Compiled by Ric Joyner, MBA, CEBS, GBA, CFCI
Dear smart gentlemen,
I need some guidance that no one else seems to know what the heck they are talking about with this.
I get the answer “what testing”. If a client is on a 12-1 renewal date and offers an HSA for the first time 12-1-09.
An Employee fully funded their HSA $5950 in Dec 2009 and is now coming up on renewal time.
According to the HSA testing I am reading, if they opt out of the HSA for this renewal (12-1-10), they would have to claim the entire amount of HSA funding done in 2010 and 11/12 of the $5950 funded in 2009 on their 2010 gross income.
Is this accurate?
Senior Vice President, Employee Benefits Advisor
You have correctly pointed out a potential issue relating to the HSA funding rules. The usual rule is that HSA eligibility is determined as of the beginning of each month and the total that can be contributed to an HSA is the prorated annual limit (1/12 of the total). However, there is a special rule that says an individual who is eligible as of the first day of the last month of the year can contribute the full contribution for the year (not a prorated amount). From the facts in your message it sounds like this is what occurred with this individual in 2009.
There is a catch to this special rule – the individual making the extra contributions must stay HSA eligible for the 1 year “testing period” following the contributions. For a calendar year tax payer the testing period ends as of December 31. Failing to qualify for the entire testing period causes the extra contributions allowed originally to become taxable and there is also a 10% excise tax on these. The rules do not permit a distribution of these amounts though and distributions remain subject to the usual rules. If they also put in the full 2010 amount in but will not be HSA eligible on 12/1 they would also have to include 1/12 of that amount. There is no excise tax on that if it is kicked out of the HSA before the filing of the tax return for 2010.
This is obviously not a good result and it would be beneficial to consider whether there may be options by which this individual could remain HSA eligible until the end of the “testing period” December 31. I am attaching the IRS notice that explains these rules.
Let me know if you have any additional questions.
Todd W. Martin
Reinhart Boerner Van Deuren s.c.
22 East Mifflin Street, Suite 600 | Madison, WI 53703
Office: 608-229-2244 | Cell: 608-219-7196 | Fax: 608-229-2100
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Todd and everyone,
Thank you for clarifying this situation with such an easy to understand explanation.
We appreciate your insight greatly.
Ric and Isaiah, As always thank you for your assistance and your partnership.
Happy Nov all!