HSA Over Contribution in 2024

[Whoislike]

Hi,

I am retiring in 2025 and will be applying to go on Medicare beginning of April.  Unfortunately, Medicare has a 6-month look back, from the date of application, where you can not be contributing to an HSA.  In 2024 my HSA contribution was the maximum, but based on Medicare's 6-month lookback, about 25% of this contribution will be subject to excise taxes as well as normal income taxes.  I am trying to avoid this by requesting a return of my contribution before the tax filing date, which I have read would be a correction to my 2024 contributions and not subject to additional taxes and that I should report the returned amounts as other income on Schedule 1, line 8f.

I have been trying to make this happen in Turbotax Deluxe on form 8889 but have not been successful.  How do I make this adjustment happen in Turbotax without having an excise tax calculated?

Note that It appears that this correction does not require a W2c, though my HSA will send a new 1099SA & 5498 form about in May, after I file my taxes.

Any help is appreciated.

[BillM223]

To be clear, Medicare does not always look back 6 months. It does so ONLY when you apply for Medicare more than 6 months after your FRA date (Full Retirement Age).

Normally, Medicare would start when you turn 65. If you apply for Social Security (which automatically applies for Medicare Part A (at least) for you) after your FRA, then the SSA looks to see how far past your 65th birthday you are. If you are past your 65th birthday, then the SSA will backdate your Medicare coverage to age 65 - but no more than 6 months.

In other words, many taxpayers don't have a 6 month backdate.

So before you run around with amending returns or getting corrected forms, let's find out what your FRA date is and what date you applied to start coverage. Then we'll work back from there.

[Whoislike]

Thanks for the quick response.

I am going to be applying for Medicare after my FRA, 65, during a Special Enrollment Period (SEP), now that I am 67+ and was covered by a qualified group insurance plan, I do expect the 6-month look back.

Let me know if you need additional information.    

[BillM223 · Accepted solution]

OK, you are correct that you will have a 6-month look back, so three months of 2024 will not be eligible for contributions to your HSA.

The way this works is this:

1. You go through the HSA interview in your 2024 return.

2. You enter your contributions (if they weren't already entered on your W-2)

3. You enter your HDHP coverage for 9 months - note there is a special page that asks you if you had Medicare, this is what you want.

4. On the next page (after Medicare), you enter Self or Family (whichever you have) for Jan-Sept, and then enter NONE for October-December. This is true even if you had HHDP coverage for those last months.

5. TurboTax will calculate your excess HSA contributions for 2024. Yes it is probably the 25% that you refer to, but there are so many variables, I feel safer having the software tell you. Besides, TurboTax keys off this amount in the following steps.

6. The moment that TurboTax detects an excess, if the contributions came through your employer (i.e., on your W-2), TurboTax will add the excess to Other Income to be taxed. This is fair because the contributions were originally removed from Wages in boxes 1, 3, and 5 when your W-2 was printed.

7. TurboTax will give you the choice of what you do with the excess. You will want to withdraw as much of the excess as you can (hopefully all of it).

7.5 If you withdraw less than all the excess, the remainder will be carried over to next year, and you will be dined a 6% penalty. And since you will be Medicare for all of 2025 (and forever and ever), there is no easy fix to this carryover, which will carry over year after year, unless you pay income tax on the carryover and incur a 20% penalty on top of that.

8. You will contact the HSA custodian to request the "withdrawal of excess contributions". There is often an online form for this at your HSA custodian's website. You can do this as soon as you know the excess amount - no need to wait until you file your return.

9. The important date is the date you requested the withdrawal (keep this in writing in your tax archives), not when you actually receive the money or the 1099-SA.

10. Note that the 1099-SA for this withdrawal (which is also a "distribution") will not be sent to you quickly (although it might be - it varies a lot). This is because you enter this 1099-SA on your 2025 return in early 2026. This is because the excess contributions are added automatically to income by TurboTax - the software does not wait for the 1099-SA. Only the earnings on the 1099-SA are taxed, and they are not taxed until next year.

So, please, make all your entries in the step-by-step mode. Too many taxpayers really don't understand how the 8889 works, and it's safer to let TurboTax fill in the form.

You do not need a corrected W-2, because the W-2 that the employer gave you is correct. TurboTax will fix things so that the right amount of deductions happen, your 8889 is completed, and your return is taken care of.

OK? You are not in a time crunch because only the request for withdrawal has to be done before April 15th. Take a deep breath.

[Whoislike]

Thank you Bill, that worked perfectly!!!

Note your comment about people not understanding the 8889 form is totally true.  I have a bachelors in accounting and an MBA and I could not figure it out!

Your instructions were very clear! 🙂