Domestic Partnerships and HSA's

[Sherryb75]

First off, I want to say this is my first year with these clients.  I have one client, who after I filed his return and he got an IRS notice about his HSA, tells me he is in a domestic partnership.  He list his partner with his work for his HSA so he can contribute the max amount.  He contributed 7100 last year and is being taxed on the overage.  He is stating and I confirmed that he has never been taxed before on it.  I have looked thru previous returns and he has never paid for it.  The previous accountant passed away unexpectedly so I can not ask her and the other CPA's I have talked to has never heard of this.  She used a different software so I have no clue if she overrode a number because it doesn't match up.  Has anyone encountered domestic partnerships and HSA's?  Am I missing something in Proseries on domestic partnerships?

[Just-Lisa-Now-]

They probably marked that he had a Family plan on the 8889, not Self, which raised his contribution cap.

Whether this is correct or not, Im not sure....I dont have any domestic partnership clients.

[qbteachmt]

"He contributed 7100 last year and is being taxed on the overage."

To one account, or to two? My understanding is that this would be split into each of two individual accounts, because they are not married and are not supposed to pay for the "other" individual out of your Taxpayer's HSA account. HSA is an individually-owned account; even if both are covered under the same high deductible insurance plan as registered domestic partners, that qualifies them each for having their own account, and the family total would be split across the two accounts.

Try this:

https://hsa.umb.com/employers/education-tools/faq/eligible+for+an+hsa/_domestic+partners+eligible

[George4Tacks]

Did the W2 have that amount as code W in box 12? 

Did you enter the amount anywhere else in the program? 

Is this a California RDP?

[Sherryb75]

Yes it has a W and no I did not enter that amount anywhere else. It auto carried in places.

[Sherryb75]

I thought that two but when I look back at everything in previous years he is marked as single..  I have everything matching what previous accountant did but I can not get rid of the 5329

[qbteachmt]

"but when I look back at everything in previous years he is marked as single."

Single for tax purposes, but Family for coverage purposes.

This is an issue of jurisdiction. The employer follows a State rule that Domestic partners are allowed/required to be offered health plan coverage and the health plan provider offers it as pseudo-family. That isn't Spousal.

Meanwhile, the tax filing is considered non-spouse, as well. So, the person is Single, but the health plan is Family, and that means two individual HSA accounts. And, as I pointed out, the accounts cannot be used for the other party, as you would do in a true family relationship.

And make sure to read the link references, and the IRS, if the other party was claimed under dependent, because that eliminates the other HSA.

[Sherryb75]

Everything you have said has made sense.  I just have to figure out how to do it in the software.  The previous accountant must have did overrides in the old software as he has never had a 5329 before.  

[George4Tacks]

Here is a novel idea! Maybe the prior preparer never entered a code W from box 12? 

Don't tell and probably IRS would never ask. That'll teach you to do things right!!!

[Just-Lisa-Now-]

again, if you mark Family on the 8889 it will up his contribution limit and take away the penalty.

[Terry53029]

You have to fill out the 8889, and you can choose family coverage, then the 5329 goes away, but I don't think you can use family coverage, unless you are married filing joint. Maybe for some states, but not federal. You should also indicate on the information work sheet at the bottom that this is a registered Domestic Partnership or civil union. 

[qbteachmt]

Filing single status and having family coverage is no different than a divorced parent having to cover the kids on health insurance at work through the divorce decree, even though the kids are in the custody of, and claimed by, the ex-spouse.

[Sherryb75]

I did finally see that at the bottom of the info page but it still wants to tax him on the overage.  I just want to make sure its correct going forward as I am not certain that last years person did it correct. 

[Sherryb75]

It taxes him $213 on the overage of HSA if I put the balance of his HSA in but if I put zero in then it doesn't penalize him.

[qbteachmt]

Have them take a corrective distribution and contribute this to the RDP's own HSA account.

"If you over-contribute to an HSA and don't correct it, you must pay a 6% penalty each year on the excess that remains in your account. But if you catch the mistake before you file taxes (including extensions), you can avoid the penalty by withdrawing the excess, plus any investment or interest earnings."

[Just-Lisa-Now-]

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@Sherryb75 wrote:

I did finally see that at the bottom of the info page but it still wants to tax him on the overage.  I just want to make sure its correct going forward as I am not certain that last years person did it correct. 

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Its at the top of the 8889, you mark the Family box on the Smart Worksheet under Line 2, that should be all you need to do.  $7100 isnt too much for a family plan. You need to ask him if this is what he's got..can he pay his partners medical expenses from his HSA? if so, its a family plan.

[qbteachmt]

"can he pay his partners medical expenses from his HSA? if so, its a family plan."

These are two different things.

No, you are not supposed to pay RDP's medical from your own HSA; this is part of that "different jurisdictions" issue, covered by the IRS treatment of HSA funds. They are supposed to have their own HSA account.

Yes, you still could have covered that person under a Family Plan.

[George4Tacks]

I do not believe we know which state is involved, but here is a California publication https://www.ftb.ca.gov/forms/2019/2019-737-publication.pdf that states:

Line 12 – Health savings account (HSA) deduction If contributions (other than employer contributions) were made to your HSA for 2019, you may be able to take this deduction. Get federal Form 8889, Health Savings Accounts (HSAs), for additional information. 

A “tax-favored account” means an individual account, plan, or arrangement that is exempt from tax under federal law, including an HSA. Where the treatment of an RDP as a spouse would result in a tax-favored account that would not be qualified as a tax-favored account for federal income tax purposes, the RDP will not be treated as a spouse for California tax purposes with respect to that account.