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I have HDHP for the whole year 2018 and only has non-taxable contribution (code DD on W2). I also have a small qualified distribution on 2018. Do I leave the part lll blank on form 8889.

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The wording on Form 8889 Part III is a bit confusing. It applies in 2 situations:

  • You funded your HSA via IRA or Roth IRA and didn't remain eligible to contribute to an HSA through the end of the month one year after the transfer was made.
  • You took advantage of the last-month rule (becoming eligible in December and contributing more than 1/12th of annual maximum contribution) and then failed to remain eligible through December of the following year.

If you were eligible to contribute to an HSA for the whole year then Part III is irrelevant to you.

To follow through this in the instructions, you'll see:

Use Part III to figure any income and additional tax that must be reported on Schedule 1 (Form 1040) and Schedule 4 (Form 1040) or Form 1040NR for failure to be an eligible individual during the testing period for:

  • Last-month rule (see Last-month rule, earlier), or

  • qualified HSA funding distribution (see the Instructions for line 10, earlier)

Which relates to the testing period language for last-month rule:

Testing period. You must remain an eligible individual during the testing period. The testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2018 – December 31, 2019). If you fail to remain an eligible individual during this period, other than CAUTION ! because of death or becoming disabled, you will have to include in income the total contributions made that would not have been made except for the last-month rule. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. (See Part III.)

Also the testing period language for qualified distributions (funding the HSA through distributions from IRA/Roth IRA, reported on Line 10):

Testing period. You must remain an eligible individual during the testing period. The testing period begins with the month in which the qualified HSA funding distribution is contributed to the HSA and ends on the last day of the 12th month following that month. For example, if the distribution is contributed on June 16, 2018, the testing period ends on June 30, 2019. If you fail to remain an eligible individual during this period, other than because of death or becoming disabled, you will have to include the qualified HSA funding distribution in income in the year in which you fail to be an eligible individual. This amount also is subject to a 10% additional tax. (See Part III.)

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