HSA overcontribution 2021

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I did a one time IRA direct rollover from my IRA to HSA in 2021 of $8200 that turned out was ineligible. So I did an indirect return of the overcontribution back to the IRA in 2021. I received a 1099-R of the IRA direct rollover into the HSA coded as G - Direct rollover and rollover contribution and a 1099-SA for the return of the HSA amount coded as 2 - excess contribution which was a check into my account. I then deposited the exact amount back into the original IRA. How do I enter these into turbotax desktop?

For the 1099-R, I chose in turbotax that the money was put into an HSA. Then under less common income, I included the 1099-SA amount. Turbotax says that I made an excess HSA contribution of 7867 (8200 - 233) and asks if I will withdraw the 7867 by April 18, 2022. When I try to enter that I withdrew 8200, turboxtax says it is too large. I also enter the 8200 as a IRA contribution (return back into the original IRA) and turbotax says I made an excess contribution of $1200 and owe a penalty. I am very confused.

Help greatly appreciated!

What am I doing wrong???? I dont see why I made an overcontribution since I already

BillM223Answer

Level 15

I did ask for the overcontribution to be returned as an excess contribution. My 1099SA distribution has it coded as excess contribution.

So far I have asked 2 CPAs and turbotax live. I got 3 different answers!

1) Turbotax live: Said to answer the qualified funding distribution (your picture) as no, I do not meet these conditions. Result is I have to pay 10% tax on the $8200 even though the IRS instructions for 8889 say "

However, you can withdraw some or all of your excess contributions for 2021 and they will be treated as if they had not been contributed"

2) CPA 1: I do not have to pay 10% additional tax. Report line 19 Qualified funding distribution as $0 since it was reversed. Turbotax does not allow me to zero line 19 unless I I answer the question above as "Yes, I meet these conditions"

3) CPA 2: Dont enter the 1099R nor the the 1099SA on your tax return since they cancel each other. If I delete these 2 forms in turboxtax, then there is no issue. I am very uncomfortable excluding these forms since one thing the IRS checks is undeclared income and that would increase my audit risk.

I am leaning to option #2 above. It will void the Turbotax guarantee but it will allow me to efile. Overriding it will also void the turbotax guarantee and also prevent efling!

Ask your HSA custodian if they will recharacterize your qualified HSA funding distribution as a mistaken contribution. Then the 1099-SA will be on their books as the return of the contribution. They may also issue a corrected 5498-SA showing the effects of all this (if they have already sent you the 5498-SA, they may not have).

That way, if you decide to not enter either the 1099-R or the 1099-SA, the HSA custodian's records will back up what you did and why. Any audit of a tax return on form 8889 is going to involve gathering your records, your employer's record, the HSA custodian's records, and (in this case) the IRA administrator's records.

If you can get the HSA custodian to update their records, this will go a long way to explain why what happened, happened.

But, as you suspect, leaving out forms that you received that the IRS also received, does increase the chance of getting a letter from the IRS, which gives you a chance to explain. So it's good to have as many ducks in the row as possible if the letter comes.

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Mike9241

Level 15

I don't think your situation is clearly covered by the tax law. if you weren't eligible to make an HSA contribution the distribution from the IRA may be taxable - ie not treated as a rollover.

then the contribution back into the IRA may be tax deductible but subject to the limit for IRA contributions

the problem comes in because TT is saying the excess is $7867 but you took out $8200. it is too much. you have a nonqualifying distribution of $333 (not $233)

the maximum IRA contribution for 2021 is 7,000. TT doesn't know you're putting back the 8200. and the issue is whether you can actually do this. if not you have an excess contribution of $1200. TT is probably taking a $7000 tax deduction for the iRA contribution you reported.

where did the 233 (333?) come from?

it makes no sense. if you weren't eligible in any month the excess should be 8200

if you were eligible for 1 month that would be $633

Mike9241

whodiiniAuthor

Level 6

Had to look at the forms to see how turbotax populated them.

Form 8889 HSA shows for my spouse, a maximum allowable contribution of 2400 and an additional 333 is because we were 55 or older and eligible for 4/12th of the year. ($1000/3=333). Then it says that the excess HSA funding distribution is 8200 - 333 = 7867 even though I took out 8200. Even though these numbers dont make sense, it doesnt add additional tax. (Except that my earnings on the 8200 was $0.10 and due to rounding in turbotax, it rounds that up to $1 and I therefore I have $1 taxable HSA distribution. Oh well, have to pay $.32 more tax on $.10 of earnings!)

In the HSA summary, turbotax reports a taxable IRA rollover contribution of -$333 and tax free employer contribution of -$7867 and an excess employer contribution withdrawn of $8200. Does this mean that its a wash taxwise?

whodiiniAuthor

Level 6

I also deleted the IRA contribution of the $8200 in turbotax since that generated the error of overcontribution. It seems that I accounted for the rollover from the IRA to HSA in the 1099-R section and then accounted for the distribution in the HSA section. But the part about the summary doesnt work anymore. The negative numbers seems problematic and turbotax reports an error now when I step thru. It only allows a return of 7867, not the full 8200!