Withdrawal Overfunded 2019 HSA

[Serg10]

I have no idea how to fix the excess contribution. Basically I got my first HSA account on 2020 and did a prior year contribution to a 2019 HSA. Fidelity said there was nothing they could do to fix it as its past their deadline.

On July 2020, I got a new job and became eligible for a HSA for the first time ever.

During that time, I funded 2020 HSA and I did a prior year contribution of $3500 for 2019 HSA.

I called my broker (Fidelity) to help change it and they said they could not because its past their deadline.

I told TurboTax that I plan to withdraw this money (and I think paid the 6% fee) but how do I take it out of my HSA?

[MayaD]

You can correct excess contributions by removing the excess amount (and any earnings attributable to the excess contributions) before you file your personal income tax return for that tax year.

To remove excess contributions, complete the HSA Distribution Request form, indicating Excess Contribution Removal as the reason for the distribution request. 

[Serg10]

Unfortunately my HSA manager cannot remove the withdraw the excess HSA because its past their deadline of October. I need to find an alternative solution according to them .  

[Serg10]

Any ideas? Is there IRS guidance on this?

[PattiF]

Page 8 of Pub 969 advises to deduct excess contribution in a later year.

IRS Pub 969

If you overcontribute to an HSA, you must remove the funds or be subject to a 6% excise tax for each year it remains in the account. You have two choices, remove the overage or let it ride and pay the penalty.

Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6% per year penalty. The mechanism that allows this is the deduction, since next year you won’t actually deposit the contribution (it is already there), you will just deduct it on Form 8889. As an example, if you have excess contributions in 2018, you can let them sit there until 2019 and then use them as your contribution for 2019. Rolling an excess contribution to a future year is allowed per the IRS Form 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.

Just make sure that you don't make excess contributions for the upcoming year.

[Serg10]

Ok got it. I now withdrew the 2019 excess contribution into 2021 hsa account and since I did not have enough room in my 2021 limit (since the balance was $1k or so), I had to send some 2019 excess HSA contributions to my checking account. One important thing to note is that these 2019 excess contributions I deposited not with an employer but with after-tax money with my checking account on July 2020. I did not get a 2019 form 5329. Also I I did not go back and define this in my 2019 taxes (technically I did not have an HSA account during the time as I was not eligible until June 2021)

After the withdrawals, I am in good standing on all years HSA accounts. Now, my question is: How do I report this with my taxes? Especially the 1k I had to withdrawal into my checking account. Do I pay the fees in this scenario? 

[BillM223]

"Basically I got my first HSA account on 2020 and did a prior year contribution to a 2019 HSA. " and "On July 2020, I got a new job and became eligible for a HSA for the first time ever."

Are you saying that you did not have HDHP coverage until July 2020? If so, you were not eligible to make a contribution to a 2019 HSA. In this case, the whole contribution should have been withdrawn.

You cannot contribute to an HSA before you are eligible to do so.

"I called my broker (Fidelity) to help change it and they said they could not because its past their deadline."

Yes, you could not withdraw the "2019 HSA" contributions after the due date of your 2019 return (either July 1, 2020 or, if extended, October 15, 2020).

As noted above, the only way to cure the "excess" after those dates is to take a distribution of the entire amount, and when the 1099-SA is sent to you, you enter it and indicate that none of it was used for qualified medical expenses. This will cause it to be added to line 8 (Other Income) of Schedule 1 (1040) to be subject to federal income tax AND you will be assessed a 20% penalty on that amount.

"I told TurboTax that I plan to withdraw this money (and I think paid the 6% fee) but how do I take it out of my HSA?"

If you do what I just suggested, then you are not "withdrawing the excess". Besides, if you told TurboTax that you were withdrawing it, it would not try to roll it over to the next year and ding you 6%...however, because the excess appeared to be form 2019, TurboTax should stop you from trying to withdraw the excess, because in the case, it can't be cured by withdrawing the excess but can be cured only by taking the distribution and paying the income tax and penalty.

Anyway, please review my questions in the first paragraph and let me know if I am on the right track.

[Serg10]

(Deleted duplicated response)

[Serg10]

@BillM223 

Are you saying that you did not have HDHP coverage until July 2020? If so, you were not eligible to make a contribution to a 2019 HSA. In this case, the whole contribution should have been withdrawn.

   A: Yes exactly that's what my mistake was. 

As noted above, the only way to cure the "excess" after those dates is to take a distribution of the entire amount, and when the 1099-SA is sent to you, you enter it and indicate that none of it was used for qualified medical expenses. This will cause it to be added to line 8 (Other Income) of Schedule 1 (1040) to be subject to federal income tax AND you will be assessed a 20% penalty on that amount.

"I told TurboTax that I plan to withdraw this money (and I think paid the 6% fee) but how do I take it out of my HSA?"

If you do what I just suggested, then you are not "withdrawing the excess". Besides, if you told TurboTax that you were withdrawing it, it would not try to roll it over to the next year and ding you 6%...however, because the excess appeared to be form 2019, TurboTax should stop you from trying to withdraw the excess, because in the case, it can't be cured by withdrawing the excess but can be cured only by taking the distribution and paying the income tax and penalty.

Ouch that's a painful 20% penalty plus income tax on it. I understand though it is my mistake and a lesson learned. 

Why is it that I cannot cure that 2019 excess contribution by moving some of my HSA balance to my 2021 HSA limit? Also would doing this avoid the 20% penalty?

[BillM223]

"Why is it that I cannot cure that 2019 excess contribution by moving some of my HSA balance to my 2021 HSA limit? Also would doing this avoid the 20% penalty?"

I admit that I was focused on curing the excess. It is not clear that the IRS considers an ineligible contribution to be exactly the same as an excess contribution, but lacking any directive, TurboTax treats them the same way.

So, given this, an option is to roll the "excess" over to 2020 and pay the 6% penalty. The effect of the rollover is to reduce the 2020 HSA contribution limit by the amount of the rollover. So, in essence, your 2020 HSA contribution was reduced by $3,500, leaving you with what, $50? ($3,550-$3,500).

Of course, this means that you made excess contributions for 2020. Now, you might think that you could withdraw the excess identified by April 15, 2021, and all would be OK, but TurboTax remembers that the original excess was never properly handled, so it won't let you withdraw it.

So, the next thing to do would be to roll over the 2020 excess (the $3,500) to 2021. If you reduce your HSA contributions so that you can count the $3,500 as under the limit in 2021, then you can use up the excess, having paid 6% twice (2019 to 2020 and 2020 to 2021).

This means, however, that you in essence shouldn't make any contributions this year, but just let the original $3,500 excess contribution from 2019 be used up this year.

Does this work for you?

[Serg10]

Yes, that makes sense.  I will do that. Thank you for taking the time to explain it to me. I was so confused but I get it now. I really appreciate it @BillM223