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Subject Author Date
Health Savings Account contributions Fred Johnson 09-08-2007
Posted by Fred Johnson on September 8, 2007, 12:26 am
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 I started participating in a qualified High Deductible
Health Plan (HDHP) on June 1st of this year and opened a
Health Savings Account (HSA) that same day but I have a
question that I'm hoping someone on here can answer.

Am I correct in my understanding that I can contribute up to
$5650 (given that I have a family policy) for 2007 but if I
do contribute the maximum and then don't remain enrolled in
an HDHP through December 31 of 2008 that I would have to pay
taxes and a 10% penalty on the "extra" portion that
corresponds to the number of months in 2007 that I wasn't
enrolled? For example, if I remain enrolled through the end
of this year but am no longer in a qualified plan on
12/31/08, then I'd have to pay taxes and a penalty on the
portion corresponding to the five months of this year
(January through May) when I wasn't enrolled in an HDHP?
That's my interpretation based on the material I've read,
but can someone more knowledgeable than me confirm this?

I'd like to contribute the maximum for 2007 but the nature
of my job is such that the odds are fairly good that I'll
have a different employer before the end of 2008, which in
turn could mean that an HDHP might not be an option for me.
Given that, it doesn't seem like a good idea to contribute
the full $5650 for this year because I'd risk paying more in
taxes and penalties than I can save by making the full
contribution.

Thanks,

Fred

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<< that may be imposed upon the taxpayer. >>
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Posted by MyVeryOwnSelf on September 9, 2007, 10:09 pm
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> I started participating in a qualified High Deductible
> Health Plan (HDHP) on June 1st of this year and opened a
> Health Savings Account (HSA) that same day but I have a
> question that I'm hoping someone on here can answer.
>
> Am I correct in my understanding that I can contribute up to
> $5650 (given that I have a family policy) for 2007 but if I
> do contribute the maximum and then don't remain enrolled in
> an HDHP through December 31 of 2008 that I would have to pay
> taxes and a 10% penalty on the "extra" portion that
> corresponds to the number of months in 2007 that I wasn't
> enrolled? For example, if I remain enrolled through the end
> of this year but am no longer in a qualified plan on
> 12/31/08, then I'd have to pay taxes and a penalty on the
> portion corresponding to the five months of this year
> (January through May) when I wasn't enrolled in an HDHP?
> That's my interpretation based on the material I've read,
> but can someone more knowledgeable than me confirm this?
>
> I'd like to contribute the maximum for 2007 but the nature
> of my job is such that the odds are fairly good that I'll
> have a different employer before the end of 2008, which in
> turn could mean that an HDHP might not be an option for me.
> Given that, it doesn't seem like a good idea to contribute
> the full $5650 for this year because I'd risk paying more in
> taxes and penalties than I can save by making the full
> contribution.

Maybe I'm missing something, but I think each tax year
stands on its own. One's contribution limit for the 2007 tax
year depends on eligibility in 2007. I haven't seen anywhere
that says a contribution limit for one year depends on what
will happen in future years.

What's sometimes confusing is that we have until April,
2008, to contribute for tax year 2007.

(Disclaimer: I'm not a tax pro, but I've had an HSAs they
were available.)

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Mark Freeland on September 10, 2007, 6:58 pm
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>> I started participating in a qualified High Deductible
>> Health Plan (HDHP) [June 1] ...
>>
>> Am I correct in my understanding that I can contribute up to
>> $5650 (given that I have a family policy) for 2007 but if I
>> do contribute the maximum and then don't remain enrolled in
>> an HDHP through December 31 of 2008 that I would have to pay
>> taxes and a 10% penalty on the "extra" portion that
>> corresponds to the number of months in 2007 that I wasn't
>> enrolled?
>> [...]
>> That's my interpretation based on the material I've read,
>> but can someone more knowledgeable than me confirm this?

Like Will Rogers, all I know is what I read in the papers,
but the IRS papers (Pub 553) are pretty clear (and confirm
your interpretation):

"[I]f you are not an eligible individual, for any reason other
than death or becoming disabled, for the 12 months following
the end of your tax year, any contribution attributable to
[the months in which you were not eligible] is included in
your income and is subject to an additional 10% tax. The
income and additional 10% tax are reported for the tax year
in which you cease to be an eligible individual."
http://www.irs.gov/publications/p553/ch01.html#d0e1626

>> I'd like to contribute the maximum for 2007 but the nature
>> of my job is such that the odds are fairly good that I'll
>> have a different employer before the end of 2008, which in
>> turn could mean that an HDHP might not be an option for me.

The HDHP could still be a good option, if you only
contribute 7 months worth (since you started on June 1).
Then there would be no penalty (assuming you're under the
plan through Dec 1 of this year).

I also started an HDHP in the middle of this year, am in the
same situation, and am considering paying in the max anyway,
but for me, the ability to shift income from 2007 to 2008
may be worth the penalty.

Worst case for you is that you contribute $5650 * 5/12 =
$2354 extra this year, you get the reduction of AGI in 2007,
it shows up as additional AGI in 2008, plus you pay a
$235.42 penalty. Assuming same tax brackets in 2007 and
2008, you are putting only the $235 penalty at risk. Your
possible savings (say, in a 25% bracket) are 25% * $2354 =
$588.54. And as noted below, you've got until April to
make your decision on those extra 5 months.

> Maybe I'm missing something, but I think each tax year
> stands on its own. [...]

See above.

> What's sometimes confusing is that we have until April,
> 2008, to contribute for tax year 2007.

Mark Freeland
BnetOnewsX@sbcglobal.net

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by MyVeryOwnSelf on September 11, 2007, 4:41 pm
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> "[I]f you are not an eligible individual, for any reason other
> than death or becoming disabled, for the 12 months following
> the end of your tax year, any contribution attributable to
these months
> [the months in which you were not eligible] is included in
> your income and is subject to an additional 10% tax. The
> income and additional 10% tax are reported for the tax year
> in which you cease to be an eligible individual."
> http://www.irs.gov/publications/p553/ch01.html#d0e1626

Thanks for the clarification. It took a while to decipher
which months were "these months" in the quote.

It was puzzling until I noticed that the penalty applies to
somebody eligible for only the last part of 2007 who
contributes for all of 2007. I didn't know that was allowed.

Since I'm eligible for all of 2007 but will become
ineligible during 2008, I'm safe contributing the max for
2007, right?

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Mark Freeland on September 12, 2007, 10:05 pm
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> It was puzzling until I noticed that the penalty applies to
> somebody eligible for only the last part of 2007 who
> contributes for all of 2007. I didn't know that was allowed.

This is a recent change. It was done to address the problem
that if a plan began in the middle of the year (say July),
they wouldn't participate. Without this rule change, people
who began a plan in July 2007 would have lots of
out-of-pocket expenses July - December, but could only
contribute half their HSA amount in 2007.

With the new rule, they get to contribute a full year's
worth up front (same as if you'd begun the plan Jan 1). But
the change doesn't come for free. If you start a plan in the
middle of the 2007, and contribute a full amount for 2007,
you have to stick with the plan until the end of 2008 to
avoid penalties for 2007.

> Since I'm eligible for all of 2007 but will become
> ineligible during 2008, I'm safe contributing the max for
> 2007, right?

That's my understanding. You can also contribute in 2008
for whatever months you are eligible. (Eligibility is
determined by whether you qualify on the first of each
month.)

Mark Freeland
BnetOnewsX@sbcglobal.net

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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