HSA Contributions - Excess?

[Terry D EA]

Client had received payments from a Christian Care insurance that is promoted by Dave Ramsey. The client chose to have the payments deposited into their individual HSA account. Those deposits are shown as a contribution on form 5498-SA as a total of $37,220.13 for TY 2021. The statement from the Trust Company shows $27,547.73 in distributions used to pay medical expenses. The difference is a contribution in the amount of $9,672.40 which exceeds the limits of $4,600.00 (client is 63) by $5072.40 which is subject to the 6% excise tax. I am trying to determine if the client can withdraw the excess now to avoid the excise tax. All distributions occurred prior to Dec 31, 2021. 

The client just now sent me the form 5498-SA. No contributions were shown on the 2021 tax return. If I amend the tax return to show the contributions, I'm not sure how all of this will look to the IRS. I did suggest to not have funds deposited this way. Any help with this is appreciated.

[mircpa]

Does he have option of returning excess money back to them or subject to excise tax

[Terry D EA]

Not sure yet. I don’t have an official 1099SA that shows the total distributions. I am working from a trustee statement, 5498-SA and that’s it. When I get more info, I’ll post it

[Lee B]

If you are talking about a Christian Health Care Ministry, it's not insurance and I don't think it's qualifies as an HDHP.

[Terry D EA]

Ok, I'm bumping this up. After waiting I now have all of the documents and will add the following:

1. This is a Christian Health Care Ministry and DOES NOT qualify as a high deductible plan. 

2. form 5498-SA shows total contributions of $37,220.13

3. Form 1099-SA shows distributions of $38,935.42

By the statement received from the HSA, all distributions were taken well before the filing of the 2021 tax return. Essentially, this client never qualified for a HSA because they are not covered by a HDP. So, on form 8889 do I put zero in for the contributions so no deduction is taken? Showing the distribution and the qualified medical expenses isn't a problem. Should a statement outlining what and why be included with the amendment? 

Another direction, would it be better to show the contributions as other income with the medical expense deduction? Using either of these methods does not change the original return balance due. 

I'm not sure what the IRS has in the client's transcript. I don't know if the trustee of the HSA has reported anything to the IRS. I can only tell the client they are required to file an accurate return. The only apparent reason is for accuracy and to avoid the 6% excise tax. On the surface seems simply enough. But...... I'm struggling here and need advice. Wondering if contacting the IRS for a ruling would help?

[jklcpa]

Terry, you need to slow down and research this more.  The IRS was proposing back as early as 2020 that these plans should be considered as insurance (they weren't in the past) if the particular plan meets the minimum essential coverage (MEC), that "premium" (aka member dues) should be considered a tax deductible expense, and that reimbursements should be tax free.

That all being said, that does not mean that these plans would qualify as a HDHP.

Sorry, I don't know the status of these IRS proposals and don't have time to look into that for you. A quick google found a couple of articles and blogs but no authoritative references.

With regard to the actual medical expenses paid, I don't see how this client could deduct those either way since, basically, someone else footed the bills.

[jklcpa]

Found these:

on IRS site from 2020: https://www.irs.gov/newsroom/proposed-regulations-address-direct-primary-care-arrangements-and-health-care-sharing-ministry-memberships

and this article from JoA in 2020: https://www.journalofaccountancy.com/news/2020/jun/irs-rules-direct-primary-care-arrangements-health-care-sharing-ministries.html

a couple of more:

article by a CPA in Jan 2021 on the subject: https://bradyware.com/proposed-changes-hcsmp/

and this blog-thing-article written this year, more geared toward employers and HR depts that may be helpful?: https://intercom.help/take-command-health/en/articles/4399639-update-on-sharing-plans-and-qsehra-for-2022

 

Maybe some of that will be helpful?

[Terry D EA]

40 minutes ago, jklcpa said:

Terry, you need to slow down and research this more.  The IRS was proposing back as early as 2020 that these plans should be considered as insurance (they weren't in the past) if the particular plan meets the minimum essential coverage (MEC), that "premium" (aka member dues) should be considered a tax deductible expense, and that reimbursements should be tax free.

That all being said, that does not mean that these plans would qualify as a HDHP.

Sorry, I don't know the status of these IRS proposals and don't have time to look into that for you. A quick google found a couple of articles and blogs but no authoritative references.

With regard to the actual medical expenses paid, I don't see how this client could deduct those either way since, basically, someone else footed the bills.

Judy, I scanned through the articles you posted and yes, they are helpful and I will research this more. It is my understanding the client was reimbursed from the Christian Care ministry for medical expenses they paid. I'm still waiting on additional clarification on this. I guess you're right on needing to slow down a bit. I agree with you regarding not being able to deduct expenses paid by someone else. So, if the client did receive reimbursement for medical expenses paid, then it should be a wash correct? The discussion within the articles you posted evolve around deductibility of the contributions or monthly share. I'll post more as to what I find.

[Terry D EA]

This thing comes down to a reimbursement for medical expenses. Any opinions on putting the contribution or reimbursement amount as other income with the medical expenses as a negative figure to zero out the other income. It doesn't make sense to pay tax on a reimbursement that was less than what was paid out.

[TexTaxToo]

Was the trustee notified that the distributions were a return of excess contributions?  The trustee should indicate that in Box 3 of the 1099-SA and determine if there were any earnings included in the distribution (reported in box 2).  These are taxable.