Excess HSA Contributions (Expert Help?)
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Taxhelplz2020
Returning Member

Excess HSA Contributions (Expert Help?)

I filed our joint tax return for 2019 and received returns before the deadline, but my wife had excess HSA contributions due to her HSA eligibility change when she changed her job last year and forgot to take the excess out by the deadline. What are our options now? (can't leave excess for future contribution because no longer has HDHP to make contributions and don't want to keep paying tax/penalty every year)

 

Since it had passed 7/15, it is too late for her HSA (according to the HSA rep.) to directly take it out of her HSA account and there's nothing they can/have to do at this point. Can someone list out the steps that we need to do to fix this on the tax end? (We're aware of tax/6% penalty fee but how to calculate/ apply, etc. But if we can take it out and since is not for medical expense (will the penalty be 20%). Also, do we have to file an amended tax return for 2019 to include the excess contribution?)

 

Also, HSA will not advise on earnings from excess. How do I calculate this? We never had our contribution invested into any funds. It is just in the HSA account. The only thing I can see earning is the $0.10 monthly interest (I assume we include all interests since she lost her HSA eligibility up until we can take out the excess contribution)! 

 

Thank you!

 

 

3 Replies
Anonymous
Not applicable

Excess HSA Contributions (Expert Help?)

did you e-file?  I ask because if all the HSA questions in TT were answered correctly, TT would have picked up the excess and unless dealt with properly would not allow e-filing and form 5329 would have been completed automatically to reflect the penalty.

 

if for some reason didn't happen you need to file an amended return to reflect the excess contribution.

assuming the HSA is reported on a w-2, the excess and any earnings thereon are taxable income in 2019 + a 6% penalty. 

 

Deducting an excess contribution in a later year.
You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the
following two amounts.
• Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
• The total excess contributions in your HSA at the beginning of the year.
Amounts contributed for the year include contributions
by you, your employer, and any other person. They also
include any qualified HSA funding distribution made to
your HSA. Any excess contribution remaining at the end
of a tax year is subject to the excise tax

Taxhelplz2020
Returning Member

Excess HSA Contributions (Expert Help?)

Yes, it was e-filed and got the tax return already (before July 15, 2020). We went through the steps indicated in the HSA section (had entered correct amount on W-2) and "checked off" option that you will remove the excess contributions before the due date. Because of that, I assume Turbo tax had removed the excess calculation and the extra tax penalty part, right?

 

Then, she forgot to ask her HSA to take the excessive out by the due date anyways. But sounds like she still should be able to, but they refrained from answering tax related questions due to liability, so frustrating, and said we have to ask tax advisor. For example, they can't even tell us the earnings on the excess. How are we supposed to find that out? (They were set aside for just normal medical use, never "invested" into a fund, so I assumed no earning but how can we be sure?)

 

And now, 1) we have to take out the excess to NOT continue to penalty on each year after (saw if we leave it in HSA, there's penalty every year?)

 

2) Amend the tax return. What form should we use if not the form 5329 anymore?

 

Are there anymore steps we are missing? Thank you!

Anonymous
Not applicable

Excess HSA Contributions (Expert Help?)

you file a 1040-x 

on the 8889 worksheet you originally indicated you removed the excess before the due date like on line 12B so that the 5329 was not generated. Now leave 12B blank because it wasn't removed by the due date. in this year you withdraw the 2019 excess + earnings thereon. talk to the administrator so they can figure out the amount of earnings that has to be withdrawn. the earnings are taxable in the year withdrawn. the excess is taxable in 2019. also find out how they'll code the removal - code 2 for excess or code 5 for prohibited.  one commentator in 2019 stated that it was unclear if you took out the excess after the due date as to whether that would be a nonqualified distribution subject to a 20% penalty.   I don't agree but it's best to check. if it's going to get coded as prohibited, you may want to consider the next option.  

 

the Code actually allows you to leave in the excess but then the amount taken out of your paychecks or contributed personally has to be reduced so you don't end up over-contributing for 2020. That would generate an additional penalty. if you leave the excess in and don't otherwise over-contribute for 2020, you get a deduction for the excess contribution left in subject to whatever the limits are for 2020.  example 1. assume spouse over contributed in 2019 $3500. since it was not withdrawn by the due date the excess becomes income for 2019 and you pay a 6% penalty.    she leaves the excess in for 2020 and otherwise makes no HSA contribution in 2020. also assume shes allowed a contribution maximum of $3500 for 2020.  that $3500 excess now becomes an allowable HSA contribution for 2020. in addition it's considered her personal contribution so you get a tax deduction for the $3500.

 

 

 from IRS Publication 969

Deducting an excess contribution in a later year.
You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the
following two amounts.
• Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
• The total excess contributions in your HSA at the beginning of the year.
Amounts contributed for the year include contributions
by you, your employer, and any other person. They also
include any qualified HSA funding distribution made to
your HSA. Any excess contribution remaining at the end
of a tax year is subject to the excise tax. See Form 5329.

 

example 2.  the 2019 $3500 excess is not withdrawn by the due date of the 2020 return. in addition, she makes another excess contribution of $2000 for 2020 and doesn't withdraw that by the 2021 due date.  you now have $5500 of excess contributions subject to the 6% penalty

example 3. same as 3 but she only withdraws the 2020 excess contribution by the due date.  that $3500 from 2019 remains an excess and would be subject to the penalty.

 

 

 

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