What is expected HSA contributions in 5498-SA form if I remove excess contributions in February 2020?

Forum|Forum|6 years ago
February 4, 2020
5 replies
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Hi, I have HSA account transferred from previous employer. I'm not in high deductible medical plan, so I'm not eligible for HSA contribution. My HSA account is with same financial institution that have my saving/checking account. Now here is mistake happened - I accidentally had moved funds from regular checking account to HSA account on 6-April-2019. I had immediately transferred back that amount on 7-April-2019.

On 3-February-2020, I spoke with bank person and they are going to issue 2 1099-SA forms. One form with distribution of type 2 (excess contributions) and another form with distribution of type 1 (normal distribution). Since form 5498-SA would be reported to IRS and me in May, I wouldn't know if my accidentally transferred amount is still reported as "contributions" on 5498-SA form to IRS or would it also be corrected to show $ ZERO contributions.

BillM223

Level 15

I am going to assume that TurboTax reported that the first transfer into the HSA caused an excess contribution error message.

In this case, you would be permitted to contact the HSA custodian and ask for the "withdrawal of excess contributions". If this is what happened, then you should be in good shape.

The IRS instructions for box 2 on the 5498-SA (Total Contributions Made in 2019) "Any excess employer contributions (and the earnings on them) withdrawn by the employer pursuant to Notice 2008-59, Q/A 24, available at IRS.gov/irb/2008-29_IRB/ar11.html, should not be reported as a contribution."

See Instructions for form 5498-SA.

So if you asked the HSA custodian in April 2019 to request a withdrawal of excess contributions (the first transfer), then this amount should not appear in box 2.

Likewise, issuing a 1099-SA a year later with the earnings on the excess is normal, because the earnings spanned two tax years, and the IRS lets you report them in the second tax year.

If, however, you did not get the HSA custodian to document these transactions as "withdrawal of excess contributions", then you have a problem.

The IRS does not permit willy-nilly transfers of money in and out of HSAs. In this case, you would have to report the first transfer as a contribution (even though you took it out the next day), take it as a tax deduction in 2019, and then report the distribution as a distribution NOT for qualified medical expenses, on which you will pay income tax and a 20% penalty.

First, ask the HSA custodian if they treated the second transfer as a withdrawal of excess contributions. If they did, you are probably OK.

Note that you will receive a separate 1099-SA for your regular distributions anyway; perhaps this is what the other 1099-SA is.

However, you should talk to your bank and make it impossible to accidentally transfer money into the HSA.

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dumrindaAuthor

Level 3

Thank you @BillM223 for details.

I talked to HSA custodian on 03-Feb-2020 and they would be sending me two 1099-SA forms. I believe first one would be normal distribution and second is "excess contribution" distribution type.

I myself had transferred back from HSA account into checkin account in 2019 (immediately next day) but did not notify bank since I was unaware of tax implications.

Since now I informed to HSA custodian before end of tax filing date (with extension) and what would be value on form 5498-SA in Box-2? Would it be still including "excess contribution"?

BillM223

Level 15

The normal way to report this is:

First transfer is a "personal" contribution to your HSA
Second transfer is a distribution for non-qualified medical expenses.

The contribution will lower your taxable income. The distribution for non medical distribution will be added to your Other Income (thus, a "wash" with the contribution) but you will also pay a 20% penalty on the distribution.

Note that you can reduce this effect if you get the excess contribution error message in TurboTax. You might see this when you add the first transfer as a personal contribution.

If this happens, then agree to withdraw the excess by April 15, 2020. Then contact the HSA administrator and request the withdrawal of an excess contribution. Call this amount X.

If you tell TurboTax that you will withdraw the excess, then TurboTax will reduce your contribution to zero. At the same time, you should contact your HSA custodian and report a "mistaken distribution" in the amount of the value of the second transfer minus X.

Be nice because the custodian does not have to accept this request, but if they do, they are required by the IRS to give you a corrected 1099-SA.

Note: you will still get credit for the amount of the first transfer that was not excess as a contribution to the HSA, and you will still report the amount of the second transfer less the mistaken distribution as income and be penalized on it...but the amount of the penalty should be less.

What you cannot legally do is just take out the amount you put in by mistake. The HSA is not a simple savings account that you can give to and withdraw at will.

I know this is complicated, but I am trying to minimize the penalty you are going to have to pay.

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