Advanced Underwriting Consultants

Ask the Experts – March 18

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can my client roll over his traditional IRA into an HSA?

Answer: No, but he might be able to transfer a portion of his IRA to his HSA without incurring income tax liability by making a qualified HSA funding distribution.

A qualified HSA funding distribution is a way to fund an HSA with IRA money. It can be made from either a traditional IRA or Roth IRA to an HSA. Ongoing SEP IRAs or SIMPLE IRAs are not eligible. A SEP or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending within the tax year in which the qualified HSA funding distribution would be made.

The qualified HSA funding distribution must be made as a direct trustee-to-trustee transfer. The distribution is not included in the individual’s income, and it is not deductible. Only one qualified HSA funding distribution is allowed per individual.

The amount an individual can transfer from his IRA to an HSA in a qualified HSA funding distribution is limited to his general HSA contribution limit on the year. This limit depend on the type of HDHP coverage the individual has, his age, the dates he becomes eligible and ceases to be eligible to contribute. In 2014, for individuals with self-only HDHP coverage, an individual can contribute up to $3,300; for family coverage, up to $6,550. Any qualified HSA funding distribution reduces the amount that can be contributed to his HSA for that year.

The qualified HSA funding distribution is shown on Form 8889 in Line 10 for the year in which the distribution is made. Form 8889 is attached to the individual’s 1040 or 1040-NR.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – February 18

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Two clients are getting married, each with separate health savings accounts. Can the two spouses combine their HSAs into one?

Answer: No. An individual cannot have a joint HSA. Each spouse who is an eligible individual who wants an HSA must open a separate HSA. Therefore, one spouse may not roll over her HSA into the other spouse’s HSA.

If the account holder dies leaving his HSA to his spouse, the HSA will be transferred to the surviving spouse. At this point, the surviving spouse can roll over the inherited HSA into her own HSA. For non-spousal beneficiaries, the HSA will be fully distributed and the funds will be included in the beneficiary’s gross income.

Your clients will probably want to maintain both accounts since distributions from an HSA are taxed as ordinary income and generally subject to an additional 20-percent tax if the amounts distributed are not used to pay or reimburse qualified medical expenses. Qualified medical expenses include those incurred by a spouse and dependents.

If your clients don’t want to maintain two accounts, they could use only one account to pay for qualified medical expenses and not make further contributions to that account. This way it would be depleted and closed.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Ask the Experts – February 17

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Are there any penalties for taking a distribution from an HSA? Are there any exceptions?

Answer: Distributions from an HSA are income tax-free if used to pay for or reimburse qualified medical expenses. Qualified medical expenses include those incurred by a spouse and dependents.

Non-qualified distributions are taxed as ordinary income and are generally subject to an additional 20-percent tax. The 20-percent penalty does not apply if the distribution is made after the account beneficiary dies, becomes disabled or reaches age 65.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.