IRS Taxation Question Judy Young is 58 years old. Judy is single, is not disable

Question

IRS Taxation Question

Judy Young is 58 years old. Judy is single, is not disabled, and has no dependents. In 2017, she had earnings from her job of $24,300. Judy has participated in her employer's self-only HDHP coverage since June 1, 2017 when she started a new job. Judy was an eligible individual all year. Judy asked the HSA trustee from her previous job to transfer the balance of $2,000 into the HSA at her new job. In 2017, Judy contributed $975 to her HSA. In 2017, Judy took funds from her HSA to pay the following expenses: Insulin $275 Doctor visit $185 Yoga classes $300 Prescription medicine $225 Premiums for COBRA coverage $425 Judy is a U.S. citizen and has a valid Social Security number.

The amount of total distributions reported on Form 8889, line 14a is:

Also, what is the amount reported on Form 8889, line 15?

Explanation / Answer

Broadly, as per the IRS, individuals must file Form 8889 if they (or someone on their behalf, including their employer) made contributions to their HSA account. Form 8889 must also be filed if a person takes funds out of the HSA, even if they do not make a contribution to the HSA that year.  

The maximum amount that can be contributed to the HSA depends on the type of HDHP coverage the individual has. If it is self-only coverage, the maximum contribution is $3,400. If it is family coverage, the maximum contribution is $6,750. If the individual is aged 55 or older at the end of your tax year, they can make an additional contribution of $1,000.  

Hence, Ms. Judy is well within the prescribed limits.  

Eligibility under HSA:

Using the last month rule, if an individual is covered by an HSA eligible health plan on the first day of the last month of a given year, he/she is considered an eligible individual for the entire year. This gives them the option to contribute the entire year’s contribution limit to theHSA, which is more than you would be allowed otherwise on pro rata basis month wise.  

However, the individual must remain an eligible individual during the testing period. The testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month.  

In view of this, Ms. Judy quaifies as an eligible individual. (In any case, the question explicitly states that she is eligible year round.)

Line 14a:

On Line 14a, the total distributions received in the year from all HSAs should be stated. Total distributions include amounts paid with a debit card that restricts payments to health care.

In the given case, all the payments made from HSA will be stated here, i.e. Insulin $275 + Doctor visit $185 + Yoga classes $300 + Prescription medicine $225 + Premiums for COBRA coverage $425 = $1,410

Further, the question states that Judy asked the HSA trustee from her previous job to transfer the balance of $2,000 into the HSA at her new job. This does not qualify as a 'Rollover' and hence, an unlimited number of such transactions are permitted. There will be no impact from this.  

Line 15:

On line 15, distributions from the HSA that were used to pay for qualified medical expenses not reimbursed by insurance or other coverage and that was incurred after the HSA was established.

Qualified Medical Expenses are listed in detail in IRS publication 502.  

Generally, one cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

Long-term care (LTC) insurance,

Health care continuation coverage (such as coverage under COBRA),

Health care coverage while receiving unemployment compensation under federal or state law, or

Medicare and other health care coverage if you were 65 or older

Further, memberships to health clubs, gyms etc are not eligible unless the can be categorised as weight loss programs prescribed or approved by a physician for health concerns.  

In view of the above information, the amount to be reported on Line 15 of Form 8889 will be = Insulin $275 + Doctor visit $185 + Prescription medicine $225 + Premiums for COBRA coverage $425 = $1,110.  

The amount for Yoga classes will be excluded.  

Since Yoga Classes for $300 were paid by HSA but were not eligible, this amount will be subject to a penalty of 20%.  

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