In previous posts of this series we covered the documents associated with filing taxes with a Health Savings Account(HSA), the difference between pre-tax and post-tax contributions, common questions about Part 1 and common questions about Part 2 of the IRS Form 8889.
This is the last post in this series, we’ll answer some common questions people have about Part 3 of the IRS Form 8889 and a couple of general questions.
Part three of Form 8889 determines if any taxes and penalties apply to amounts contributed when an account holder is not eligible to contribute. Keep in mind that HSA eligibility only affects when contributions can be made to an HSA, rather than when money in the HSA can be spent. The money in the HSA is useable for the lifetime of the account, regardless of insurance status.
Part III Common Questions
Part three is for people that made contributions to their HSA when they were not eligible to make contributions. This is different than making contributions that exceed the IRS limit and the penalties are different. In part three, you should only report contributions made when you were ineligible.
I wasn’t eligible the entire year. How do I check to see if I made contributions when I was eligible?
You can make contributions as soon as you are HSA eligible. You can read more about eligibility here. If you made contributions before this date, they should be included here in part three. As soon as you cease to be covered by a High Deductible Health Plan (HDHP), you can no longer make HSA contributions. Any contributions made after this date should also be included.
How does the Last Month Rule affect my eligibility to make contributions?
First, you should check if you fall under the Last Month Rule. If you qualified for the Last Month Rule and you did not maintain coverage for the entire following year, you may face penalties you need to report on line 19.
What is the penalty for contributing to my HSA when I wasn’t eligible?
If you contribute when you were not allowed, you will pay a penalty of 10% on the amount you contributed. The 10% penalty will be carried over to line 60 of your 1040 and the total ineligible contributions should then be included as income.
General HSA Tax Questions
What do I do if my spouse and I both have HSAs and we file jointly?
You must fill out a form 8889 for each HSA and then combine the amounts for line 13 and enter it on each person’s IRS Form 8889 on line 13. For specifics see: http://www.irs.gov/instructions/i8889/ch02.html#d0e362.
How do I determine state tax laws regarding HSAs?
Most state tax laws align with federal laws in regards to HSAs, with some exceptions. As of the end of the 2014 tax year, the following states had HSA tax laws that differed with the federal HSA tax laws: Alabama, California, New Jersey, New Hampshire and Tennessee.
Often times your state’s tax laws regarding HSAs will be explicit in the form you file when you file your state taxes. We strongly recommend consulting your tax advisor on whether interest or investment gains/losses have special provisions in your state.
This concludes our series on filing taxes with an HSA. If your questions weren't answered, feel free to contact us and we will try to address them. Happy Refunds!