File and Suspend effect on HSA

Submitted by Gil Shifrin on Tue, 2015-08-11 19:52

This is a social security and HSA question. I recently went to social security office to file and suspend and to start my wife’s spousal benefits at her FRA.I am 68 years old my wile will be 66 in 2 months. She has no work credits for social security. At that time social security clerk asked me if I had high deductible /HSA insurance plan. I stated yes and they told me that I could no longer contribute to HSA becuase the file and suspend strategy triggerred automatically Medicare Part A for me. Is this correct? They also said once I file and suspend that medicare part A would go back 6 months. I would possibly receive a penalty for HSA contibutions during that period. Is that correct and how is the penaly calculated (i.e. what percent)?



Submitted by Alan - IRA critic on Tue, 2015-08-11 23:15

Yes, the File and Suspend application will result in automatic Med Part A enrollment retroactive for 6 months. This will reduce your max HSA contribution for the year and may create an excess contribution. To avoid a 6% excise tax, you must request a return of the excess contribution amount with allocated earnings. The earnings would be taxable and you would not be able to deduct the returned contribution amount. The return is handled just like an IRA excess contribution. Since you must remove the excess at some point to stop the 6% excise tax from continuing into additional years, do it ASAP to avoid the tax for the current year as well.



Submitted by Gil Shifrin on Wed, 2015-08-12 10:10

Thanks for the follow-up. Yesterday I stopped future contribtions to HSA starting with 09/01/2015. I will go back to the social security office next week. At that time I will file and suspend and my wife will receive her spousal benefits starting in September. I prefer to not return the “excess ” HSA contribution. I was using the HSA account as another bucket of money in retirement. I will incur a penalty if I understand correctly for any contribtions made to HSA on and after 02/18/18 ( assuming my appointment at social security is 08/18/15). How do I calculate the penalty amount? I will have contributed about $4000 from 02/18/15 to 08/31/15. Do I multiply 6% times 4000 = 240.00. How long will it take them to identify (estimate) the excess and ask for the penalty? This appears to me to be the best solution. For what it is worth this is a ridiculous rule regarding file and suspend. I understand  when you file and receive social security you expect to start the medicare insurance process. One last question: The part A will also start for my wife. Is that correct?



Submitted by Alan - IRA critic on Wed, 2015-08-12 17:01

  • We first need to determine how much you are eligible to contribute for January, which is the final month either of you are eligible. Your wife has not enrolled in Medicare earlier?  Have you both been covered by an HDHP (family coverage) and been using the family coverage contribution limit? Once your January contribution limit is determined, any amount in excess of that will be an excess contribution for 2015. It does not matter when you make the contributions. If you incur the excise tax due to failure to withdraw the excess by the deadline, you will also owe another 6% for each year the excess remains. You would need an investment return of 6% to break even.
  • NOTE: With catchup contributions and family coverage, your Jan contribution limit should be 720.83   (8650/12)

 



Submitted by Gil Shifrin on Wed, 2015-08-12 18:04

This is more complex that I thought. My wife has not enrolled into medicare. We are both covered by HDHP and have been using the family contribution limit (8650.00 for 2015, which includes employer contribution of 200.00). My excess contibution for 2015 will be $4325. I would be charged .06 x 4325 = 259.50 for 2015. I thought it would be a 1 time charge; however from your explanation they will charge me 259.50 for 2016 if I do not remove the excess contribution by end of 2016. Do I understand this correctly?It looks like I have 2 other alternatives 1) I can file and suspend in March 2016 timeline and then my wife can receive 6 months retroactive spousal benefits. My wife will be 66 years old Nov 27,2015. Social security told me that they can do up to 6 months retroactive benefits. When I return to social security to file in March 2016 timeline there will be no excess contribution . The only down side is that the government gets our money and hold on to for up to 6 months.2) Other alternative is a paper nightmare, I believe. I would have to contact HR have the excess contribution removed. The down side is someone will make a misttake in the process plus I would hve less pool of HSA money when I retire. I leaned towards the alternative to wait till March 2016 timeline to file and suapend. Do you think I understand the options correctly. Correct me if I am wrong.



Submitted by Alan - IRA critic on Wed, 2015-08-12 20:24

  • You would only contact HR if you needed to stop contributions if you are making them by payroll deduction. For the actual distribution of excess contributions you would contact your HSA custodian (not HR) and tell them the amount of excess contributions you want returned. Obviously, you could not deduct excess contributions on Form 8889. Although you have until 10/15/2016 to remove the excess and avoid the 6% excise tax completely, you would normally want to complete this by around March so you will be able to file your return correctly. Any earnings on the excess amounts is taxable in the year of the distribution, so if the corrective distribution is done this year, the earnings would be taxable for 2015. If you do NOT withdraw the excess by 10/15/2016, then you will owe the 6% for 2015. And if you do not withdraw it by 12/31/2016, you will owe another 6% excise tax for 2016. You can keep the excess in the HSA as long as you are willing to pay the excise tax, but you cannot deduct the excess contribution on Form 8889.
  • This site is dedicated to IRAs and other retirement plans. The SS and Medicare laws are complex, so I cannot verify issues regarding effective dates of Medicare coverage, but I do know that if you do not have proper employer coverage, there is a penalty for late Medicare enrollment for Parts B and D. This applies separately for each spouse. You would not generally benefit by incurring any late enrollment penalty or by leaving an excess HSA contribution in the account just to have a higher HSA balance. I think you are overweighting the benefits of a couple thousand extra dollars in your HSA account.


Submitted by David Mertz on Thu, 2015-08-13 00:52

gshifrin, I think you have some errors in your calculations.  Your catch-up cannot be contributed to your wife’s HSA and your wife’s catch-up cannot be contributed to your HSA.  With full-year eligibility for each of you, to contribute a total of $8,650 to HSAs would require that at least the $1,000 of catch-up for each of you be contributed to each of your individual HSA accounts (one account for you and one for your wife) and the remainder split between the two HSA accounts.  However, with only one month of 2015 eligibility for you, the maximum contribution to your HSA would be $637.50, not $720.83.  Anything beyond $637.50 to your own HSA account would be excess.  If you contribute the entire $637.50 that you are eligible to contribute ($554.17 of regular contribution plus $83.33 of catch-up), the maximum contribution that your wife could make to her HSA account (with full-year eligibility and family HDHP coverage) would be $7,095.83 ($1,000 + $6,650 – $554.17).  If you have 2 months of eligibility, the numbers would be $1,275.00 for you and $6,541.67 for your wife.



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