HSA tax implications of Fidelity failing to process my excess contribution withdrawal by tax deadline

[purplestar777]

In October 2024 before the tax extension deadline I requested my HSA broker Fidelity to withdraw excess HSA contribution that was made in 2023 calendar year.

In October 2024, on my 2023 tax return I promised that I had filed the request before the 2024 tax extension deadline.

After the deadline it turned out that Fidelity failed to process it. I spoke to multiple agents, escalated to several supervisors, they promised to fix it, but they failed. Fidelity HSA department have been astronomically incompetent and giving run-arounds this whole time.

Now, several months later, in 2025 at this point, they are saying that I need to make a regular withdrawal and talk to a tax professional.

If they processed the excess contribution before the deadline, than it would be as if I never made the contribution and my taxes would have been simple.

What do I do now? How do I correct the now invalid promise on my 2023 tax return of excess contribution having been withdrawn? Do I need to file the amendment to my 2023 tax return?

How do I word it, where do I amend it, how do I explain it? Any caveats?

What do I do on my 2024 return that is due soon this year? 

I didn't own any stocks in my HSA, but it still earned a small interest on cash balance.

[LindaS5247]

You can provide an explanation for your HSA withdrawal not being made timely, such as  "Excess not withdrawn due to failure of broker to follow timely request to remove excess before tax filing deadline".  

You can amend your 2023 tax return to reflect the failure to withdraw the excess.  You can do this using the TurboTax 2023 edition of TurboTax desktop or if you use TurboTax Online you can do it through the TurboTax account used to prepare your 2023 tax return. You will not be able to e-file the amendment you will have to mail it.

There are two main ways to correct HSA excess contributions: 

1. You can withdraw the excess funds. To avoid a penalty, you can withdraw your excess HSA contributions from your HSA account before the deadline to file your taxes. This includes extensions, (which you tried to do but it is too late) or   

2. You can deduct your excess contribution in a later year. If you missed the deadline to correct your excess HSA contribution for the tax year, you may be able to deduct it in a later year. You would report this on Form 5329. TurboTax will generate Form 5329 for you.

You can try to discuss the discrepancy with your HSA Broker to see if they can provide you with any help to remedy for their error. They should be able to initiate the withdrawal for you.

To enter this in TurboTax you can:

1. Click on "Search" in the top right of your TurboTax screen
2. Type "hsa" in the search box
3. Select "Jump to hsa"
4. Your screen will say, "Tell us about health-related accounts you had in 2024" On the screen that says "Let's enter your HSA contributions" you can indicate your excess 2023 HSA Contributions.

Your TurboTax screen will look something like this:

Click here for "Why am I showing an excess HSA contribution?"
 

Click here for How to File an Amended Tax Return with the IRS

Click here for How do I amend my federal tax return for a prior year?

Click here for Amending Your Income Tax Return

[purplestar777]

Thank you @LindaS5247 

1. If I excessively contributed half of 2023 HSA limit (so, $3,850/2 = $1925) because I did not realize that I had non-high deductible student insurance still active for half of 2023, how do I calculate what amount of interest I must withdraw too?

2. I also requested to withdraw my full 2022 contribution when I did my 2022 taxes in 2023 before the tax extension deadline.

(I started working after college in late 2022 and did not realize that I still had another insurance in 2022 and half of 2023 - so this affected two years of my taxes: FY2022 and FY2023).

Fidelity issued paper check in late 2023 because they failed to direct deposit the 2022 excess contribution removal.

I did not realize it because I was abroad frequently in 2023-2024. In April 2024 they redeposited the check back to HSA. I noticed it in October 2024 and had them reissue the check on October 15, 2024, which posted on Oct 16 2024.

It may have earned tiny amount of interest after getting redeposited in April 2024 (I kept the balance in cash, but even cash earns something like 2% interest in Fidelity HSA).

Do I need to claim this interest as income? If so, how do I claim it? How do I calculate it?

I don't think I can claim it as excess contrinution withdrawal because I already did that in 2023 when I was doing my 2022 taxes. The money entered back in April 2024 to the account due to Fidelity's issueing a check instead of direct deposit and my not being able to deposit it on time because I was abroad. This makes it a bit weird situation.

