How to fill Form 8889 (HSA) Part III?

Question

I have a hard time understanding Part 3 of Form 8889 (HSAs). The situation is as follows - I have an HSA for a few years. This was opened about 3 years ago, while I was working for my previous employer. Years 2009 and 2010 were full years where I had an HDHP and made 12 monthly contributions to the HSA. Last October, I moved to a new workplace where I no longer have an HDHP, and have since stopped making HSA contributions.

I never made a withdrawal (distribution?) from this account, so I have all the contributions still there.

So, according to the instructions, I am an Eligible for the months Jan.-Sep. (and since the health insurance continues for extra 30-days, I assume I am an Eligible for October too). During the 1-9 mo period, there were some total of $3,507 contributed biweekly (reported on W-2/box 12/code W). My averaged contribution limit is (6,150 x 10 / 12 =) $5,125 so I am within margins here.

However, if I read the instructions correctly, I fail the last-month rule test and the Testing Period.

1. Do I have to report anything in Part III?
2. Line 18 - should only withdrawals made after the HDHP was closed be reported here?
3. Line 19 - my understanding is that here I should put the difference between line 9 and the averaged limit, is this correct?
4. Line 20 - whet is this about?
5. If I make any future (eligible) withdrawals from the HSA, on money that was contributed during an eligibility period - will I be penalized b/c I am no longer an Eligible person?

Answer 1

I fell into a similar situation as you. I spent a lot of time trying to understand this, and the instructions leave a lot to be desired. What follows is my ultimate decisions, and my rationale. My taxes have already been filed, so I will let you know if I get audited!

1.)

So in cases like this I try to understand the intent. In this case section III is trying to understand if pre-tax money was added to your HSA that you were not entitled too. As you describe, this does not apply to you. I would think you should be ok not including section III (I didn't.) HOWEVER, I am not a tax-lawyer or even a lawyer!

2.) I do not believe these are medical distributions

From the 8889 doc....

Qualified HSA distribution. This is a distribution from a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) that is contributed by your employer directly to your HSA. This is a one-time distribution from any of these arrangements. The distribution is treated as a rollover contribution to the HSA and is subject to the testing period rules shown below. See Pub. 969 for more information.

So I don't think you have anything to report here.

3.) As you have no excess this line can just be zero.

4.) From the 8889 doc

This is a distribution from your traditional IRA or Roth IRA to your HSA in a direct trustee-to-trustee transfer.

Again, I don't think this applies to you so you can enter zero.

5.) This one is the easiest. You can always get this money tax free if you use it for qualified medical expenses.

From the 8889

Distributions from an HSA used exclusively to pay qualified medical expenses of the account beneficiary, spouse, or dependents are excludable from gross income. (See the line 15 instructions for information on medical expenses of dependents not claimed on your return.) You can receive distributions from an HSA even if you are not currently eligible to have contributions made to the HSA. However, any part of a distribution not used to pay qualified medical expenses is includible in gross income and is subject to an additional 20% tax unless an exception applies.

I hope this helps!

Answer 2

Part III of form 8889 is applicable only if we have taken advantage of last month rule -had high deductible health plan (hdhp) on Dec 1 of the tax year. The advantage we get because of the rule is -we can contribute maximum amount to HSA for the tax year even though we had hdhp for just few months and not the entire tax year.

Now there is one limitation to that advantage - we have to maintain 12 months of hdhp in the next year (after tax year). If we cannot maintain full 12 months of hdhp along with tax year's Dec 1 to Dec 31 hdhp then we fail glorious testing period. Such a failure would require us to pay taxes and penalty that we report on part III of 8889 form. These taxes and penalties are applied on last year's (tax year) contribution except dec month.

Reference: http://www.hsaedge.com/2014/03/25/hsa-last-month-rule-and-testing-period-explained/