Funding an HSA w/ an IRA

Submitted by Jason Hochstadt on Tue, 2016-07-26 13:32

Hello,

With respect to the once in a lifetime funding of an HSA with an IRA:

1. If this is done, are the funds which are converted (from a pre-tax IRA into an HSA which could have tax-free distributions if qualified) subject to income tax in the year of conversion – similar to a Roth IRA conversion?

2. Assume a wife is the one with the HSA thru her employment (self employed/S. Corp.) Can the husband, who is covered under the HSA, rollover one of his pre-tax IRA’s into the HSA – up to the $6,750 limit in 2016 for a family contribution if <55 [assume no HSA contributions made to-date]? Or must the funds come from a pre-tax IRA owned by the wife since she is the HSA owner?

Thank you!

Jason



Submitted by Alan - IRA critic on Tue, 2016-07-26 17:00

  1. There is no tax due, and the funding distribution must be done by a single trustee to trustee transfer. There is no 1099R reporting, but the taxpayer must report the transfer on Form 8889. This feature is somewhat overblown because it replaces the amount that otherwise could have been contributed to the HSA as a new contribution, and the IRA balance is accordingly reduced. Therefore this might be beneficial if there is no money for a new HSA contribution or the taxpayer has low income and would not benefit much by the HSA deduction. If the IRA has basis, the amount of basis is unchanged.
  2. Both HSAs and IRAs are individually owned accounts. The qualified funding distribution must be executed between and HSA and IRA owned by the same spouse, so the husband’s IRA cannot fund the wife’s HSA per Sec 408(d)(9). However, if the husband took a taxable IRA distribution and used the money to fund a new deductible HSA contribution to the wife’s HSA, the income tax impact would offset, but not the early withdrawal penalty for the IRA distribution, if applicable. Also, any basis would come out pro rata. Also, note that there is a 12 month testing period requiring maintainence of high deductible health coverage, or the funding distribution becomes taxable.

Submitted by David Mertz on Tue, 2016-07-26 20:40

An HSA funding distribution is actually reported on Form 1099-R the same as a regular IRA distribution.  The taxpayer must report the distribution on Form 1040 line 15 with the notation “HFD” to indicate that the amount of the distribution excluded from income on line 15b was done so as the result on an HSA funding distribution.

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