LIVELY'S

2019 HSA Tax Guide

This guide covers everything you need to know about filing the correct information with your 2019 tax return.

Introduction

If you have an HSA, getting your tax forms organized well ahead of April 15th is critical. Because of HSA’s triple-tax benefits, there are a few extra steps you’ll need to take when filing your taxes.

  • UPDATE AS OF MARCH 24, 2020: The federal income tax return filing deadline has been postponed from April 15, 2020 to July 15, 2020. Publication 969 states that you may make contributions to your HSA for 2019 at any time up to July 15, 2020. Be sure to comply with both state and federal law when filing taxes. You can find more information regarding this situation here.

A health savings account (HSA) is a savings account you can open and contribute to if you are also enrolled in a high deductible health plan (HDHP). The reason these two are paired, is the contributions you make to your HSA are supposed to help you cover your deductible and other out-of-pocket expenses that are typically much higher under an HDHP than you would otherwise be responsible for under a traditional plan.

All contributions to HSAs are tax-deductible, they roll over from year to year, they earn you interest, you can invest your funds (if you have an HSA like Lively’s), and they can be used to pay for any qualified medical expense. For more information, see our HSA Guide.

If you have contributed to or distributed from your HSA in 2019, you’ll need to submit additional information, usually obtained from your employer or HSA administrator.

Let’s get started with the basics.

HSA Tax Benefits

Some-Health-Plan-Terms

The tax benefits of an HSA are threefold:

  1. Contributions to HSAs are untaxed.
  2. Starting at age 65, you can use your HSA contributions on anything.
  3. You can roll your IRA money into your HSA.

Benefit 1: Contributions to HSAs are untaxed.



If your tax rate is 22 percent, and you contribute the maximum amount for 2019, which is $3,500 for an individual, $7,000 for a family, you could save $770 and $1,540, respectively, in tax payments. If you’re over 55 and not yet enrolled in Medicare, you can contribute an additional $1,000 per person, per year. That’s an additional $220 in tax savings!

This also means any qualified health expense you use your contributions for is also untaxed, including your deductible (the minimum deductible for HDHP in 2020 is $1,400). If you bought a traditional healthcare plan, your annual deductible might be lower, but you would have to pay for that out-of-pocket cost with after-tax money.

Benefit 2: From the age of 65 and on, you can use your HSA contributions on whatever you want.



Prior to age 65, the IRS requires you to use HSA contributions for qualified medical expenses, and if you don’t, the amount you use for unqualified expenses will be subject to the appropriate income tax plus an additional 20 percent penalty. But at the age of 65, that 20% penalty is no longer valid.

Since your money rolls over from year-to-year (there’s no “use it or lose it”), nor is it tied to a particular employer, you can use your HSA as a typical retirement savings account like a 401(k). All you have to do is use less than you contribute each year.

Benefit 3: You can roll your IRA money into your HSA.



You can only do this once, and the transfer can’t exceed your HSA contribution limit for that year, but it’s another way your HSA can aid you in retirement.

If you decide to roll IRA money into your HSA, there is another important rule to be aware of. You must maintain HSA eligibility (i.e. you must have an HDHP) for at least 13 months following the transfer. If you don’t, the amount you transferred will be subject to the appropriate income tax and will incur an additional 10 percent penalty tax on top of that.

HSAs & Taxes

The way your HSA affects your taxes will largely depend on whether or not you follow the IRS rules for contribution limits and distributions. Here are three major impacts of your HSA:

Your HSA affects how much you pay in income taxes.

Another instance when your contributions are not tax-deductible is when someone can claim you as their dependent on their tax return.

In addition to contributions, you must also follow the IRS rules regarding distributions if you want to keep your HSA from negatively affecting your taxes. According to the IRS, if you use your HSA money to pay for anything other than a qualified medical expense, and you’re under the age of 65, you’ll have to add the amount you paid for the non-qualified expense to your taxable income on your tax return. Then you’ll have to pay an additional 20 percent tax penalty on that amount.

