Excess Contributions to an HSA Account

[wyo_vern]

I filled for MediCare starting July 2024 the last week of June 2024.  Since I am over 65 years old the MediCare look back period went back to November 2023.  I knew about the six month look back so I stopped all HSA contributions in 2024, however, I did not start the calculation with correct month.  I was undergoing cancer treatments at the time and they lasted until November 2024.  In November 2024 I calculated the excess and income on that excess and requested a distribution from my HSA bank.  Since I was past six months filing my return, I drafted a 1040X reporting the excess contribution.  Now that I am working on the 2024 return, TurboTax shows the excess as a 2024 contribution and adds the 6% penalty.  It does not allow me to show that I have timely withdrawn the excess so the 2025 tax return would do the same again next year. 

What am I missing?

Why do I have to pay tax twice on the same excess even though I done the withdrawal and paid taxes on it?

My account balance is far too large to reasonably reduce to zero.

Thanks

[BillM223]

It sounds like TurboTax is still carrying over your excess contributions.

Listen, when you go through HSA interview, TurboTax is going to ask if you overfunded the HSA the previous year. NOTE: if you withdrew the excess in a timely manner (before the due date of the return), then you should answer NO to this question (I admit that this is not clear).

Does this address your issue?

[wyo_vern]

Sorry no.  Due to medical issues I did not take the distribution until November 2024 or after the six month period.

[BillM223]

You got me confused...was the original excess on your 2023 return or on your 2024 return?

If the excess is on your 2024 return, then all you have to do it tell TurboTax, when it tells you the excess, that you will withdraw it before April 15, 2025.

Listen, calculations on form 8889 (HSA) are done on an annual basis, so it doesn't matter which month you do something.

If the excess was on your 2024 return, you have until April 15, 2025 to withdraw it.

If the excess was actually on your 2023 return, then you were required to withdraw it prior to April 15, 2024. If you did not (because of treatment) then it carried over to 2024, and you were charged a 6% excess tax on the carryover amount.

For "most" people, you could just use the carryover amount as a contribution in the following year, but...as a Medicare person, you will never be eligible to contribute to an HSA again.

The only way to stop the perpetual carryover and 6% is to take a distribution from the HSA, not for medical purposes. Just call the HSA custodian and ask to withdraw the original amount of the excess. Take the money and go to Las Vegas or do whatever you want. Then probably early next year (but custodians are unpredictable on when they do this) you will get a 1099-SA with the distribution.

When you enter this 1099-SA in TurboTax for your 2025 return, be sure to say NOT for medical expenses. Then TurboTax will add the distribution amount (the excess) to your Other Income and hit you with a 20% penalty...but THEN, the rollover will be canceled permanently (not more 6% a year).

Does that work for you?

[wyo_vern]

Thanks for the response.

The excess contribution occurred in 2023 due to the six month look back when you sign up for Medicare.

I did not do the withdrawal before April 15, 2024, I amended the 2023 return and paid the 6%.   I did the withdrawal in November 2024 including the income earned and I have a 1099-SA for 2024.  I have entered that into TurboTax as an excess contribution.  Yet, TurboTax does not allow me to click on the I will withdrawal the amount before April 15, 2025 because it was a 2023 excess contribution.  So the program is calculating the 6% again for 2024.  If the law is 6% for every year the excess in left in the account I should be paying the 6% for 2023 and the additional revenue from the withdrawal in 2024.  But that is not an option that I have found.

Thanks again. 

[BillM223]

Yes, the issue is that if you do not withdraw the excess by the due date of the return, then you can't withdraw it as an excess contribution to cure the problem. 

TurboTax is correctly applying the rules.

As I noted above, if you have a lot of money in the HSA, and don't want to see it frittered away with the 6% year after year, you can do the one-time distribution to get rid of it.

So let me understand - you did withdraw the excess at some point (but after the due date of the return)? Was the 1099-SA on your 2024 return? If so, you can go into the spot where you entered the 1099-SA and change the dialogue so that you mark that the distribution was NOT for qualified medical expenses (whether or not they actually were). This will add the distribution to Other Income and hit you with the 20% penalty, but as I noted above, the excess will be gone.