Paying Penalty on HSA Excess Contribution and then later withdrawing the Excess Contribution.

[sidbee]

If i file my taxes right now in such a way where i don't agree to withdraw the excess HSA employer contribution and pay the tax on my excess contribution ($980) and the 6% penalty on that 980$ . Then later suppose on April 5 , I change my mind and able to get that excess contribution back from the bank. Then can i declare that refund of excess contribution in 2017 return ?  as I don't want to go through the hassle of filing the amended return for  just $59.

[MiriamF]

Yes, you may file your 2016 return without withdrawing the excess HSA contribution for 2016.

To avoid the 6% penalty, though, you would need to amend your 2016 return, since that is the year to which the penalty applies.

If you file your 2016 tax return without indicating that you withdrew the excess HSA contribution, then you will be able to withdraw it in future years, but you must pay a 6% penalty on the excess contribution plus earnings, in addition to income and payroll taxes on that amount.

More information about HSA contributions and distributions can be found in IRS Publication 969, Health Savings Accounts.

[sidbee]

I am OK to pay 6% Penalty the First year  , I am planning to  file my 2016 Taxes by 18th April  . Can i get the excess withdrawn after that . I dont have much money in my HSA , and plan to use all that money for medical expenses in 2017 and then close the account ( would have no HSA after that). Want to Withdraw only if i cant finish that money . Can i do this? I dont want to file Amended Tax return the 2016 Year.

[MiriamF]

If it's okay with you to pay the penalty, then you can withdraw it later. You will still be taxed on the excess contribution, though, even if you use it for qualified medical expenses.

[sidbee]

You mean I would be taxed again in 2017 or now in 2016 .

[sidbee]

I understand there will penality in 2017 , if i don't have 0 balance by end of 2017. As I am paying tax on the access contribution this year , would I have to include qualified medical expenses of the excess contribution? again in 2017 income ?

[MiriamF]

No, if you are already paying the tax on the excess distribution for 2016, you won't have to pay it again. Just the penalty, plus income tax on additional earnings attributable to the excess. If I understand Publication 969 correctly, you will not have to report qualified medical expenses for the excess when you withdraw it, only for the qualified contributions.

[sidbee]

Thanks a lot. Never going to do an HSA again. As per my understanding there would be no income tax on the excess earnings next year . That's why they have 6% penality . I  may be wrong and don't want to worry about next year today.