If you’re unsure of what’s considered a qualified medical expense, the IRS offers this general guidance: HSA money should be used to pay for the cost of diagnosing, treating, preventing, curing or mitigating a disease or illness.

You should also be aware of whether or not you’re eligible to make pre-tax contributions to your HSA. You are only eligible to contribute to your HSA if you have an HDHP and do not have additional coverage as part of a spouse’s traditional health plan. You can have additional insurance to cover dental, vision, disability, long-term care, accidents and hospitalization, but if you maintain supplemental traditional insurance coverage as part of a spouse’s health plan, you will have to pay income taxes on your HSA contributions.

  1. Deductions. Since HSA contributions are pre-tax, you can’t include medical expenses for which you paid for using HSA money in your itemized deductions.
  2. If you owe back taxes. The IRS can levy your HSA in order to pay your outstanding tax bill and if they do, and you’re under the age of 65, you’ll have to pay a 20% tax penalty on the involuntary distribution.

The Last Month Rule

A situation to be wary of is the Last Month Rule. The Last Month Rule is an allowance the IRS makes for people who become eligible to contribute to an HSA by December 1st. If this happens, they are allowed to contribute up to the maximum allowable amount for that year, as if they had been eligible for an HSA the entire 12 months.

The caveat is, if you take advantage of the last month rule, you must remain eligible to contribute to your HSA for the entire following year. If you don’t remain eligible, a portion of the initial December contributions will be deemed an “over-contribution” and subject to income and excise tax. If you become eligible for an HSA this December and contribute the maximum amount, but lose that eligibility sometime next year, here’s how the IRS would calculate the “over-contribution”:

The Last Month Rule
December 2019 Contribution: $3,500
Appropriate December Contribution: $292 ($3,500 / 12 months)
Over-contributed amount: $3,208


Because of the specifications stated previously by the Last Month Rule, this chart details how the IRS would analyze your HSA if you chose to max out your account in December.
In the event that you sudennly become ineligible for an HSA within the next year, the IRS will consider what is deemed the over-contributed amount from your HSA as untaxed income.

HSA Tax Forms

  1. W-2: This is the basic tax document you receive from your employer at the end of the year. It will show your taxable income and the taxes you’ve already paid. Any contributions that were witheld from payroll and deposited into your HSA will be shown in box 12 on this form. If you’ve made excess contributions to your HSA, and that excess amount hasn’t been added to box 1 of your W-2, you must report it as “Other Income”.
  2. Form 5498-SA: You’ll receive this form from your HSA administrator and it will show how much money you, your employer and/or a third party contributed to your HSA over the course of the year. You do not need this form to submit your tax return. All contributions minus Box 12 on your W-2 is typically what your Employer contributes to your HSA, assuming there is no other 3rd party contribution.
  3. Form 1099-SA: You’ll also receive this form from your HSA administrator and it will show the distributions you’ve taken from your account over the course of the year. Box 1 will show the total amount you’ve used. If you’ve only used the money for qualified expenses, then box 3 will show the distribution code: 1, which means all distributions were tax-free. If you see the distribution code: 5 in box 3, that means you didn’t use all of your distributions for qualified medical expenses and you’ll have to report the excess on your tax return.
  4. Form 5329: If you’ve made excess contributions to your HSA, you’ll use this form to calculate the extra taxes you owe. You can get this form directly from the IRS or download it here.
  5. Form 8889: This is the form you attach to your tax return. Complete it by inputting all of your contributions for the year as well as any additional taxes for which you’re responsible. You can get this form directly from the IRS or download it here.

How HSA Contributions Work

Maximizing-your-savings

How you can contribute to your HSA



How you contribute to your HSA depends on how you get your health insurance. If it’s administered through an employer, then you would select the HDHP and the corresponding HSA. You would then select how much you would like to contribute each month or out of each paycheck (depending on how you’re compensated) and your employer would deduct that amount from your paycheck each month on a pre-tax basis. Your employer then sends you contributions to the HSA administrator.

