“So for a policy conflict one would basically follow the same process as for excess contributions using the Line 3 Limitation Chart and Worksheet?”
Yes, the Line 3 Limitation Chart and Worksheet in the form 8889 Instructions is used to calculate your specific annual HSA contribution limit, based on your individual circumstances. From this, you can apply the contributions that you actually made to the calculated HSA contribution limit to see if you made excess contributions.
Note that the chart and worksheet does not cover the last-month rule. This is covered in the text under line 3 on page 3. The last-month rule says that if you were covered by an HDHP policy on December 1st of the year, then your annual HSA contribution limit is as if you had that HDHP coverage for the entire year. This rule overrides the calculation in the chart and worksheet, but only if you had that coverage on December 1st.
How do I handle employer contributions (lump-sum and payroll deduction)? My contributions are entirely in this category. The bank for the HSA says to contact the employer to get those excess funds withdrawn.
Having the employer withdraw the excess funds is one possibility. Please see IRS Notice 2008-59, question 23.
However, the employer is not required by the IRS to recover the funds. When the employer declines to do so, the employee should request the withdrawal of excess contributions from the HSA custodian, who should honor it.
In the latter case where the employee withdraws the excess funds from the HSA, then that amount – if treated as the “employer contribution” (either contributed by the employer or by the employee through payroll deduction) – should be added to Other Income on the 1040 (in 2019, this is line 8 on Schedule 1 (1040)).
Can the excess funds be rolled into a contribution for next year instead of withdrawn?
In a fashion, yes. If the taxpayer cannot (or chooses not to) withdraw the excess HSA contribution by the due date of the return as extended, then the excess not withdrawn is subject to a 6% excess tax.
However, the taxpayer can apply the excess to the next year’s return, thus using it up and making it no longer “excess”.
To do this, the taxpayer must reduce the contributions being made in the next year so that the sum of the excess amount carried over plus the current contributions being made next year do not exceed the annual HSA contribution limit for that year.
It is as if the excess can be converted into a “personal contribution” for the next year. It is not reported that way on form 8889, but that is the net effect of using up the excess.
However, be very sure to reduce your HSA contributions in the next year to allow for the carryover amount to be used up under the contribution limit.
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