Excess HSA Contribution Problems Due to Medicare Enrollment-6 Month Rule

[dmertz]

The timing of the contributions is irrelevant, provided they are made by the due date of the tax return.  With family coverage over age 55 and 9 months of eligibility, one had until April 15, 2024 to make up to $6,562,50 of total contributions.  With only $4,000 contributed, no matter when it was contributed prior to the due date of the tax return, there is no excess contribution.

[Boomhauser]

So what should we do now, we already requested those contributions to be returned and they sent checks for that period when she was enrolled in medicare? Now, those 2023 returned contributions would change her taxable income. Should we ask her HSA custodian to reverse this if possible or do we have to file an amended tax return? Also, can she still contribute to her HSA if enrolled in medicare and her contributions are lower that the limit? I'm reading everywhere that you're not allowed to contribute to HSA while enrolled in medicare period, there are no thresholds mentioned. Thanks,

[dmertz]

Given that April 15, 2024 has already passed, I don't think the distribution can be undone.  However, because there was no excess contribution, getting TurboTax to properly prepare the amendment might not be possible without overrides.  Amending will require reducing the amount on Form 8889 line 9 by the amount of contribution returned and adding the amount returned as other income on Schedule 1 line 8f.

The alternative would be to do nothing to change the 2023 tax return and file your 2024 tax return with an explanation statement, treating the distribution as a Normal Distribution (code 1) instead of as return of contribution (code 2).  This might be the more correct approach since the tax code technically permits a return before the due date of the tax return of only actual excess contributions.

[Boomhauser]

I called the custodian and they say these are technically excess contributions although there was no excess contributions, because she is older than 65 and contributed while enrolled in medicare. They said they will not issue any corrected forms for 2023 because it's already after the deadline to file returns. They said they'll issue a1099 form for 2024 next year and would include both year excess contributions (2023-2024). They recommended calling the IRS how to approach this, also they said it's possible to reverse this return of the 2023 contribution, we'd have to refile excess contribution form and send them a check for the amount they just issued. The question is, what's the easiest way to correct this? I would like to return those 2023 contributions and not to file an amended return. I know because of this mess e-filing would be a problem.

Should we just return those 2023 excess contributions and wait what happens in 2025 or file an amended return and report this simply as other income, but some amounts on 2023 W2s and 1099sa will be still wrong. Any idea how to fix this mess????

[dmertz]

The custodian is providing bad information if they are saying that the timing of the 2023 contributions has any relevance to determining whether or not an excess contribution was made.  An entire 9/12 of the 2023 annual limit could have been contributed all on April 15, 2024 and it would not be an excess contribution.  The type of coverage on the date the contribution is made irrelevant.  All that matters is that there was 9/12 of a year of eligibility.

Section 223 of the tax code is says:

(a) Deduction allowed

In the case of an individual who is an eligible individual for any month during the taxable year, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by or on behalf of such individual to a health savings account of such individual.

(b ) Limitations

(1) In general

The amount allowable as a deduction under subsection (a) to an individual for the taxable year shall not exceed the sum of the monthly limitations for months during such taxable year that the individual is an eligible individual.

You can see from this that eligibility determines the amount than can be contributed, not the timing of the contribution.

[Boomhauser]

To be honest I don't want to file an amended return if I have to override TT forms and file paper returns. If I understand I have a few options here, please let me know if any of these options seem right to you.

1. Return the check for 2023 excess contributions to the custodian and do nothing and wait until the next tax year. We already requested all contributions for 2024 to be returned and she stopped contributing to her HSA in 2024, she has zero contributions for year 2024 now. Even if the IRS asks to file an amended 2023 return, the tax on those 3 month contributions of $692 is not a huge deal.
2. Do nothing and keep the check for October-December 2023 contributions and wait until next tax year for new tax forms incl. 2024-1099SA which should include 2023-2024 excess contribution amounts and file 2024 taxes according to those forms.
3. Keep the check for 2023 contributions and file a 2023 1040-X return showing returned $692 contributions plus earnings as other income on schedule 1. This is my least favorite option because I would have to mess with total HSA contribution amounts and other issues and this would most definitively cause problems while filing 2024 taxes.

...or maybe there are other options. Thanks