Author Topic: Contributing too much to HSA?  (Read 4224 times)

Joel

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Contributing too much to HSA?
« on: December 21, 2014, 08:42:12 PM »
I'm getting married next year. Currently, we both have HDHP insurance with HSAs. We both have setup our payroll contributions to maximize our HSAs for $3,350 for the year. When we get married, we will be switching over to a family HSA plan which is limited to $6,650 per year (instead of $6,700). Therefore, I need to calculate exactly how much I can actually contribute to the HSAs during the year.

According to IRS Publication 969,
"You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.
1. You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
2. You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings."

Does reporting these amounts as other income result in the 7.65% SS and Medicare taxes being added onto what I owe for the year?

I think it makes sense to err on the side of contributing too much. But I want to make sure that I can pull the money back out once I can calculate exactly how much was excess. Next, I want to determine what additional tax penalties I may have to pay and if I have to then pay the 7.65% SS and Medicare taxes with my tax return. In theory, I would expect that I would have to, but this could be one of those silly loopholes. If it avoids the 7.65% SS and Medicare taxes, in this one year only, does it make sense to overcontribute to the HSA and shelter $3,400 from the 7.65% taxes?

Joel

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Re: Contributing too much to HSA?
« Reply #1 on: December 23, 2014, 05:44:29 PM »
Anyone have any idea?

I've spent a couple hours researching and have not yet been able to find anything indicating otherwise, even though I feel like there should be.

seattlecyclone

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Re: Contributing too much to HSA?
« Reply #2 on: December 23, 2014, 05:46:43 PM »
Why not just decrease your contribution election by $50 so you don't need to worry about it?

Joel

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Re: Contributing too much to HSA?
« Reply #3 on: December 23, 2014, 05:53:17 PM »
I could do that.

I could also shelter $3,400 from FICA taxes since it appears the tax code is written in a way that allows it...

Realistically though, since we are getting married mid year and switching over to a family plan, I have to ensure the timing of the contributions is precise otherwise I likely end up overcontributing or not contributing enough. Since both companies are on different pay timelines and have different ambiguous time lags before stuff like this is effective.
« Last Edit: December 23, 2014, 05:55:19 PM by Joel »

seattlecyclone

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Re: Contributing too much to HSA?
« Reply #4 on: December 23, 2014, 06:07:06 PM »
Oh, I see. I first read it as you were worried about what would happen if you overcontribute by $50 because the limit is slightly lower than for two single plans. Instead you're asking about what happens if you contribute the full amount on both of your single plans until you get married and then switch to contributing the new maximum to your family plan after you get married.

Would you owe FICA tax on the excess contributions when you withdraw them or not? That's a good question. You may have a valid loophole here. The documentation just says that this money must be reported as "other income" on Form 1040. It doesn't say you need to report it to your employer so that they can withhold payroll taxes on it.

When are you getting married? I don't know about your respective employers, but mine does not allow you to front-load HSA contributions. If yours are the same way, the maximum overcontribution under this strategy would be limited to $3,400 times whatever fraction of the year elapses before you get married.

Joel

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Re: Contributing too much to HSA?
« Reply #5 on: December 23, 2014, 10:19:01 PM »
I'm getting married in October.

Due to the way her health insurance plan works, we will be going on a family HDHP w/ HSA with her employer, and I will also be keeping the single HDHP w/ HSA with my employer. Otherwise, I get charged a spousal surchage in which it is cheaper to just pay for my employer's cheapest insurance to avoid.

So with that said, I could in theory maximize the family plan and my single plan each year, and then withdraw all of the contributions to my plan at the end of each year.

For this year though, it likely will be a negligible amount, but I just want to figure out what is going to be the best way to handle in. Hopefully being able to take full advantage of the tax-deferred space.

Joel

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Re: Contributing too much to HSA?
« Reply #6 on: December 24, 2014, 01:02:52 PM »
So with that said, I could in theory maximize the family plan and my single plan each year, and then withdraw all of the contributions to my plan at the end of each year. That allows me to avoid $256.28 in FICA taxes ($3,350 * 7.65%) for a cost of $25. The HSA also has a monthly maintenance fee of $2.95, so that costs me an additional $35.40. This would result in a net of $195.88. I looked into how easy this will be with my HSA and it seems like a major pain in the ass, so I think it's probably going to end up not being worth it.