@brian-perrigino wrote:
Thank you @BillM223
A couple follow-ups if I may.... the overfunding was a result of employer reimbursement. If the excess funds are removed, who gets the money.... the individual who had the overfunding (J in this case), or does it go back to the employer? Its sounds like J correct? And would the 1099-Misc be for 2022 taxes or 2023?
Also, if I answer TT and say that the excess will not be removed, TT adds in a 6% penalty. This seems like it would be significantly less that receiving a 1099-Misc and paying tax on $3550 since they are in a high tax bracket. Is that legit?
On the tax return, because the taxpayer is withdrawing the money and paying the tax, the money belongs to the taxpayer. There is no procedure for the money to be returned to the employer, and the employer is not notified by either the HSA bank or the IRS.
Depending on what the employee agreed to, the employer might have the right to demand repayment. For example, if the employee signed a contract that says "I agree that I will be fully eligible to receive this money as a tax-free contribution and that if my eligibility changes, I will return any excess" then the employer might have a case.
When J changed to a family plan, that was a "life event" that arguably should have been communicated to M's employer, but again, that depends on what conditions, if any, M's employer put on the contribution.
I would say it is unusual, but not impossible, for the employer to require repayment, but it would be something that was agreed to in advance.
The excess will always be subject to regular income tax, whether withdrawn or not. If it is not withdrawn, it will also be subject to a 6% penalty. And the 6% penalty will recur every year in the future as long as the excess remains in the HSA.
