My daughter had an HSA beginning December 2021 when her employer's health plan changed to an HDHP.
She funded her HSA in the first few months of 2022 in the amount of $3540, which is less than the full year limit.
However, she left this employer in April 2022 and began working for a different employer that did not have an HDHP, so the HSA contribution limit is prorated to only 4 of 12 months.
During her time with the employer with the HDHP, she used all the funds in her HSA including some contributed in 2021. So, by the time she left the employer, her HSA balance was zero.
Now, her balance is zero but the HSA had been over-funded compared to the prorated limit.
As such, TT is calculating a penalty (which appears to be 20% or more of the overfunded amount) and advising that she withdraw the excess funds before April 18th (to avoid an additional 6% penalty). Well, those funds were already used and the balance is zero (and was before the end of tax year 2022).
So, my question, should she select the option in TT that says she will withdraw the full excess balance by April 18th (because it was actually already fully distributed in 2022)? If so, what amount is taxed and what penalty is applied?
Specifically, the excess contribution in 2022 was $2323. Also, apparently an additional $200 (of $500 contributed in Dec 2021) is treated as income from 2021 due to the 'last month rule' since her HSA that began in December 2021 didn't exist through all of 2022.
Thank you.
