@ebenann wrote:
What happens to the employer contributions to the HSA, my contribution will be 0 but it appears my employer still contributes $1000 to the HSA in the plan year. Does this make me non compliant to the IRS rules?
If you are ineligible for all of 2023 but your employer contributes $1000, you must either:
a. withdraw the $1000 before April 15, 2024 as a "return of excess contribution." It will be added back to your taxable income (because you aren't eligible to exclude it from income) but you won't pay a penalty. Note that a return of excess contribution is a special procedure that may require a special form, it is not a regular withdrawal.
b. leave the money in the account. It will be added back to your taxable income (because you aren't eligible to exclude it from income) and it will be subject to a 6% penalty. It will be considered "excess funds" in the account and will be subject to a further 6% penalty for every future year that it remains considered to be excess. If you plan to be eligible in 2024, the easiest way to remove the excess will be to contribute less than the maximum in 2024 which allows you to apply the prior excess to the new year limit and "use up" the excess. For example, if the 2024 limit were $7800, you could contribute $6800 (combined you and your employer) and the old $1000 excess would be counted toward your overall limit.
If you want to keep the account open, because you plan to be eligible in the future, it might be worth eating the $60 penalty for 2023. It's up to you.
Also, if you spend the $1000 for qualified medical expenses, there will be no penalty because the penalty is calculated from the amount of excess contribution in the account or the account balance, whichever is less. (The excess contribution will still be added back to your taxable income no matter what.)
