Discussion:HSA's

I forwarded this issue on to the Lacerte & ProSeries tax analysts and received the following from the Lacerte team:

Most contribuiton situations require only the following 3 entries:

1. Type of coverage: 1=self only, 2=family
2. Amount contributed
3. Annual deductible

In some rare cases, the user has to override the limitation. An example would be if their deductible changed mid-year.

For distributions, users enter two things:

1. Amount distributed
2. Qualified expenses

I hope this helps! I'll forward on anything I learn about how this is done in ProSeries as well. If you have any suggestions for how HSAs could be made easier in either ProSeries or Lacerte, I'll be happy to send that along to the teams.

Thanks!

- Tim Doyle, TaxAlmanac Moderator - Talk to me 21:02, 31 August 2006 (CDT)

The tough part is to get the info. out of clients. Ask for the 1099SA for contribution and distribution, deductible amount and premiums paid. NanoEA, Health Insurance Licensed

In ProSeries or Lacerte? Or both?

- Tim Doyle, TaxAlmanac Moderator - Talk to me 10:39, 2 September 2006 (CDT)

Thanks!

- Tim Doyle, TaxAlmanac Moderator - Talk to me 12:01, 2 September 2006 (CDT)

Tim

• Form 1099-SA has $110 in Box 1, Gross Distribution, with Distribution Code of 1 and HSA box checked.

• Form 5498-SA, Boxes 1 and 2 are $70 for the contributions made in 2006. Box 5, FMV of HSA is 13 cents. Box 6, plan type is HSA.

• On the W-2, Box 12, Code W is $110.

• Taxpayer had medical expenses of $2,992 in 2006 but doesn't have enough to itemize.

After entering amounts in ProSeries on Form 8889 and 1099-SA, line 21 of Form 1040 shows $110 other income. The penalty on line 60 is 0, because I checked the box on the 1099-SA worksheet that all of the distribution was used to pay medical expenses.

If anyone can tell me if I've done this right or wrong, I would be very grateful. To me, this has been the most confusing thing I've encountered, I think, and it's definitely not popular around where I live.

Thanks for any help!

If I'm reading the info right, your client should qualify for a $70 exclusion on 1040 line 25 based on his contributions to the plan -- presumably the employer contribs were pre-tax. What you might have to do is enter the amount of qualifying unreimbursed medical expenses paid on line 13 of form 8889. Pretty much the same expenses qualify as for sched A, EXCEPT health insurance premiums. (So I expect that's why ProSeries isn't automatically transferring amts from sched A to f8889). Incidentally, you can't claim the same expenses on 8889 and sched A, but if with an HSA it's to one's advantage to do it within the HSA.

Writing this while other folks were responding... I think you've all got it.

Hating to beg to differ with more learned folks (I'm just a tax geek, not a pro, who happens to have an HSA...), I've been quite pleased with my HSA, both in its function and tax consequences. They're quite easy to use and are quite a cost-effective solution for those who don't qualify for traditional employer-sponsored plans (i.e. lack of employer). I pay about the same per quarter as I would per month with a low-deductible plan, plus effectively get my medical expenses at a <insert combined state and federal tax rate here> percent discount.

Thanks, N. Paul Inast. There are checkboxes on the 1099-SA worksheet to tell the program that the entire (or partial) distribution was used for medical expenses. Then that amount ($110 in this case) is transferred to Form 8889, line 13. Schedule A isn't affected by this HSA, since this taxpayer doesn't have enough to itemize deductions on his joint return.

So, currently, the 1040 form shows an adjustment of $70 on line 25 and 0 on the other income line. I need to call the client and ask what his deductible is, but it doesn't appear that anything will change if I change the $2,700 deductible to a lower amount, except the form doesn't like any amount entered that is less than $1,050 for the deductible. If I enter $1,049 or less, the error-checking will find an error for that line.

It sure would be nice if there was a nice, little worksheet that had easy instructions on what needs to be entered for this situation. I hope I'll never get another one of these, but I'm sure I will one of these days.

LOL! I feel the same way. Would like to cheer but don't know if it's correct or not.

Thanks again, D&T. I'm still laughing at all of your comments.

Also the new law authorizes certain taxfree rollowers to HSAs.

Now in ref the techincal issues can Pub 969 will be helful? I believe there is an example on how to fill out this forms.

In order to have an HSA and the associated tax benefits, the minimum annual deductible (for self-only coverage) is $1050. Nothing should change if you lower the deductible amt unless your client had contributions in excess of the new number.