If you purchase an HDHP on your own, you would also set up an HSA on your own. You would contribute to the HSA by sending money to the administrator over the course of the year or in a one-time payment. If you set up an HSA on your own, you will deduct your contributions from your taxable income number when you file your taxes.

Contribution limits



The IRS ties contribution limits to the consumer price index so they change on a yearly basis. In 2019, the contribution limits for HSAs were: $3,500 for individuals and $7,000 for families. If you are 55 or older, you can contribute an additional $1,000 per person. In 2020, contribution limits will be: $3,550 for individuals, $7,100 for families. The catch-up contribution for those 55 and older will remain at $1,000 per person.

Changing the amount you contribute



If you decide mid-year you want to change the amount you’re contributing to your HSA, you must contact your plan administrator. If you arranged for your HSA through your employer, contact your HR department. If you arranged for your HSA on your own, contact the HSA administrator directly.

Who owns your contributions?



You do. Even if your employer is also adding money to your account. This means if and when you leave your place of employment, you get to take the full balance of your HSA with you.

How HSA Distributions Work

How-to-use-your-HSA-funds

How you access your HSA money depends on the administrator. Generally speaking, there are two main ways to distribute your funds:

HSA Debit Card



An HSA debit card provides the most direct access to your contributions. It allows you to pay for your qualified medical expenses at the point of sale and shifts the financial burden from your personal accounts (e.g. checking or credit card) to the HSA account. It also negates the need for paperwork.

Reimbursements



In this scenario, you pay for your qualified medical expenses with your personal account (e.g. checking account or credit card) and then submit the bill and proof of payment to your HSA administrator. If your HSA is set up this way, it’s important to submit your reimbursement immediately so that you don’t run the risk of having to pay credit card interest for something that’s supposed to be a tax-free purchase. These reimbursements will either come in the form of a check or direct deposit.

There are a few rules surrounding HSA distributions:

  1. Distributions must be used for qualified medical expenses if you are under the age of 65. If you use the money for anything other than qualified medical expenses, you will not only pay income tax on the misused money, but you will incur an additional 20% penalty tax. If you’re over the age of 65, you can use your HSA contributions for whatever you want.

  2. You can use your HSA money to pay for qualified medical expenses for: you, your spouse, your children, anyone you claim as a dependent (this could include your parents), and anyone could have claimed as a dependent this tax year but weren’t able to because they either filed a joint tax return (e.g. a teenage child who is also married and filed a joint tax return with his or her spouse) or were claimed as a dependent on someone else’s tax return. This is true even if you change away from a high deductible health plan, and still have your HSA.

Frequently asked questions
What happens if I over contribute to my HSA?

Option 1: Withdraw the excess contributions from your HSA before you file your federal tax return. Consider the excess contributions that you had in your HSA as taxable income.

Option 2: Keep the excess contributions in your HSA, and pay a 6% excise tax. Consider contributing less the folowing year to help make up for the excess that you contributed the year before.

How long do I have to contribute to my HSA?

You can contribute to your HSA up until the annual April tax-filing deadline. For example - if you are contributing for the 2019 year, you can contribute all the way up until April 15, 2020.

Do I have to spend all my money before the year is over?

No! An HSA does NOT have a use-it-or-lose-it rule like an FSA does. Anything that goes into your HSA stays yours - even if you quit your job or move to a different healthcare plan.

What forms will I need to file my taxes if I have an HSA?

IRS Form 8889: This is the form that you will fill out and submit to the IRS with your tax return.

IRS Form 1099-SA: this form shows the amount of money you spent from your HSA during the past year. You do not need to submit this form to file your taxes - but you will need the information on it to fill out a different form.

IRS Form 5498-SA: this form shows the amount of money that was deposited into your HSA during the past year. You don't need to submit this form, just the information on it.

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