The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from South Dakota is representative of a common inquiry related to retirement plan distributions. The advisor asked:
“Can a person fund his or her Health Savings Account (HSA) with a distribution from a 401(k) plan?”
Highlights of the Discussion
No; however, an owner of an HSA may have a one-time opportunity to use a trustee-to-trustee transfer of dollars from his or her traditional or Roth IRA to fund his or her HSA. An exception to the one-time rule applies if a person makes a distribution during a month when he or she has self-onlyhigh deductible health plan (HDHP) coverage, and in a later month in that tax year makes another qualified HSA funding distribution following a change to family HDHP coverage. A qualified HSA funding distribution is not included in income, is not deductible, and reduces the amount that can be contributed to an HSA by the individual or any other source, such as an employer.
A qualified HSA funding distribution would be beneficial for a person if he or she wants to avoid taking required minimum distributions from the amount transferred and/or take it at any time from the HSA for qualified medical expenses with no tax or penalty due on the withdrawal.
Here are the eligibility rules for qualified HSA funding distributions:
- The maximum amount that can be excluded from a person’s income as a qualified HSA funding distribution is based on the contributor’s age at the end of the year and his or her HDHP coverage (self-only or family) at the time of the transfer. All contributions (individual, employer and qualified HSA funding distributions made are combined for the year, and must not exceed the maximum annual limit ($3,500 for self-only coverage and $7,000 for family coverage in 2019, plus $1,000 for a catch-up contribution for those age 55 and older).
- A qualified HSA funding distribution must be made by Dec. 31 of a given year. That’s because a qualified HSA funding distribution relates to the taxable year in which the distribution is actually made. Therefore, the April 15 deadline for all other HSA contributions does not apply.
- Only distributions from traditional or Roth IRAs qualify – not amounts taken from “ongoing” simplified employee pension (SEP) or savings incentive match plans for employees (SIMPLE) IRA plans. Such plans are considered ongoing if a sponsoring employer makes a contribution for the plan year ending with or within the participant’s tax year in which the qualified HSA funding distribution would be made.
- Qualified HSA funding distributions must be reported on IRS Form 8889 Health Savings Accounts (HSAs), which is attached to the appropriate IRS Form 1040.
(See IRS Notice 2008-51 and IRS Publication 969 Health Savings Accounts and Other Tax Favored Health Plans for additional details.)
Conclusion
A person can fund his or her HSA with a qualified HSA funding distribution – which is a trustee-to-trustee transfer from a traditional or Roth IRA. For eligible individuals, such transfers may be beneficial.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2019, Retirement Learning Center, LLC. Used with permission.
