Health Savings Account

[asdfcam]

Hi,

I created a health savings account (HSA) thru my employer last year. They contributed a small amount of money, I contributed none. The problem is that it turns out I was ineligible to open and contribute to an HSA because I was also covered by a non HDHP plan. 

So, I need to close the account and return the money. When I called the bank to close the account, they sent me a distribution form. There is an option to fill out Excessive Contribution, and also Prohibited Transaction. Which should I fill out? Also, how should I report this on my taxes?

Thanks!

[RalphH1 · Accepted solution]

This is an “Excess Contribution,” since it was simply a contribution which was made which was not allowed, based on your not being an eligible individual. (A “Prohibited Transaction” is a more complicated and unusual misuse of the HSA.)

To report this in Turbot Tax, go to “1099-SA, HSA, MSA” in the Deductions & Credits section. First you’ll go through the 1099-SA sections (which is relevant if money also came out of the account in 2022), then you’ll then see the questions clarifying your allowed contribution for the year (see this TurboTax discussion).

You’ll see that your original contribution amount is carrying over from your W-2 (the box 12 “W”). And you’ll be looking for a page which says, “You may want to withdraw money from your HSA.” It should give you the exact amount of the excess contribution, and allow you to check “I’ll withdraw the full [$X.XX] excess contribution by April 18, 2023” (as long as they can actually do it today!). The program will then reassure you that it’s removing the extra tax.

Either way, the “pre-tax” benefit on that excess amount is undone at this point, and TurboTax will automatically include it in your income (since the employer didn’t earlier, and the tax benefit is no longer available once it’s not in the HSA).

Good luck with this, @asdfcam! Be sure to re-post here if other questions come up...