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February 16, 2021

What is a Qualified HSA Funding Distribution (QHFD) ?

Your Guide

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Qualified HSA Funding Distribution

A one-time tax-free distribution from an eligible IRA to an HSA. Subject to dollar limit. Reported as a regular distribution. Tax preparer reports as tax-free

A  Qualified HSA Funding Distribution (QHFD) , also referred to as:  Qualified Funding Distribution (QFD) , HSA Funding Distribution (HFD),and Qualified health savings account (HSA) Funding Distribution.

Definition

Also referred to as:
qualified 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.

  • Qualified health savings account (HSA) Funding Distribution.
  • Qualified Funding Distribution (QFD) and
  • HSA Funding Distribution (HFD).

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.

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.

Referring Cite

IRC § 408(d)(9),IRS Instructions for Form 8889 ; IRS Notice 2008-51

Tax Reporting

The IRA custodian reports QHFDs as regular distributions ( no special tax reporting). The IRA owner’s tax preparer is required to report the amount as nontaxable on the IRA owner’s tax return.

Additional Helpful Information

  • If the individual fails to remain an eligible individual during the testing period, he or she will have to include the distribution in income and the amount is subject to the 10% early distribution penalty . An exception applies if the individual ceases to be an eligible individual by reason of death or disability. The testing period is the period beginning with the month of the contribution and ending on the last day of the 12th month following such month. The amount is includible for the taxable year of the first day during the testing period that the individual is not an eligible individual.
  • The provision does not apply to ongoing SIMPLE IRAs and ongoing SEP IRAs

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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