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Crank

HSA Distribution

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Need some opinions.

Client is considering an HSA withdrawal for medical insurance premiums.  Im a bit perplexed after reading pub 969.  Specifically the exception for "Health Care Continuation Coverage (such as COBRA)"

Client was employed in a large S&P 500 company in which his premiums were deducted pre-tax.  He became disabled and is now considered an "Employee on long term disability". 

He no longer receives a salary but buys the same benefits that employees get at employee prices by paying out of pocket.  He has to go through the open enrollment process every year the same as every other employee.  He continues to accrue pension benefits at the rate of salary as of when he became disabled until he reaches retirement age (i.e. age 65).  So I believe he IS an employee.  He does receive a W2 ONLY for imputed income on company provided life insurance and Box 12, Code DD shows the cost of his health insurance.  The only reason is benefits aren't pre-tax is because he doesn't receive a salary to offset the cost of the benefits.

Im leaning towards him being allowed to pay for these benefits with the HSA that was provided with the High Deductible Health plan he purchases through the company.

Im struggling to justify it with pub 969 and the  "Health Care Continuation Coverage (such as COBRA)" premium exception.

Could he do this? Am i looking at the correct exception or is there another reason to justify it?

It doesnt seem fair that he be penalized just because the doesnt draw a taxable salary to offset the cost of the premiums.

What are everyones thoughts? 

Thanks. 

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Crank, I would lean toward that too because the only thing taxable is the L.I. benefit, and think that wouldn't necessarily slot him into still being an employee.  

As for the W-2 showing the cost of the health insurance, this doesn't detail out the amount paid by employee or employer but is more of an informational amount.  I am curious why this person isn't dealing with the insurance provider directly instead of still going through the employer.  Every one I've seen, the former employee is offered coverage through a benefits provider, but is outside of the company's actual group plan but is still based on a marked-up rate of the former employer's group rate.

Was 2017 the first year for for the separation where the cobra kicked in?  Is that why you were still seeing the DD coded on that year's W-2?

 

 

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20 minutes ago, Jack from Ohio said:

HSA money cannot be used for insurance premiums.  Simple answer.

Jack, that's just not true.   In general, HSA funds can be used to directly pay, or to later reimburse, for:

  • COBRA premiums of the (former) employee, spouse, and dependents,
  • Health coverage while receiving unemployment under federal or state law,
  • Medicare premiums parts B, C, D, if former employee is 65 or older (if former employee isn't 65 but spouse or depdendent is, HSA can NOT be used for those person(s) premiums 
  • Medicare expenses of copays and deductibles, and
  • Long-term care insurance

 

HSA can NOT be used for Medigap premiums.

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Jack: Pub 969 allows 4 exceptions for health insurance premiums and an HSA  #2 is the health continuation coverage which I believe this could be.

jlkcpa: They still classify him as an employee and he is treated as such except for the salary.  He buys the same benefits offered to paid employees at the same cost from the company.  This isnt COBRA.  He has been in this situation for the past 16 years and receives the same w2 every year.  This is the first year he inquired about using the HSA to pay the premium.

Isnt this a type of "continuation of coverage", as noted in exception #2 in pub 969?  I cant find any more information on what that is except for the note which says "such as COBRA)

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Crank, rather than trying to decide what is meant by the Pub, I took a look directly at sec 223(d)(2)(C)(i) where it stipulates that the coverage must be required under any Federal law.  I don't know for certain.  Would this person's coverage be "required" in his circumstance?

Quote

(2) Qualified medical expenses

(A) In general

The term “qualified medical expenses” means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care (as defined in section 213(d) [1] for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. Such term shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

(B) Health insurance may not be purchased from account

Subparagraph (A) shall not apply to any payment for insurance.

(C) ExceptionsSubparagraph (B) shall not apply to any expense for coverage under—
  • (i) a health plan during any period of continuation coverage required under any Federal law,
  • (ii) a qualified long-term care insurance contract (as defined in section 7702B(b)),
  • (iii) a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law, or
  • (iv) in the case of an account beneficiary who has attained the age specified in section 1811 of the Social Security Act, any health insurance other than a medicare supplemental policy (as defined in section 1882 of the Social Security Act

 

Edited by jklcpa
formatting

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Thanks

The only thing I can think of is that the company may be required to provide health coverage to it employees.  Since he is technically still an employee.  Is that a thing? Or required to provide it to him since he is classified as an employee.

I dont think they are doing it out of the goodness of their hearts for the past 16 years and to continue for the next 7 years until he turns 65.  The same with continuing to accrue pension benefits at the salary rate for the same 23 year period.

I really dont know and Im at a loss as to where to find a definitive answer.

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I have a client, mid seventies, who is a retired American Airline stewardess.

As part of her retirement benefits, she receives free flights.

Prior to 2017, AA issued a 1099 to her for the value of the flights.

Beginning with 2017, the IRS required AA to issue a W-2 for the value of the flights, including FICA withheld.

Who knew ?

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1 hour ago, Crank said:

Thanks

The only thing I can think of is that the company may be required to provide health coverage to it employees.  Since he is technically still an employee.  Is that a thing? Or required to provide it to him since he is classified as an employee.

I dont think they are doing it out of the goodness of their hearts for the past 16 years and to continue for the next 7 years until he turns 65.  The same with continuing to accrue pension benefits at the salary rate for the same 23 year period.

I really dont know and Im at a loss as to where to find a definitive answer.

Great question. I think that might be covered by the FMLA or ADA. If the company provided a health insurance plan prior to the disability, I think it is required to allow the employee to purchase the coverage under the same terms and rate.  Don't quote me on that, but maybe someone else here has run into this themselves or researched this for a client. 

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32 minutes ago, grandmabee said:

Is the disability from a on the job injury?  Maybe that is why the company still offers the benefits.

 

No it is not.

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1 hour ago, jklcpa said:

Great question. I think that might be covered by the FMLA or ADA. If the company provided a health insurance plan prior to the disability, I think it is required to allow the employee to purchase the coverage under the same terms and rate.  Don't quote me on that, but maybe someone else here has run into this themselves or researched this for a client. 

Thanks This seems like a possibility.  Im also thinking could this possibly be COBRA?

Hopefully others can help with this.

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