@Log_Lady wrote:
Thank you so much for your detailed response. I was trying to search for an answer when I saw this discussion and thought it's the same as my situation. It made me think the over-contribution due to failing last-month rule is subject to this year's penalty (10%+income tax) plus future years' (ongoing 6%+income tax). It's a relief to know at least I don't need to make non-qualified withdraw or empty out my HSA account to avoid future penalties. So many tax details when trying to save a little bit of money on medical expenses with HSA.
The income tax and 10% penalty for failing the testing period for the last month rule are only reported on form 8889, there is no carryover to form 5329. So although there is a 10% penalty now, there is no ongoing 6% penalty.
(Likewise, if you were in a situation where you spent all the money in the account, you still pay the 10% penalty for failing the testing period, even though your balance is zero, because the penalty for failing the testing period is calculated differently than the penalty for making excess contributions.)
