ExpertMedium1 markMultiple Choice
CPA · Question 35 · Area I: Individual Compliance and Planning
A taxpayer has a Health Savings Account (HSA). In Year 1, they contribute $3,000. Their employer contributes $1,000. The annual limit for their coverage type is $4,150 (stated). They withdraw $500 for non-qualified medical expenses. They are 40 years old. What are the tax consequences?
A taxpayer has a Health Savings Account (HSA). In Year 1, they contribute $3,000. Their employer contributes $1,000. The annual limit for their coverage type is $4,150 (stated). They withdraw $500 for non-qualified medical expenses. They are 40 years old. What are the tax consequences?
Answer options:
A.
Employer contribution is taxable; Withdrawal is tax-free.
B.
Employer contribution is excluded from income; Employee contribution is deductible; Withdrawal is taxable plus 20% penalty.
C.
Withdrawal is taxable but no penalty.
D.
Employee contribution is not deductible because employer contributed.
How to approach this question
HSA Rules: 1. Contributions (Emp + EE) < Limit are tax-advantaged. 2. Qualified distributions = Tax Free. 3. Non-qualified distributions = Tax + 20% Penalty (unless >65 or disabled).
Full Answer
B.Employer contribution is excluded from income; Employee contribution is deductible; Withdrawal is taxable plus 20% penalty.✓ Correct
IRC §223. Employer contributions are excludable. Employee contributions are deductible for AGI. Non-qualified distributions are included in gross income and subject to a 20% additional tax (penalty) if the account holder is under age 65.
Common mistakes
Forgetting the 20% penalty or thinking employer contributions reduce the deductibility of employee contributions (they just reduce the remaining limit).
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