California form 3805 P. Why does the form charge me a 2.5% penalty tax for early distribution when I'm in my 60's?

[dlkurelowech9]

I did a IRA to HSA one time exchange per the IRS rules. Turbo tax has entered a 3805 P form into my California taxes and has indicated an early distribution of just the amount I exchanged. The rules say an early distribution is taken before 59 1/2 years old. If I'm in my 60's, why am I seeing a penalty?

[MonikaK1]

California does not conform to federal legislation that enacted Health Savings Accounts (HSAs) beginning January 1, 2004. Therefore, California treats HSAs as another type of investment account, so you may have had taxable HSA income for California this year. This may be what you are seeing on your California return.

See here for information from California on tax-favored plans.

See here for instructions to California Schedule CA which itemized the differences in Federal and State treatment of income and deductions. You can preview your return before filing to find out how your taxes were calculated. See here for details. 

See this thread and this one for further discussion of this issue. 

There have been bills introduced in the California legislature to change the treatment of HSAs, so this may change in the future.

[dlkurelowech9]

I understand that California taxes HSA contributions. They don't want to help with medical expenses. The problem is, I'm being charged an early withdrawal penalty of 2.5% in addition to the standard income tax. I was in my early 60's when I performed this transaction.  The FTB codes, IRC section 72 reads that this distribution would be subject to an early withdrawal penalty if done before age 59.5 years of age. I have talked to a representative of CA FTB and they say talk to turbo-tax because they agree it is wrong. Is there a way to correct Turbo-tax?

[BillM223]

Please clarify:

1. Did you receive a 1099-R for this IRA to HSA rollover?

2. If yes for #1, what was the distribution code in box 7 of the 1099-R?

3. I understand that line 4 on the 3805P is the 2.5% penalty...what are the numeric values in line 1, 2, and 3?

[dlkurelowech9]

To the second response, yes I received a 1099-R form which combined all my IRA distributions. The HSA transfer was indicated as a IRA distribution. Then it was listed as being a contribution ( for the one time IRA to HSA transfer). Box 7 was listed as a 7, normal distribution. Turbo tax put in line one the value of the HSA contribution only, Line two has a zero, line 3 has the same as line 1 (Turbotax input),  line 4 is what I am paying in early withdrawal penalties. Funny thing is that only the HSA portion of my distribution is listed as an early distribution, the other amount I lived off of was not. So, why am I being penalized when I am in my 60's?

[dlkurelowech9]

Following up on the second reply, I did 8889 form for federal in Turbo tax. Turbo tax entered the distribution amount in lines 3,5,6,8,10, and 11. All the other lines had a zero. Line 3 of form 8889 has me a little confused. Turbo tax has indicated my HSA distribution here. Was this incorrect? I do not understand why Turbotax filled out form 3805P? Since all my IRA distributions where combined in my 1099-r which lumped my HSA together with everything, why did turbotax isolate just the HSA contribution as an early withdrawal?

[BillM223 · Accepted solution]

Let's review what you entered into TurboTax in the 1099-R interview:

1. On the screen "What did you do with the Money from [name of 1099-R]?", did you check 

* [name] moved the money to another retirement account

* [name] did something else with it

2. If you chose the first bullet above, two more lines should have opened:

* [name] rolled over all of this money to another traditional IRA or other retirement account

* [name] did a combination of rolling over, converting, or cashing out the money

3. If you chose the second bullet above, three more lines should be opened:

* Amount rolled over to another retirement account _________

* Amount converted to a Roth IRA account ___________

* NOTE: We'll assume everything that wasn't rolled over or converted was cashed out or wound up somewhere other then a retirement account.

I am assuming that you checked bullet #1 on screen #1, and bullet #2 on screen #2.

On screen #3, how much did you enter on bullet #1? What was the entire amount of the 1099-R distribution? 

[dlkurelowech9 · Accepted solution]

I went back to the way I entered my 1099-R form in federal. I did not go with bullet #2 for screen #1 as I did originally. I am now seeing a much different set of selections. Since 75% of my 1099-R distribution was cash, I originally picked bullet #2. Following your suggestions, I chose bullet #1. I followed with your recommendations for the next bullets. Turbo tax is treating the portion I put into my HSA different, and I am getting more money back from both federal and state. The issue with California state taxes is I am still  getting a 3805P early distribution for the portion I rolled over from my IRA into the HSA, but California is giving me more money back in spite of the 3805P form early distribution penalty of 2.5%. The only question I have is: The money I rolled into the HSA came from an IRA established  years ago. The wording for some of these bullets are confusing.  The subject wording makes me feel that I contributed to an IRA and then that money went to the HSA, and everything happened in the same year? Are we getting a double credit for the conversion? Thanks for your help.

[dlkurelowech9]

I found out why I'm getting more money back. I made it look like I did an HSA rollover and contributed to an IRA. I deleted the IRA contribution and I'm back to normal except the California 2.5% penalty as before.

[jdxray]

I have the same issue. Please see my post from this year because this does not answer the question posed.

https://ttlc.intuit.com/community/taxes/discussion/ca-early-distribution-on-form-3805p-for-ira-to-hs...

Thanks

[BillM223]

Upon rereading the 3805P instructions, I would think that exception 12 is the closest to the situation you have, although I am glad that the 99 worked for you.

jdxray, may I assume that you have handled your issue to your satisfaction? Yes, I did the screenshots from the CD/download version of TurboTax, and the Online version seems to vary more than usual this year, but I was hoping that once you got into the right part of the ballpark, you could work it out, as it seems that you did.

See your other post here.

@jdxray 

[jdxray]

Thanks again for your help. Is there any way to report this to Intuit so they fix it? Prior years have had people report this issue in the forum. I contacted the CA FTB and they said that the form should not have been generated on my return and to contact the software maker (and that 12 was the right exception as you noted). But Inuit doesn't seem to offer that, and apparently does not comb the forum for experts (like you) who reply to questions and acknowledge bugs.