Qualified HSA funding distribution question
A client turns 65 in September of 2016.
He has never made the once-per-lifetime Qualified HSA funding distribution from an IRA. He otherwise qualifies for an HSA contribution right now. Can he make a pro-rata contribution via the Qualified HSA funding distribution now for the months between January and August?
Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2016-03-10 23:01
He could, but this funding contribution just replaces an HSA contribution that he is eligible to make with new money. His IRA would be reduced instead of his cash savings being reduced as would be the case for a new HSA contribution. It is important that he remain HSA qualified for every month through August or a funding distribution for all 8 months will become a partially taxable event. The funding distribution must be done by direct transfer from the IRA but is reported similar to a rollover on line 15 of Form 1040.
Permalink Submitted by Patrick Rudy on Fri, 2016-03-11 18:26
Thank you for the help Alan. Am I reading this wrong?From: https://www.irs.gov/irb/2008-25_IRB/ar09.html Section titled testing period rules:”The testing period begins with the month in which the qualified HSA funding distribution is contributed to the HSA and ends on the last day of the 12th month following that month.””If at any time during the testing period the individual ceases to meet all requirements to be an eligible individual, the amount of the qualified HSA funding distribution is included in the individual’s gross income. The qualified HSA funding distribution is included in gross income in the taxable year of the individual in which the individual first fails to be an eligible individual. This amount is subject to the 10 percent additional tax (unless the failure is due to disability, as defined in § 72(m)(7), or death).”It seems to me that someone would have to be greater than 12 months away from taking medicare in order to not fail the test.What am I missing?
Permalink Submitted by Alan - IRA critic on Fri, 2016-03-11 19:04
The testing period only applies to taxpayers who use the last month rule to allow earlier months to be HDHP covered months, That should not apply to this taxpayer who I assume has HDHP coverage through August and cannot qualify for additional months by turning 65. Therefore, his only concern in this case is maintaining the HDHP through the end of August. His funding contribution cannot exceed 8 months (2/3 of his annual limit).