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Wednesday, April 12, 2017

As more and more people learn about the benefits to an Idaho MSA and open accounts, the need for ongoing education becomes increasingly important.  This is exactly what we are here to accomplish, and is also the reason we wrote this blog post...to address the issue of over-contributions to your Idaho Medical Savings Account.  

Before we scare anyone with this, over-contributions certainly aren't the end of the world.  They can be both fixed and prevented (depending on circumstances I'll outline below), but they are definitely something you'll want to do your best to avoid.  

Now let's take a look at what it means to over-contribute, how this happens, what we can do to fix them, and what we can all do to prevent them from happening in the first place!

What Do You Mean...Over-Contribute?

Contributions to an Idaho MSA are capped annually, based on your tax filing status.  For single or individual tax filers, this annual limit is $10,000.  For joint tax filing households, this annual limit is $20,000.  So in a nutshell, putting more money into your Idaho MSA than you are allowed in a given tax year, is called an "over-contribution".

What's Wrong with Over-Contributing?

Any money you put into your Idaho MSA reduces your State taxable income, dollar-for-dollar.  That's great news, right?  That means you can save a significant amount of money simply by paying insurance premiums and medical expenses you have to pay anyway out of a different account (not your checking account, for example).  As a quick side note, if you're interested in seeing how much you can save with an Idaho MSA, check out our online savings calculator!

But back to what I was saying, the problem with over-contributing is that the State of Idaho will only let you place a certain amount of money into these accounts each year because they're not offering a free-for-all deduction party.  These accounts are designed to help Idahoans to afford the rising cost of health insurance premiums and medical costs, not to deduct groceries, vacations and vehicles.  Depressing, I know.

In addition, and what further complicates the matter, is that the money you place into the Idaho MSA earns tax-free interest on the State level.  This is another great benefit, but the State has a cap on this free money, based on the contribution maximums.

So the issue the Tax Commission has with over-contributions is really two-fold.  The first, is if you're obviously trying to deduct more money than you are entitled to.  That one is pretty obvious.  If you put anything over $10k or $20k on your taxes as an Idaho MSA deduction that's a first-class invitation to the audit party.  

But what if you don't try to deduct the full amount you put in that resulted in an over-contribution?  So if you put in $25k and only claimed $20k you're not trying to get a larger deduction that you're entitled to.  That doesn't hurt anyone and it's kind of a "no harm, no foul", right?  

Good attempt in theory, but this is where that tricky "interest earned" part comes into play to blow this strategy up, and subsequently brings us to the second problem the Tax Commission has with over-contributions: interest earned.

As we said above, the interest earned on your Idaho MSA contributions is tax-free on the Idaho level.  So if you've put more money than you're allowed to into an Idaho MSA, even if you don't claim the overage, you're still earning interest in an account based on money that shouldn't be in there, that therefore you are not entitled to.  So obviously, that's a no-go.

Does It Matter When I Over-Contribute?

Yes, it definitely matters not only when you over-contribute, but also how many times you over-contribute.  The timing and frequency will determine how difficult it's going to be to ultimately fix the issue.  Let's look at some examples to help illustrate this point.

Simple Over-Contribution:

Jim has deposited $20k in his Idaho MSA this year.  He files a joint tax return, so this amount is fine.  However, Jim makes a $5k deposit to his account in October, bringing his year-to-date contributions to $25k.  This is no longer fine.  Jim doesn't contribute any further that year, so when he goes to calculate his taxes he's going to need to make some adjustments to fix this, but it is not complicated to determine how he will fix this.  To see how to fix the simple over-contribution, see the section below.

Complicated Over-Contribution:

Jim has deposited $20k in his Idaho MSA this year.  He files a joint tax return, so this amount is fine.  However, Jim deposits $5k in June.  Then again in July, then again in August.  So now Jim's over-contributed 3 separate times resulting in $15k in overages.  This is obviously no longer fine, and Jim is going to need to make quite a few adjustments to fix this.  Due to the frequency in which he over-contributed, it will be a relatively complicated process to fix it.

