I have the privilege of working with some truly great talent here in "Southwest Flyover Country" (aka Dayton, Ohio). One of my favorites is Pete Deist, who runs FlexBank, a local FSA/HRA/HSA administrator. Pete has a long and storied career "in the biz," and so has a unique and helpful perspective for those of us still in the trenches.
As part of an FAQ he recently compiled, he posed the following:
James enrolled in a High Deductible Health Plan (HDHP) with family coverage effective February 1, 2007. He contributed the maximum permissible amount of $6,450 ($5,650 plus the $800 "catch-up"). James turned 65 in January, and enrolled in Medicare effective January 1. As of that date, he was no longer eligible to contribute to his Health Savings Account. Is there a problem with his 2007 contribution?
I must confess that I have never run into this particular scenario before, but I suspect it will become more prevalent with the "graying" of the population. The answer was surprising, and enlightening:
Yes. Under the "no-proration" rule, he was treated as having been an eligible individual during every month of the year (2007) and was permitted to make contributions for those months during the year before he actually enrolled in the HDHP. However, he did not remain HSA-eligible during the 13 month "testing period" (beginning in December of the year for which those contributions were made and ending on the last day of the 12th month following that December) [ed: who writes these laws, anyway?!]. Therefore his contribution must be pro-rated based on the number of months he was an eligible individual.
Whew!
Believe it or not, there's still more: He'll have to notify the bank which holds the account that over $500 was contributed that shouldn't have been. Plus, he'll have to take that $500+ as a distribution and report it as "other income" on his taxes. Ouch!
If nothing else, this underscores the need to have a competent administrator for your HSA loss fund.
Thanks Pete!
[Hat Tip to Cornerstone]
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