspects of the ruling and the law suits continue to mount. Consequently, the finality of this is still not certain. The results of the past Presidential and Legislative Election seem to only throw more doubt into it. In order to give the financial industry time to review the new rule and prepare for the changes, some of the changes will not be applicable until April 10, (This date was changed to June 7, Others do not take effect until January 1, And extensions continue to be given for various parts of the rule. There are already a number of different opinions being bandied about as to how this will affect all areas of the financial industry. The Industry continues is sorting it out as this is written. The also continues to be many challenges and court cases. The overall basic reason for this change was to make sure fiduciaries were not taking unfair advantage of their position making sure they were acting in the best interest of the individual, not themselves. The DOL wanted to lessen the chance for self-dealing or a conflict-of-interest by the fiduciaries. Consequently, a broader definition. While the DOL and/or the IRS have promised additional clarifications and guidance, it has been slow to come. So the best thing for all financial institutions to do now is to review the ruling with your compliance officers and your legal counsel. Many are already predicting an aggressive audit procedure by the IRS and DOL, so it appears it will be imperative to abide by this ruling. There were a number of changes from the Proposed Rule so be sure the FINAL version is the one reviewed. So all financial institutions must stay on top of this new ruling. JM Consultants will keep you informed as the interpretations, changes and challenges come forward. Suffice it to say there appears to be as many consensus opinions as there are dissenting ones. And, the number of each is growing rapidly. JM Consultants, Baxter, MN

94 The bottom line still appears to be, in fact, is even more so that BE CAREFUL is the new buzz word. All QRP, IRA, HSA and CESA Custodians/Trustees/Administrators should carefully review all aspects of their procedures and programs with their legal and compliance counsel. On Wednesday, June 8, 2016 President Barack Obama vetoed a resolution to kill the Department of Labor new fiduciary rule. It had been approved by the House in April and the Senate in May. In part, the President said This rule is critical to protecting Americans' hard-earned savings and preserving their retirement security. The House and Senate resolutions did not come close to the supermajorities needed to override the veto. This appears to be another matter that likely will be decided in the November elections. If you follow the activity surrounding the new Fiduciary Rule you will see that for every opinion agreeing with the new definition there appears to be at least one siding with going to court over it. This matter does not look like it will be clear any time soon. Beyond that, what should be done? As already noted, there should be discussion with the QRP, IRA, HSA and CESA Custodian s/trustee s compliance and legal counsel. All policies and procedures should be reviewed with them even the smallest of procedures. In addition, these questions should be asked: What is Fiduciary Responsibility? Why do we have Fiduciary Responsibility? Who does it pertain to? Are all transactions affected? Does education and explanation of the customer fall under this new definition? Does it affect all financial institutions or just those with Trust and Brokerage Departments? Are Self-Directed accounts also covered? How will we be monitored or audited? Are there special forms and reporting? And, be assured, JM Consultants will continue to monitor the situation and update our publications. Until that time, if you have any questions, please contact us. Additional information on this new fiduciary rule can also be found in Chapter 20 of JM Consultants A Real World Desktop Manual for IRA Procedures. NOTE: January 9, Representative Joe Wilson, R-S.C., has introduced a bill that would delay the DOL's fiduciary rule effective date by two years. Wilson's Protecting American Families' Retirement Advice Act calls the DOL rule 'one of the most costly, burdensome regulations to come from the Obama Administration. Delay is one of the most immediate and simplest options available to Republicans while they work on long range efforts to repeal the rule. NOTE: There is hardly a week that goes by without some continuing challenge, differing opinion or a new law suit. Consequently it emains imperative that all financial institutions JM Consultants, Baxter, MN

95 carefully review this with their legal and compliance team! The bill of over 1,000 pages must be reviewed because there have been different effective dates for man sections. There have even been some section that went into effect but are NOT being enforced. JM Consultants, Baxter, MN

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97 Chapter 14 HSA Questions and Answers Q-1 Most of our HSA Owners use Debit Cards for HSA distributions. The following scenario occurs more times than we care to administer. The HSA Owner receives a credit back on the card. How must it be administered and reported? A-1 Generally it is handled as a contribution. There are no IRS procedures that allow for anything else to be done. Q-1A What if this causes an excess contribution? A-1A Then it causes an excess and must be corrected like any other excess contribution. Q-1B The insurance companies, accountants, other financial institutions keep pressuring us to report it in some other manner, like reversing distributions for the amount of the credit. A-1B Again, there is no IRS procedure allowing such a transaction. If the HSA Custodian/Trustee administers this in any other manner they will be subjecting their financial institution to potential IRA penalties for knowingly and willfully reporting incorrectly. Reminder: Back-dating is considered fraud by the IRS! Changing transactions to accommodate the customer can also be considered fraud. Q-1C Could the mistaken distribution rule be used for this? A-1C If it is actually a mistaken distribution, yes that rule could be used. But you must remember that a mistaken distribution means the HSA Owner took a distribution that was thought to be valid and qualified at the time. Then a credit shows up later. A mistaken distribution IS NOT paying for a qualified medical expense and then waiting for an insurance reimbursement. If the HSA Owner states that it is a mistaken distribution the HSA Custodian/Trustee should have them verify that IN WRITING. Please refer to the procedures earlier in the manual. Q-2 Is it allowable for an HSA Custodian/Trustee to accept an employer s contribution that will cause an excess? A-2 Remember, as discussed in the section titled HSA Custodian/Trustee Responsibilities, the HSA Custodian/Trustee is responsible to make sure no more than the family amount plus catchup is contributed. JM Consultants also recommend monitoring for the self-only plus catch-up limits. Consequently, the employer contribution should NOT be accepted. JM Consultants, Baxter, MN

