BillM223
Expert Alumni

Get your taxes done using TurboTax

1. If the excess contributions are due to employer contributions (i.e., W-2 box 12 code W), two things can happen:

...A If the employer realizes that you were not eligible for the contribution, then the employer, under certain circumstances, can take it back from your HSA. Of course, the employer would have to re-issue the W-2 so that it does not show up as income and that the code W entry is not there either.

...B Otherwise (which is the usual case), after the taxpayer requests the "withdrawal of excess contributions", the HSA custodian will send a check for the excess to the taxpayer.

 

2. 1.b will happen because as soon as the excess is found by TurboTax, it will be added back to Other Income, so it is only fair that the taxpayer get the income.

 

3. The 1099-SA (not 1099-MISC) reporting the withdrawal of excess contributions will generally be for the following year. NOTE: TurboTax has already added the excess back to income, so you don't need the 1099-SA for the current year to pay the tax on the income.

 

4. You will be assessed 6% penalty if you carryover the excess to the next year, as you note. However, it is NOT cheaper to do this rather than withdraw the excess in the current year before the due date of the return. This is because you will pay income tax on the excess no matter what, so the 6% is in addition to the income tax (check your 1040 for the excess as Other Income).

 

If you can, withdraw the excess now, and don't try to discharge it next year.

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