@Log_Lady wrote:
I ran into HSA over contribution issue this year when doing tax for 2022, realizing that I did not follow the last-month rule for 2021. For the option of emptying out HSA account, do I have to make qualified distribution for all the remaining HSA balance, or the balance after taking out 2021's over contribution chunk?
The last month rule is special and does not follow the usual rules for making excess contributions. You may be getting the wrong information because you are posting to an old discussion that was started by someone who had old excess contributions that were for other reasons, not the last month rule.
The consequences of failing to meet the testing period for the last month rule are much simpler. No withdrawals are required. Any amounts you contributed in 2021 that are not eligible (because you failed the testing period) are added to your taxable income for 2022, and assessed a 10% penalty. You can't waive the penalty by making withdrawals, but you are not forced to make withdrawals, and the money is not subject to the ongoing 6% penalty that attaches to excess contributions made for other reasons.
Separately, if you made excess contributions for 2022, you need to remove them before the tax filing deadline or pay income tax plus a 6% penalty.
https://www.irs.gov/pub/irs-pdf/p969.pdf
If you fail to remain an eligible individual during the test- ing period, for reasons other than death or becoming disa- bled, you will have to include in income the total contribu- tions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are calculated on Form 8889, Part III.
