A Qualified HSA Funding Distribution allows investors to transfer funds from an IRA to an HSA tax-free and penalty free (no 10% early withdrawal penalty). The amount transferred cannot total more than what the investor would be allowed to contribute to an HSA for that year. In 2019, the maximum amount is $4,500 for a 55-year-old with single health coverage who has not made other HSA contributions during the year.
The HSA funding distributions (QHFD), is a distribution from a traditional IRA or a Roth IRA, that is made to the individual’s Health Savings Account (HSA) as a contribution. This is a one-time contribution, which must be made in a direct trustee-to-trustee transfer. For this purpose, ‘direct trustee-to-trustee transfer’ means that the amount must be paid to the receiving HSA custodian, for the benefit of the HSA participant.
These distributions are not includible in the individual’s income.
These distributions are not subject to the 10-percent early distribution penalty
The transaction is reportable on IRS Form 1099-R (for the IRA) and Form 5498-SA for the HSA.
This amount is limited to the otherwise maximum deductible contribution amount to the HSA computed on the basis of the type of coverage under the high deductible health plan at the time of the contribution. Withdrawals are not taxed as long as they are used for qualified medical expenses. Since an HSA does not have a time limit for distribution, the funds can be used for health-care costs in retirement.
The amount that can otherwise be contributed to the HSA for the year of the contribution from the IRA is reduced by the amount contributed from the IRA.
No deduction is allowed for a QHFD. If the IRA includes nondeductible contributions, the QHFD is first considered to be paid out of otherwise taxable income.
by Daniel DeHoek, CPA | ABV | CFP®