Need help with HSA transfer v. rollover rules

[charis]

Hi,

I have two HSAs  - one at HSA Bank that is used for direct deposit by my employer/health plan and the other is an Elements HSA, which I opened years ago for its TD Ameritrade investment option.  I have the ability to deposit funds from my HSA Bank HSA directly into my Elements HSA via a simple external transfer online.   It does not hit my checking/savings account or go anywhere else on the way.  Does count as a trustee-to-trustee transfer (unlimited transfers) or an HSA rollover (limited to one rollover every 365 days)? 

A trustee-to-trustee transfer seems to entail a special form that is reviewed by HSA Bank and then they send the money to Elements.  I don't see how this is effectively any different than a direct transfer initiated by me online.   A rollover is typically described as a distribution that I take from one HSA (usually via a check or deposit into checking/savings account) and then I send the $ to the other HSA within 60 days. 

I'm asking because I'd like to be able to do an HSA-to-HSA transfer more than once every 365 days.  Can't find any Google guidance on this specific circumstance.

[terran]

What's going to matter is how the banks report this transaction to the IRS. Have you completed this type of transfer/rollover in any previous years?

If HSA Bank considers it a distribution (there's no distinction on this end between types of distribution even if it's subsequently rolled over) then your 1099SA will include the distribution in box 1. On the other end, Elements will add a rollover contribution to box 4 of your 5498SA (but this won't come out until May of the following year).

I've never done a trustee to trustee transfer because my HSAs have always charged for that, but https://www.irs.gov/instructions/i1099sa says that they shouldn't be reported on 1099SA, so if you don't see anything on a 1099SA from HSA Bank for a year in which you did the transfer then you should be good.

If this is the first year you're doing this then I'd probably just do one this year to be safe and check how it's reported. I wouldn't rely on anything customer service tells you either way as I've generally found they're not reliable on technical/tax issues.

[charis]

So sorry I didn't respond to this.  The transfer finally completed and it was processed as a distribution.  The effective date is exactly 364 days since my last rollover.  I have no idea what the fall out from this will be or how I will be notified.  I searched high and low on the internet for anyone who has dealt with this but coming up empty.

[terran]

From what I've read the date the distribution is received is what matters (not the date of contribution to the new HSA, or any other date). Are the dates each distribution was received what are 364 days apart?

[charis]

From what I've read the date the distribution is received is what matters (not the date of contribution to the new HSA, or any other date). Are the dates each distribution was received what are 364 days apart?

Yes.

[terran]

So just to confirm, your 1099SA from HSA Bank has an an amount listed in Box 1?

In that case, you would normally list that amount on line 14a of Form 8889 and the amount rolled over to the Elements HSA on line 14b. However, the instructions for form 8889 line 14b refer you to a section on rollovers on page 3 which says you can only make one rollover in a 1-year period. To my reading that means you can't legitimately put the second rollover on line 14b, so unless you have eligible unreimbursed medical expenses that you can put on line 15 you're going to have a taxable distribution on line 16 and a 20% penalty on line 17b.

If this isn't a rollover contribution it will simply be a contribution to the Elements HSA, so you'll need to remove any of it as an excess contribution that exceeds your annual limit when added to any other contributions you have/will make to your HSAs.

[charis]

Well, the transfer occurred recently, so I won't get the 1099 until next January, right? But it's described as a "distribution" on my account statement, while a trustee-to-trustee transfer that I executed after that is described as a "distribution transfer."  I did the second one because HSA bank limits the amount. I do have plenty of unreimbursed medical expense for the last two years that add up to more than the amount transferred.

[terran]

Right, if you didn't this year then your 2021 1099SA will be the one that dictates whether the transfer is considered a distribution, so I'd wait and see what that says. You could consider stopping future contributions for 2021 to avoid or reduce the amount you might have to remove as an excess contribution. That would mean you won't get the FICA tax deduction from payroll deducted contributions if that applies to your situation, so maybe better to just plan on removing the excess contribution + gains next year after you get your 1099SA, but before your tax filing deadline if it ends up being necessary. Since you have plenty of unreimbursed medical expenses you won't owe tax or penalty on the distribution and only a bit of tax on the gains on the excess contribution.