Which brings me to our next topic, "What can be done to fix an over-contribution"?

What Can Be Done to Fix the Over-Contribution?

This answer can be broken down into two separate windows of time, based around the date in which you over-contributed:

  • Before 30 days has passed since you over-contributed
  • After 30 days has passed since you over-contributed

Before 30 Days Has Passed:

If you're in this camp, I have some great news!  All you need to do is simply contact our office and we can reverse the deposit.  It will be coded at the bank as a "deposit made in error", and it will not count towards your annual year-to-date amount.  As long as your year-to-date after the reversal is still under your allowed maximum for the year, problem solved.

After 30 Days Has Passed:

This is where things get complicated, because the option to simply reverse the contribution has been lost.  When you over-contributed, and how often you over-contributed will now come into play.

The entire goal of the exercise to follow, is calculating the interest earned on your over-contributed money that was not allowed.  

What you will need to do is go back and figure out when you first over-contributed to your account.  You will need to calculate the interest earned on your account from the date in which you over-contributed until December 31 of that tax year.  If you over-contributed more than once, you will need to calculate each and every time you did this, and it will be tiered.

So for example, if you over-contributed in June, again in August, and then again for a 3rd and final time in September, you calculate interest earned on the over-contributed funds from June-August.  Then you do it from August (including June and August's funds) to September.  Then you do it again (including June, August and September's funds) through the end of the year.

Once you have this number figured out, you will need to report it as income earned on your Idaho Supplemental Schedule Form 39R.  This is the same form you would normally use to claim your deduction.  In a case such as this where you over-contributed, you will need to be sure and report the full amount you contributed to your account, even if it is over the maximum allowed $20k.

Obviously, this can become a very difficult and time-consuming chore that you are going to have to do yourself, or pay your CPA's hourly rate to go back and figure it all out.  The frustrating thing about this is all of this is completely avoidable either by you monitoring your own account and being aware of the rules, or by utilizing our services to do this for you, automatically.  Which brings me to my last point.  This is avoidable!

What Can Be Done to Prevent Over-Contributions?

In short, being aware of how much you can contribute based on your own tax filing status and a little self-monitoring of your own money in your own accounts goes a long way.  But we completely understand this can be a complicated situation, and keeping track of rules and regulations for all these tax-deferred "alphabet soup" accounts can get a little confusing.  That is exactly what we're here for!

First and foremost, we have a unique and automated "Over-Contribution Monitoring" system in place that tracks every single dollar deposited to an Idaho MSA.  We know what your tax filing status is as well, so with those two pieces of information we can immediately determine when an over-contribution has occurred.  Within 24 hours we alert you to the problem, provide you with pre-filled out forms to correct it, and all you need to do is sign and return them.  Once we receive the forms we mail a cashier's check out and you're set! 

Further, we provide a running year-to-date on your montly bank statements so you always know where your account sits.  

We take these proactive steps as a courtesy to all of our account holders and it is the least we can do to help keep all of them in within the compliance guidelines before they find out there's an issue and it's too late to correct it.  As the saying goes, "An ounce of prevention is worth a pound of cure."

That's just a snapshot of some of the "behind the scenes" work we put into your account, and I can assure you that you won't find these services anywhere else in Idaho.

Questions or Comments?

If you've made it this far, we certainly appreciate you reading up on the "in's and out's" of Idaho MSA over-contributions.  We're quite passionate about the Idaho MSA, but we're even more passionate about our valued account holders!  

If you have any questions, comments or suggestions for future blog posts we're always happy to hear them.  There are so many nuances to these accounts and they are treated so many different ways by different individuals that there always seems to be another topic we can expand upon to help someone.  Feel free to contact our office and we'd love to hear from you.

As always, we appreciate your business and look forward to our next opportunity to serve you and your family's banking needs.  Have a great day!

Posted by idahomsa at 4/12/2017 9:07:00 PM
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