HSA penalty avoidance.

[divliv]

I have decided to continue working into 2020 in order to cover my wife (who has worked at the same company, and is not yet Medicare age) through the group HDHP plan. There are now no other coverage options offered. The company makes a beginning of the year contribution to an HSA in my name (I already have an HSA but stopped contributions this year), of $1100 to help with the deductible. I have already filed for Medicare A & B. I am told there is no other option for payment of the $1100 (such as FSA, even though I could contribute to an FSA they can't direct the $1100 to the FSA). 

1. What penalty will I incur? Further, how is the penalty calculated?

2. Is there any known way of avoiding the penalty?

[dmertz · Accepted solution]

Since you are ineligible for HSA contributions, the company should not be making any contribution to your HSA.  You must inform your employer that you are ineligible for HSA contributions.  Since your wife is eligible for an HSA contribution, the employer can make contributions to your wife's HSA, but not you your HSA.

If money (other than a rollover) is deposited to the HSA of an individual who is ineligible for an HSA contribution, the contribution is an excess contribution subject to a 6% excess contribution penalty on the excess each year that the excess remains in the account.  To avoid any penalties, the excess can be removed by explicitly asking the HSA custodian to make a return of excess contribution prior to the due date of the tax return for the year for which the contribution was made.  Since an employer contribution would have been excluded from your wages in box 1 of your W-2, the excess returned will be added to your taxable income for the year of the contribution.  To resolve the excess after the due date of your tax return you would have to make a taxable distribution from the HSA, resulting in double taxation of this money.

[divliv]

Sadly the company says there is no other option than the HSA to route the $1100 than to put it in my HSA. 

It sounds like from your answer, however, that I could receive it and reverse it in the same tax year as received . If that is so I would like to find out the steps to accomplish this. 

I would like to get specific advice on this issue. If you know how I can achieve this through my TurboTax membership I would appreciate finding out how to do this.

I also think I have to reverse some contributions from this year because of the backdating of my Medicare Part A enrollment.

Thank you for your previous answer.

[dmertz]

I don't know why the company would indicate that there is no option to deposit the money into an employee's spouse's HSA (assuming that is willing to make the contribution under these circumstances at all) unless the employer simply has not implemented a procedure to do so.  It is perfectly acceptable under the law, is not particularly uncommon and TurboTax has specific provisions reporting a code W amount on one spouse's W-2 as having been deposited into the other spouse's HSA.

HSA contributions on behalf of an eligible individual, your spouse in this case, can be made by anyone.  If the employer will make an HSA contribution, but only to your HSA despite you being ineligible, let them make the contribution, obtain a return of excess contribution, then make an HSA contribution on behalf of your spouse to your spouse's HSA.  The result will be the same as if the employer had made the deposit to your spouse's HSA (except for the taxation of any gain required to be distributed with the return of excess contribution).  In this case you would tell TurboTax when entering your W-2 that the entire amount was deposited into your HSA, that you obtained a return of excess contribution of this amount, and that you made a personal contribution of this amount to your spouse's HSA.  The result would be that the excess amount would not be included in income on your Form 8889, would be included (along with any attributable gains) in income on line 21 of Schedule 1, would be included as a personal HSA contribution on your spouse's Form 8889 and would appear as a deduction on line 25 of Schedule 1 (essentially offsetting the amount on line 21).