[RobertB4444]

Unfortunately the only people who can tell you how much interest the over contribution has earned are with Fidelity and you're going to have to contact them.  They will give you that amount and return it to you along with the original over contribution which has to be out of the HSA before you file the 2024 return so that you don't have to pay the penalty two years in a row.

So forget about the 2022 taxes for the overcontribution.  You pulled that out on time.  So you did as you promised.  The 2023 overcontribution is what we're working with now.

First, go back to 2023 and amend that return.  Say that you did not remove the overcontribution and then pay the penalty.  (If it were me I would immediately bill Fidelity for the penalty but that will be up to you.)

Then, after you have filed the 2023 amendment you will go file your 2024 return.  TurboTax will still show the 2023 overcontribution as in your HSA account and it will once again ask if it has been removed.  You will answer yes and then enter the interest that the 2023 overcontribution has generated and that will be taxable income to you.  Then, you will enter the redeposited 2022 overcontribution as a 2024 overcontribution.  But you will say that you pulled it out on time as well.  And then you will enter the interest from that and that will be taxable to you as well.

But then you'll be done with this nonsense.

Good luck.

@purplestar777 

[purplestar777]

Thank you so much for your response @RobertB4444 !

I've regretted participating in HSA at this point - it cost me so much stress and time alreday due to Fidelity incompetence. Unfortunately, my eemployer selected them as custodian for 401k, FSA, HSA. I'd leave them if I could.

I would really appreciate if you could kindly answer these follow-up questions:

1. Is it critical for me to amend my 2023FY return and pay penalty before April 15 deadline of this year? Can it wait a few months? I am going through a lot health and family wise - I was planning on filing for an extension this year. Would that increase the penalty?

2. What is the penalty amount? How big is it? 

3. How would you try to bill Fidelity if you were in my shoes?
I escalated to multiple supervisors and they have been unhelpful and they lie a lot: Their supervisors promised to fix this a long time ago and call me if something goes wrong. Not only they didn't fix it and didn't call me, they even sent me a message via internal Fidelity message system saying that the transaction got processed successfully.

So, not only they failed to notify me and fix it despite multiple promised over the course of multiple months, they even LIED. They now claim it was an automated message due to "closure of the case by the back office", but the wording is very clear—the message reads: "we've processed your HSA excess contribution withdrawal successfully".

They keep saying "contact a tax professional". I told them that my taxes are normally very simple and I can do them myself—it's their screw up that made it complicated. I asked them if they were going to pay for the tax professional which their screw-up now made necessary, to which they answer that they will not.

What are good steps to try to force them to pay at least the penalty?

4. Do you know which agencies I can report them for these screw ups besides FINRA?


Thank you so much

[LindaS5247]

1. No, it's not critical to file the amended return prior to April 15, but the sooner the better. Have you considered having someone do it for you if you are not well?

2. Generally, the IRS penalty equals 6 percent of your excess contributions. It applies to all years the excess remains.

3. The only thing I can suggest is being very persistent and sending them certified letters to let them know you are looking into the situation.

4. Your state Department of Finance may be able to help.

[purplestar777]

@LindaS5247 thank you!

Re: 1. Yes, I considered having someone do it for me, but I don't know how to find a good specialist (the US law says that one is liable for any mistakes on the return even if it was prepared by someone else, so that makes selection a serious matter). I would appreciate tips on that.

What would be the difference in filing before April 15 VS after (with tax extension)? Would it make the penalty higher?

Re: 3.  So, certified paper letters only? I have been recording my conversations with Fidelity over the phone (and I tell them that every time, also they warn about recording too when you call them). Is that still worse than certified letters?

Thanks

[LindaS5247]

You could ask your friends and relatives if they know a good financial advisor or tax advisor. Your bank may know someone that they consider reliable. Check the IRS directory: The IRS maintains a robust database that taxpayers can use to find tax preparers near them, including CPAs. You can find that by clicking here.

Mailing your amended 2023 return shortly after the April 15 deadline won't make a huge difference, but as I said, the sooner these things are cleared up the better.

I recommend certified letters because businesses tend to take them more seriously. They tend to get elevated. It also serves as a record that you informed the business of their error or your concern and if it is in writing, they can't deny it. If you send it as Certified Return Receipt Requested, you will get back a card that they will have to sign to get the letter. You will have ‌proof that they have received your correspondence.