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This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.
Identify the penalty-free HSA transaction.
- Cam receives individual HDHP coverage on 12/01/19 and contributes $3,500 to his HSA. He makes $300 monthly HSA contributions in 2020 until he loses HDHP coverage on 11/30/20.
- Manuel initiates a $2,000 distribution from his employer-sponsored HSA and plans to rollover the funds to his personal HSA. After 90 days, Manuel deposits $1,500 into the personal HSA and uses the remaining $500 for car maintenance.
- Erykah, age 55, uses her HSA to pay for nonprescription drugs and medicine.
- Yousef, age 67, uses his HSA to pay for health club dues and nonprescribed nutritional supplements to maintain ordinary good health.
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Correct answer: D. Yousef, age 67, uses his HSA to pay for health club dues and nonprescribed nutritional supplements to maintain ordinary good health.
Instructor insight:
Although Yousef’s expenses are considered non-includible medical expenses per IRS Publication 502 (Medical and Dental Expenses), he is over age 65. As a result, the HSA distribution for health club dues and nutritional supplements is subject to tax but will be penalty-free.
Since Cam used the last month rule to maximize his HSA contribution in 2019, HDHP coverage must remain active throughout the testing period that lasts until 12/31/20. His HDHP coverage was lost on 11/30/20, therefore, tax and a 10% penalty will be applied to his excess contributions.
Manuel took a distribution from an employer-provided HSA, but failed to rollover the funds to his personal HSA within the 60-day indirect rollover window. In addition, a portion of the HSA rollover was used for non-medical expenses. Tax and a 20% penalty will be applied to the $500 used for car maintenance.
Erykah’s purchase of nonprescription drugs and medicine using HSA funds is subject to both taxation and a 20% penalty since she is 55 and the items are considered non-includible medical expenses per IRS Publication 502.
CFP® Exam insight:
HSAs have numerous planning uses including coverage of annual health care expenses, tax-deferred investment gains, annual above-the-line tax deduction for contributions, and, can serve as a pool of funds for long-term care costs. Remember this multi-purpose characteristic of HSAs as you work through problems on your exam.
