HSA Custodian Error Correction Subject to Tax Year?

[neworchid]

Got a unique situation:

1. Had HDHP with my employer, and HSA contributions, thru May 2021 (and payroll HSA contributions stopped in June and July)... then switched to HDHP with my spouse's employer the rest of the year.  I closed out the HSA account (zero balance) with the custodian and transferred my balance to another custodian.

2. Left my employer in Aug 2021.  One week before my departure in Aug, Payroll made a mistake reinstating my HSA contribution but it was duly corrected on my final paycheck.

3. Filed our taxes in April, based on the W2 which I verified showed the correct total of HSA contributions.  Did not think to check my balance with my old employer's HSA custodian until April when I found out that they gave me back credit for the correction/reversal.  So now there's an erroneous HSA balance on my account, which then overstated my Form 5498-SA issued in May.

4.  After so many emails to my former employer and calls to the HSA custodian from April thru June 2022, the response I got is "We cannot do a reversal  because the tax year has closed.  You have to talk to your advisor".

5.  I've found this topic on several websites like https://www.thehortongroup.com/resources/irs-allows-employers-to-recover-mistaken-hsa-contributi

ons#:~:text=As%20a%20general%20rule%2C%20amounts,that%20were%20made%20by%20mistake.

6.  Is the HSA custodian's response correct in that they absolutely cannot do the reversal because of the tax year being closed?  Does this only leave me with the option of taking the money (which I've emphasized to them should be returned to my former employer) and taking the penalty for excess contributions?

Thanks in advance for your help.

[NCperson]

@neworchid - what is the total contribution to both HSA's reported on you and your spouses' W-2.  It's code W in Box 12. 

Does that include the money that is now remaining in your HSA? and how much is that?

[neworchid]

Our W2s correctly reflect total employer and employee contributions - no problem there. 

The problem I have is the Form 5498 they issued in May which is overstated  by that extra credit and does not match the W2 HSA amount. The extra credit only shows up on the HSA custodian side - it's obviously erroneous because (1) it did not come out of my contribution via payroll deduction nor was it an employer contribution (2) the amount which was exact figure I used to contribute (down to the cents) was credited to my account a week after my last paycheck where my last paycheck did not have a contribution but rather a reversal of the original erroneous Aug payroll deduction (3) I was no longer eligible - not being enrolled in any insurance with the company.

[NCperson]

@neworchid I guess I am trying to understand what the real issue is, as long as the total contributions are below $7300 (assuming you are both under 55), hence why I asked what the amounts were. 

[neworchid]

We're both over 55 and met the maximum allowed between the 2 of us.

The problem is the Form 5498-SA which does not match my W2 HSA declared in our 2021 tax return.  If the IRS uses  and adds up all the Form 5498 amounts, it will show we're over the max allowed because of this erroneous credit done by the custodian.  Isn't that an issue for audit?  It's an excess but it's not MY contribution.  FWIW, the amount is small ~$250+.  

[Mike9241]

see if you can get a letter from the custodian acknowledging that the 5498 amount is overstated.    then wait to see if you get an IRS notice about this. at that point, you can respond to the notice with the letter from the custodian which should clear things up.  if they won't provide such a letter wait for an IRS notice and explain the situation.  if the IRS does inquire please realize that it can be months or even years before this happens. 

[neworchid]

As of today, July 13th, they're giving me the same response - they cannot do any correction or reversal, and all their response is via  phone call - they refuse to send anything in writing.

Is it better to take this money then pay the penalty for excess contribution or wait to see if we get questioned by the IRS - knowing we don't have anything in writing from the HSA provider?