One thing about discussing rare situations like this here at TA is that I might be able to better retain what I've learned, even if I don't see another one of these for another two years.

If nobody else responds to tell me I did something wrong, I'll enter his actual deductible after I call him tomorrow and will finish the return as it is now. Thanks!

I remember thinking last year that I was so happy I got through the entire tax season without any HSAs or Archer MSAs!  :) I got this one during my last appt tonight, and I had plans to try to get a bunch of returns done after they left, but nope, it hasn't happened so far, due to spending time on this dang HSA and a deceased return with yet another "delayed Form 2210."

These delayed forms are more upsetting than anything else this year, since they require more time, more 'splaining to clients, and more focus on returns that can't be efiled yet.

The other type of client has money, they contribute to IRA's and HSA's; the HSA is invested in mutual funds, and once a year they may request a reimbursement from the HSA for the medical incurred during the year. The rest of the contribution rolls on into the future, and if they never use it for medical reasons by the time they reach retirement age, they can draw it out like they would an IRA. As far as how to input the info, remember you have to put in the deductible, the contributions, the medical expenses. Train your clients to bring you this information - this can really help people. Deb I use Lacerte, not Proseries, so I don't know how you input it in your program, sorry.

Something to watch out for here... if you are currently claiming your medical expenses on sched A, then you cannot use HSA distributions to reimburse yourself for them --now or later-- or at least if you do so you have to count the distributions as taxable income. (see p. 5 of the instructions for form 8889).

If you're not itemizing medical expenses (or you don't have enough of them to get over the 7.5% AGI threshold), then your plan seems very sensible. Could you post a reference to what you've read about covering expenses in prior years? The IRS instructions and publications seem somewhat vague on the subject, at least to my inexpert eyes: they don't come right out and say that you can make HSA withdrawals for prior year expenses, but they don't seem to explicitly forbid it, either. But it's likely I missed something...

"You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. This includes amounts contributed to your account by your employer through a cafeteria plan."

That's why pretaxed employee contributions are showing up in box 12 on the W-2 form as employer contributions. I think this was what was confusing to me, and when I realized tonight that these contributions are pretax contributions, it made more sense.

As I'm sure you know, only after-tax contributions would be entered on Form 8889, but you'll have to fill out Forms 8889 and 5329 for the other required info.

Most likely, this was related to non-taxable combat pay and should be in box 14. I had to amend a previous tax return where they used W as HSA contributions when it was combat pay.

However, won't the T/P have to report the 2008 distribution of $2,350 on line 21 and $235 on form 5329 in 2008? Wouldn't it be better to leave as is and pay only the 6% tax on excess or am I missing something here?

Thanks for any input.

Income from 1099SA page 1 of return HSA contributions max of $ 5,650.00 Above the line deduction for self employed health insurance of $ 4600 Line 60 is showing a 10% penalty of the amount on 1099SA. She also paid out of pocket medical expenses.. she is under age 55.. Her response to my question was this : I don't know what that form is for-- All I know is what I paid for the premiums (Golden Rule) and my deposits to HSA, which were all put towards my deductible and out of pocket. that $5,000+ was most definitely not reimbursed expenses (I wish) H. The way Golden Rule works is their payment is usually for a combination of the health ins. premium, and a contribution to the HSA. When I paid $1700.34, that was 1200 for premium and $500 for HSA. I was racking up expenses so fast, I arranged to pay the premium only to GR ($1284.36 per quarter), and made my own deposits to the HSA. I tried to make sure all my health costs were paid through the HSA, so I would get the full tax benefit.

First, to have an HSA she must have a high deductible health plan (minimum $1100 for individual or $2200 for family) and no other medical coverage. If she is self-employed, the HDHP premiums will be eligible for SEHI deduction.

Second, the contributions to the HSA will also be deductible. They are reported on Form 8889, Part I. The deductible amount is prorated for the number of months the HDHP has been in place as the only coverage. The max deductible HSA contribution is $2850 for a self-only plan or $5650 for a family plan (i.e. a plan that covers taxpayer and one or more family members). Catch up contributions of up to $800 are allowed for those over 55.

Third, withdrawals from the plan will be nontaxable to the extent they are used to pay for medical expenses. Essentially, if you can deduct in on Sch A, it is allowable against plan withdrawals. Form 1099-SA reports plan distributions but those distributions may be all, partly or non-taxable. Their taxability is determined by completing Part II of Form 8889.

Good luck.