98 Q-3 An HSA was opened by the wife with a family HDHP. She attained age 65 and enrolled in Medicare in March He husband wants to use the funds for medical expenses. Does he need to establish an HSA for himself to contribute? Can the wife s HSA be transferred to his HSA? A-3 If he is an authorized signer he can request funds from her HSA. Her HSA CANNOT be transferred to his HSA. If it is still a family HDHP he does NOT need to open an HSA for himself unless he intends to make a catch-up contribution. Q-4 Our HSA Owner has both employer and employee contributions in his HSA. He had a HSA eligible self-only HDHP. His 2015 contributions totaled $6,532 before he died on July 15, His spouse is his sole primary beneficiary. We transferred the decedent s HSA balance into his wife s new HSA. The employer is continuing the spouse s health insurance. Can the spouse, if eligible, make HSA contributions? His prorated share for 2015 is $4,462.50, leaving an excess of $2, The account balance is only $1, A-4 As long as the spouse s insurance will be a self-only HDHP she will be able to make HSA contributions. The husband s self-only contributions were put into his HSA and her self-only contributions will be put into her own HSA, just as the Regulations call for. If she has a family HDHP she will be able to contribute the maximum family amount minus what was already contributed by her husband. She will need to prorate the contribution amounts if she was not eligible the whole year. However, she could use the partial year rule also. Concerning the excess, it must be corrected, however there is little guidance for this when the HSA does not have enough funds to cover the correction. As described in the section of this manual, Excess HSA Contributions, Example 3, if there are sufficient 2015 distributions, and there should be, they can be re-coded to actually correct the excess contribution as shown in that Example. Then the spouse s own HSA is administered like any other HSA. Q-5 Our HSA Owner has a family HDHP with his wife and children. He has now switched to a self-only HDHP for him and the wife has a family HDHP with the children. She has opened an HSA for herself. Here are my questions: Does his account need to be changed to single from family? Do they have to share a contribution? Or do they get self-only limits for him and family limits for her? A-5 First HSAs are not titled, classified, or otherwise described as family or single/self-only. IT S THE HDHP THAT IS SO DESCRIBED. So nothing is done with his HSA. I m not sure JM Consultants, Baxter, MN

99 what sharing a contribution means, but he is eligible for a prorated family contribution and a prorated single contribution based on the months he was eligible in each. She is entitled to a prorated amount of the family limit. However, regardless of the situation, in no way can the contributions into the two HSAs can be more than one, family limitation amount for the year. Q-6 Our HSA Owner, with a family HDHP, died six months after establishing and contributing to a HSA. We have established an HSA for the surviving spouse and transferred the funds in to it. Can the spouse continue to contribute the remaining amount of this year s HSA contribution? A-6 If the spouse s HDHP is still considered a family plan, then she can proceed with complying HSA contributions. If her plan is now a self-only plan, his contributions must be prorated for the number of months he was alive and she must prorate for the number of months she is eligible. However, regardless of the situation, in no way can the contributions into the two HSAs can be more than one, family limitation amount for the year. Q-7 Our HSA Owner with a family HDHP is turning age 65 on October 1, and will enroll in Medicare. Her husband attains 65 in March and will enroll in Medicare. What portion of the contributions are they eligible for? A-7 When he attains age 65 and enrolls in Medicare, the HDHP is still a family plan, so there is no calculation needed. He will not be eligible to contribute, but the contribution limit remains the same. It just be contributed to her HSA. When she attains age 65 and enrolls in Medicare she no longer is eligible to contribute so the maximum contribution that can be made is 9/12 of the annual amount. NOTE: It s important to remember, attaining age 65 alone does NOT cause an individual to not be HSA-eligible. It is the enrolling in Medicare that does that. Q-8 When our HSA Owner receives a debit card refund to their HSA, is it coded as a contribution or as a non-reportable transaction? Other HSA Custodians and Trustees I have spoken with record it as non-reportable. A-8 The only non-reportable HSA transaction would be as a Mistaken Distribution. So unless this can be considered a Mistaken Distribution, that is not available. But be careful, it must be a true Mistaken Distribution. That means the HSA Owner could not have known about it. Since this specific transaction is NOT addressed by the IRS, we can only recommend it to be recorded and reported as a current year contribution, regardless of what other HSA Custodians/Trustees are doing. JM Consultants, Baxter, MN

