@Steelydan989 wrote:
Thank you for laying this all out so clearly. It makes sense and will help me make a decision about what to do now. I did have some medical expenses in 2020 which we paid out of pocket. I assume I can deduct these from the amount I'm returning now as a mistaken distribution.
Still a bit confused about exactly which monies incur the 6% penalty each year. Is this correct:
2019 tax return: I owe 6% on contribution made in Dec 2019.
2020 tax return: I owe 6% on distribution amount I'm now returning (which is total 2020 distribution minus my 2020 medical expenses).
2021 tax return: I'll owe 6% on my HSA account balance on 12/31/21?
Also, just double checking:
As long as I'm paying this 6% penalty, I can use funds from my HSA for medical expenses and still be claimed as a dependent on my parents' tax returns even though I've never made any valid HSA contributions?
1. Yes, if you had medical expenses that were paid out of pocket, either in 2020 or in 2019 after the date you opened the account, that part of your distribution is qualified. You only have to return the non-qualified part.
2. You owe a 6% penalty each year based on whichever is lower, (a) the amount of non-qualified contributions in the account as of 12/31, or (b) the total account balance on 12/31 of the year. Since you aren't eligible to make new contributions, (a) and (b) will always be equal in your situation.
So for a $2000 deposit, all of which was non-qualified, you would owe $120 when you amend your 2019 return. For your 2020 return, you should owe the penalty on the amount you return as a non-qualified distribution. For your 2021 tax return, you would owe a 6% penalty on any remaining balance that you weren't able to spend on qualified medical expenses. And so on, until you either spend the account down to zero, or become eligible to make contributions in your own name.
3. Yes, since you have money in an HSA, you may use it to pay for qualified medical expenses for yourself, your spouse or your dependents (I know your situation, I'm just quoting the full rule), even if the money was improperly deposited. The "improperness" of the contribution is dealt with on your 2019 and future tax returns as we described, but the 6% penalty for having a balance that includes improper contributions does not "taint" the use of the account for qualified medical expenses.
