How do you correct Excess HSA Contribution paid in 2019 if you are no long contributing to HSA Account

[ruddydw]

In 2019 I maxed out my HSA for the year based upon Financial Investor recommendation, but retired early in the year, which resulted in over contribution of $5K.

Also, since I am retired, I can no longer contribute to the HSA account since I am on Medicare. Not clearly understanding the impact, I was advised to just pay the 6% and keep the overpayment in the account. In 2020 I discovered that the excessive payment carries over yearly, so after speaking with someone at the IRS, they said to request from my HSA for excessive Contribution removal which I did in 2021.

I have 1099-SA which reflects the $5K plus interest distribution #2 (excessive contribution).

When I enter this into TurboTax, and I select that I have removed the excess contribution, it responds saying since excess was prior year, it is to late to remove.

So how do you finally get this cleared up so I am not paying 6% penalty every year?

Thanks

[DaveF1006]

 This is a revision to my previous post. After doing some more digging, i found you would not be able to remove the excess contribution in 2019 or 2020 because it should have been removed at that point. You removed it in 2021 but this new excess cannot be fixed by withdrawing it, because it's really still the 2019 excess.

The only way to remove it is to declare it as a distribution of the amount of the 2019 excess plus the interest earned as a distribution not for medical purposes. This will be put on line 8 Sch 1 (1040) as Other Income and will be dinged with a 20% penalty, but the 2019 excess will finally go away. This is what the IRS person meant. For you, this the only way to kill the 2019 excess.

[ Edited 02/18/22| PST]

@ruddydw r

[ruddydw]

I did use Turbo Tax for my 2019 return, but isn't removing excess in 2021 past the timeline allowed for 2019 filing? Since it stated excess had to be removed before April of 2019. Also, if I amend 2019, do I also need to amend 2020 since this carried over and I paid the penalty that year as well?

[DaveF1006]

Please see what I posted above.  This was a very important revision to my original post and this follow up post. 

[ Edited 02/18/22| 04:00 PM PST]

@ruddydw 

[dmertz]

The distribution from the HSA was done improperly.  After the due date of your 2019 tax return, including extensions, the excess must be corrected by an ordinary distribution made taxable by not applying it to any medical expenses and reported on a code-1 Form 1099-SA, not code-2.  The HSA custodian should have recognized that because you made no contribution for 2020, there was no amount that was permissible in 2021 to be distributed as a return of excess contribution.

I would try contacting the HSA custodian to get them to issue a corrected Form 1099-SA showing code 1 instead of code 2 since they made an error by allowing this to be reported with code 2.  Absent that, you'll need to enter it into TurboTax with code 1 instead of code 2, then print and mail your tax return so that you can include an explanation statement describing why the code 2 is incorrect.

When entering the code-1 2021 Form 1099-SA, you must indicate that none of this amount was used for medical expenses so that TurboTax treats is as taxable and correctly reports it on Form 8889 line 16 and on Form 5329 Part VII Line 44.  If you were under age 65 at the time of this distribution, you'll also have a 20% penalty on Form 8889 Line 17b.

[ruddydw]

Ok, that makes sense. With a code 1, Turbo Tax will then clear the excessive withholding and penalty, and then I am  processing the money as taxable income, again based upon age impact since I am over 65 at time of distribution in 2021.