HSA Excess contribution for 2021 AND 2022

[JcT5]

Hi!

I was very careless and totally missed the pro rate rule on HSA contribution limit and want to see if I can fix this.

My current situation:

2021 December: contributed $3600 thinking that I would stay with this job for few years.

2022 July: becomes part time and miss out on med insurance. No more HDHP. Front loaded HSA to $3650.

I understand I failed the testing period for the year 2021, and as a result, ended up over contributing 

2021: $3300

2022: $1823

I was hoping that I would just amend 2021 tax return to have form 5329 and withdraw $5123 but turbotax says I cannot withdraw 2021's excess contribution.

At this point, what is the best way to approach this?

Withdraw $1823 and take non-qualified withdrawal of excess amount for 2021 ($3300)? How do I report this on the tax return?

Thank you so much for your help.

[dmertz]

You have no excess contribution for 2021.  Because you did not complete the testing period for contributing under the last-month rule, you are simply subject to a 10% penalty for the months that you would not have been eligible to contribute for 2021 if it were not for the last-month rule.  Apparently you were only an eligible individual for December 2021, meaning that you owe a 10%, $330 extra tax on the $3,300 contributed for January through November.  Nothing can be done to change that.

Because you were only an eligible individual for the first six months of 2022, you have made an excess contribution of $1,825 for 2022.  You must contact the HSA administrator to obtain a return of the $1,825.  the will calculate the investment gain or loss attributable to the $1,825 and distribute to you the adjusted amount.  If there is a gain, the gain will be taxable on your 2023 tax return when you receive the code-2 2023 Form 1099-SA.

[JcT5]

Thank you so much for your reply. 

And just to confirm, I get $1825 back from 2022 HSA contribution. I would leave the entire $3600 (from 2021) in my account and leave it to grow tax free but pay the income tax + 10% additonal tax on it now.

Am I understanding this correctly?

My next question would be,

how do I file this using turbotax? I have a mac download version.

It does let me check the months I had HDHP in 2022 and gave me an excess contribution amount (which I requested my HSA servicer to distribute). However, I am not so sure about how I would report $3300 from 2021 as my income and pay 10% additional tax.

Thank you so much for your help.

[dmertz]

"I get $1825 back from 2022 HSA contribution."

Not quite.  You get back a gain/loss adjusted amount that accomplishes a return of the $1,825 excess contribution for 2022.  Only if there was no investment gain or loss attributable to the $1,825 of contributions being returned would the distribution equal $1,825.

"I would leave the entire $3600 (from 2021) in my account and leave it to grow tax free but pay the income tax + 10% additional tax on it now."

Correct.  You are not permitted to request a return of the $3,300 contribution made for the first eleven months of 2021 when you were not an eligible individual and must pay the 10%,  $330, extra tax on the $3,300.

In 2022 TurboTax you'll enter the $3,650 contribution (either $3,650 with code W in box 12 of your W-2 if contributed through and properly reported by your employer or as a personal contribution) and indicate that you had qualifying coverage for only January through June.  TurboTax will tell you that you had a $1,825 excess contribution and you'll indicate that you had the other $1,825 of your contribution returned (no matter the amount of the gain/loss adjusted amount of the distribution).  Finally, assuming that you used 2021 TurboTax to prepare your 2021 tax return and transferred that tax file into 2022 TurboTax to begin your 2022 tax return, TurboTax will recognize that you did not complete the testing period for using the last-month rule and will complete Form 8889 Part III to calculate the 10%, $330 additional tax on the $3,300.  If you did not transfer in a 2021 TurboTax tax file, TurboTax will ask about your coverage in 2021 to be able to complete Part III.

In 2024 you'll get a code-2 2023 Form 1099-SA to enter into 2023 TurboTax.

[JcT5]

Thank you so much for your detailed explanation!

I am looking at the form 8889 part III on turbotax.

Line 18 originally had "0" but didn't seem to add up so I manually input 3300 (excess from 2021 due to failing testing period). Is this ok?

And my Schedule 1 Line 8f comes out to be $5125 (which seems right since $3300 and $1825). $330 (10% additional tax) is shown on Schedule 2 Line 17d.

[dmertz]

What you've posted is correct.  I forgot to mention that the $3,300 is also includible in income in addition to being subject to the 10% extra tax.  Including it in income accounts for the fact that it was excluded from income on your 2021 tax return.