Contributing to an HSA With a Qualified HSA Funding Distribution From an IRA
By Alexis Gonzalez-del-Valle, CIP, CHSP
What is a qualified health savings account (HSA) funding distribution?
A qualified HSA funding distribution is a means—other than new contributions—by which HSA owners can fund their HSAs in order to cover anticipated qualified medical expenses. It allows HSA owners to directly move their Traditional or Roth IRA assets to their HSAs as a regular contribution. The check from the distributing IRA must be made payable to the receiving financial organization holding the HSA. The election to make a qualified HSA funding distribution is irrevocable. Qualified HSA funding distributions are not deductible and cannot be treated as prior-year contributions.
These distributions cannot be made from “ongoing” simplified employee pension (SEP) IRAs or simplified incentive match plan for employees of small employers (SIMPLE) IRAs . SEP and SIMPLE IRAs are considered ongoing if the employer is making contributions to them for the plan year ending with or within the IRA owner’s tax year in which the qualified HSA funding distribution is being taken.
How much can be distributed from an IRA for a qualified HSA funding distribution?
When aggregated with other HSA contributions for the same tax year, the total amount is limited to the annual HSA contribution limit, which depends on the type of high deductible health plan (HDHP) coverage (self-only or family) held at the time of distribution, as well as the HSA owner’s age.
For 2022, the self-only contribution limit is $3,650 and the family contribution limit is $7,300. If an individual will be age 55 or older by the end of the tax year, then he can make an additional catch-up contribution of up to $1,000. Generally, only one qualified HSA funding distribution may be made in a lifetime. However, if an HSA owner switches from self-only to family HDHP coverage at any time during the year, he may make an additional qualified HSA funding distribution in the same year so that the total distribution amount equals the larger regular family contribution limit.
Can a qualified HSA funding distribution be used to satisfy a required minimum distribution (RMD)?
Yes, a qualified HSA funding distribution may go toward satisfying RMDs for IRA owners and beneficiaries.
What is the testing period associated with qualified HSA funding distributions?
For the HSA funding distribution to be qualified, the HSA owner must be HSA-eligible at the time of distribution and remain HSA-eligible (with exceptions for death and disability) during a testing period. The testing period is generally defined as 12 months following the month of the contribution to the HSA. For example, if an HSA owner takes a qualified HSA funding distribution on January 5, 2022, the testing period ends on January 31, 2023. If an HSA owner takes a second qualified HSA funding distribution because he switched from self-only to family HDHP coverage during the year, each qualified HSA funding distribution will have its own testing period. It is up to the HSA owner to track each testing period.
If the HSA owner does not maintain HSA eligibility during the testing period, the qualified HSA funding distribution is taxable under the HSA rules for the tax year in which the individual is no longer eligible and a 10 percent penalty tax applies (with exceptions for death and disability). If the HSA owner distributes these assets later on to pay for nonqualified medical expenses, the assets will be taxed again and possibly subject to the 20 percent penalty tax.
How are qualified HSA funding distributions reported?
The financial organization should report the receipt of a qualified HSA funding distribution as an HSA contribution in Box 2 on Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information.
Qualified HSA funding distributions from the IRA are reported on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in Boxes 1 and 2a. Code 1, Early distribution, no known exception, code 4, Death, or code 7, Normal distribution, is reported in Box 7 as applicable. Qualified HSA funding distributions from a Roth IRA are reported on Form 1099-R in Box 1, but Box 2a should be left blank. Code J, Early distribution from a Roth IRA, no known exception, code Q, Qualified distribution from a Roth IRA, or code T, Roth IRA distribution, exception applies, is reported in Box 7 as applicable. The Taxable amount not determined checkbox in Box 2b should be marked for both Traditional and Roth IRAs.
Taxpayers report qualified HSA funding distributions on Form 1040, U.S. Individual Income Tax Return, and Form 8889, Health Savings Accounts (HSAs).