100 Q-9 Our HSA Owner took a distribution in 2014 in the amount of $4,000 for qualified medical expenses. Now, August 2015, she discovers she can be reimbursed by some special Government Program, not Medicare. Is this an acceptable Mistaken Distribution and if so, how is it administered and reported? A-9 The IRS has very little specific information about Mistaken Distributions. The definition is that the distribution in question must be because of a mistake of fact due to a reasonable cause. A pretty general definition. The IRS leaves it up to the individual to decide, NOT the HSA Custodian/Trustee. So if the HSA Owner thinks this qualifies as such, have them give that to you in writing. Many vendors have documentation for this. Administering it and reporting it is a different matter. Do not report the mistaken part of the distribution on Form 1099-SA. The HSA Custodian/Trustee must correct any already filed Form 1099-SA with the IRS and sent to the HSA Owner as soon as you become aware of the error. Under these circumstances, the distribution is not included in gross income, is not subject to the 10 or 20 percent additional tax, and is not subject to the excise tax on excess contributions. Do not treat or report the repayment as a contribution on Form 5498-SA. It is a non-reportable addition to the HSA. As unusual as that seems, it is an internal correction. It is highly recommended that the transaction is shown on all statements, just not reported to the IRS! A clear audit trail should also be left with a written explanation and statement from the HSA Owner. Q-10 We have an HSA Owner with a family HDHP that covers the father, mother and two married, adult children. According to our understanding of the ACA, children can remain on the policy until age 26. Can either the mother or father establish an HSA or must it be in the name of the primary policy holder? Can the HSA cover medical expenses for all parties on the policy? A-10 First the ACA does not change anything for HSAs. Any eligible individual can establish an HSA and contribute to it. So either could establish an HSA. Qualified HSA medical expenses must be for the HA Owner, the HSA Owner s spouse or the HSA Owner s DEPENDENTS. If they believe, and it is up to them, that either or both of the children qualify as DEPENDENTS per the very strict IRS Tax definition, then the expenses can be covered. It is NOT being on a HDHP that makes the medical expenses qualified, it is being a dependent. It is NOT the responsibility for the HSA Custodian/Trustee to determine and JM Consultants does NOT recommend doing so. Q-11 Our HSA Owner has an employer provided family HDHP. He is attaining age 65 and enrolling in Medicare in July The insurance continued. How can contributions be made? The wife is still eligible. JM Consultants, Baxter, MN

101 A-11 The spouse can make the eligible contributions into her HSA. She can NOT make them into his. He is no longer eligible. Only prorated contributions for him can be made in Q-11A The HSA Owner discovers in October 2017 that the maximum contributions have been made into his HSA from 2015 through What must be done? A-11A All the contributions made into his HSA must be corrected as excesses. They cannot be redeposited into her HSA. Q-12 Our HSA Owner accidently made a personal loan payment from his HSA account. We are not able to reverse/correct it in our system. Can we just put the money back into the account and not code it for reporting purposes? Is it a mistaken distribution? A-12 As noted in many Q&As and in the Mistaken Distribution section of this manual, determining what is and is not a Mistaken Distribution is a less than clear procedure. If the HSA Owner declares, in writing, that he had a Mistaken Distribution then follow the procedure as described earlier in Q&A-9. Again, the HSA Custodian/Trustee is NOT responsible to determine this. But get their interpretation in writing. Q-13 Are Medicare premiums a Qualified HSA Medical Expense? A-13 Although most other insurance premiums are NOT a Qualified HSA Medical Expense, Medicare Premiums are a Qualified HSA Medical Expense. This includes Parts A, B, C and D. Caution though, the HSA Owner is still NOT eligible to make HSA contributions once he is enrolled in Medicare. Q-14 Our HSA Owner with a self-only HDHP did not fulfill the required Testing Period for his 2014 HSA Full-Year contribution. He was only eligible for six months. What is the procedure for this? A-14 Since he was not HSA-eligible for the full testing period, his 2014 HSA contribution must be recalculated. He is only eligible for six months, ($3,300 x 6/12 = $1.650). He must include the difference between the full contribution and the eligible amount, $1,650. He must include this amount on his 2014 personal tax return, adding it to his gross income. Form 8889 is used for this BY THE HSA OWNER. There is nothing to report by the HSA Custodian/Trustee. He will owe a 10% additional penalty tax on the amount, or $ JM Consultants, Baxter, MN

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