@krshaf01 wrote:
Thank you for your reply. The spend down approach is definitely an approach that I have been considering. The account has about $10K in it so that will take some time. The time required is an issue and from what I have read, the tax issue with the IRS does not really go away. They may not be pursuing taxpayers on this issue though. My HSA Manager has state that they can no longer calculate the gain and I will need to take a non-qualified distribution of the Excess Amount. I would need to establish the resulting gain on my own. So I'm moving toward the approach of taking the $296 excess contribution plus the gain amount as a distribution. My approach would then be to add an additional amount of money in the requested distribution to ensure compete coverage. Taking an additional amount is no big deal. Does this approach allow the problem to be closed, or are there other issues that I'm not seeing? I have not used the account so this minimizes the complexity of problem. I cannot exercise any of the typical options cited throughout the internet, because I have retired and am on Medicare. My one concern is the non-qualified distribution would not be directly associated with the Excess Contribution but the accounting may consider it a fix. Thx
Remember that after age 65, the distribution rules on the account change. You can still withdraw money for qualified medical expenses tax-free (even if you can't make contributions), or you can make withdrawals for any other reason and only pay regular income tax with no penalty (as if it was an IRA).
If the penalty is really only $16 per year and you have $10K in the account, I would just continue to spend it for your medical expenses, like Medicare Part B and D premiums, co-pays, and so on. Should you be so lucky as to live 30 years with no unusual medical expenses, you still will have only paid $480 in penalties, and you can earn that back in two years by investing half the balance in a conservative mutual fund. And if your HSA bank does not offer mutual funds as an investment, you can open an HSA at any other bank that does and do a rollover into the new account.
I would not take the IRA route and withdraw the money to close the account and pay tax on it. The ability to pay your medical expenses tax-free is too significant a savings to worry about a $16 penalty.
