HSA Monday Mythbuster: Too Late to Contribute for 2019? Nope!

It's not too late to contribute to your Health Savings Account for 2019. And it may be advantageous to do so.

The other day, my nearly 26-year-old son asked me for some help with his new Roth Individual Retirement Arrangement. He had contributed $2,000 and needed a $3,000 minimum balance to buy shares of a mutual fund. Of course, I encouraged him to deposit another $1,000 if he had the money available. I suggested that he apply the contribution to 2019, in case he subsequently loses eligibility to contribute in 2020 due to his income.

A day later, I realized that this lesson was equally applicable to Health Savings Account owners. Yet many don't know it. So, let's clear up this misconception now.

Contributing for a Prior Year

Health Savings Account rules permit owners to continue to make contribution for a tax (calendar year) up to the earlier of

(1) the date that they file their personal income tax return for that year,

or

(2) the due date - without extensions - for that year's tax return.

Thus, you can make contributions to your account as late as April 15, 2020. Those contributions are tax-deductible, which means that you include any amounts attributable to 2019 that you didn't make through your company's Cafeteria Plan (pre-tax payroll deductions). You include them on Line 2 of Form 8889 that you file with your income tax return.

The contribution reduces your federal taxable income, as well as your state taxable income if your state imposes an income tax (unless you live in California or New Jersey - the two states that don't allow a deduction for Health Savings Account contributions).

Your maximum contribution for 2019 depends on your contract size. Deposits from all sources can't exceed $3,500 for self-only or $7,000 for family coverage. If you were age 55 or older at any point in 2019 (even a Dec. 31 birthday counts!), you can contribute another $1,000.

And if your spouse is HSA-eligible and is age 55 or older as of Dec. 31, 2019, he/she can open a Health Savings Account and contribute $1,000 - again, as late as April 15, 2020, and again, on a tax-deductible basis.

No Issues with Eligibility

Why designate personal contributions (not through an employer's Cafeteria Plan) made early in 2020 as 2019 contributions? Because you don't face the eligibility uncertainty that you do in 2020. The year 2019 is over, and you know how many months you were eligible to make and receive contributions. Nothing that you do beginning Jan. 1, 2020, will affect your contribution limits for the 2019 calendar year.

But you have no such certainty for 2020. You could end up losing your eligibility to make and receive contributions for any number of reasons, including:

• You leave your company for any reason and don't retain your HSA-qualified coverage.
• Your employer no longer offers an HSA-qualified plan or positions this plan less favorably then in 2019.
• A change in your medical condition makes a different plan in 2020 more cost-effective.
• You enroll in other coverage (like Medicare or a spouse's plan) in 2020.

Any of these situations that you experience in 2020 may affect your 2020 eligibility and contribution limits. But if they occur in 2020, they don't affect how much you can contribute in 2019. Thus, if you want to make personal (outside your employer's Cafeteria Plan) between now and April 15, 2020, it's best to apply those contribution to 2019, up to your limit for that year.

An added bonus: You receive the tax deduction sooner than you would if you attribute the same contribution to 2020. Better to reduce your 2019 taxable income and enjoy a lower tax bill or a refund in 2019 than to wait a year or more to receive the same benefit.

When It Makes Sense to Delay the Deduction

The exception to this rule: If you anticipate moving to a much higher federal or state marginal income-tax rate in 2020, your tax deduction is worth more in 2020. For example, if you file as an individual, your federal marginal income tax rate will increase from 12% to 22% at about $39,700 in 2019 (the figure for married filing jointly is about $77,400). If you have a taxable income of $35,000 in 2019 and expect that figure to increase to, say, 47,000, in 2020, you can save an additional $100 in federal tax liability for every $1,000 of additional contributions to your Health Savings Account in early 2020 by designating the deposit as a 2020 rather than a 2019 contribution. It may be worth the wait to delay the deduction until your 2020 tax return to reduce your tax liability from $120 to $220 for every $1,000 of contributions.

Note that, unlike my son and his Roth IRA, you won't lose your eligibility to make or receive Health Savings Account contribution in 2020 if your income exceeds a certain figure. Current law allows everyone who's HSA-eligible - regardless of income - to contribute up to their maximum. In this aspect of life, you're on par with billionaire Democrat presidential candidates Tom Steyer and Michael Bloomberg, as well as Warren Buffett, Bill Gates, Jeff Bezos, and the Walmart heirs. Inhale that rarefied air!

If you're not sure how to contribute for 2019 in 2020, ask your Health Savings Account provider. It may be as simple as going online (or completing a form) and checking a box indicating that the contribution is for 2019. But be sure to do so. Your account provider's default is most likely to apply a contribution to the year in which you make it.

For more information on this topic, please read my HSA Wednesday Wisdom column to appear Jan. 8 on LinkedIn.

I'm director of strategy and compliance at Benefit Strategies, LLC, a provider of Health Savings Accounts and other tax-advantaged benefits. You can read my biweekly Health Savings Account GPS blog and subscribe by clicking here and my weekly HSA Wednesday Wisdom and occasional Healthcare Update column published on LinkedIn. My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, Medicare, and retirement planning. It's available in book and e-book forms from Amazon.