Excess HSA Contribution Problems Due to Medicare Enrollment-6 Month Rule

[Boomhauser]

Hello,

In April 2024 my wife filed an application for Social security benefits (she will be 70), which she supposed to receive in July 2024. Because of this, she was automatically and retroactively enrolled in Medicare part A. She is still working and has been contributing to her HSA account until the end of March 2024. We had no idea, that she should has stopped contributing to her HSA 6 months before applying for SS. We asked her HSA administrator to send her a check for excess contributions dating back to January 2024 thinking that the 6 month period would start in January.  A few days ago her application for SS benefits was approved by the Social Security Administration, but it shows that her Medicare Part A coverage started in October 2023 not in January 2024 as we originally thought (benefits start date July 2024).

My questions:

1. Does she have to file another excess contribution form for October-December 2023 period?

2. We already filed 2023 joint tax return, do we have to file an amended 2023 tax return or is there any other easier way to correct this issue?

3. Is her employer going to issue corrected W-2 forms for year 2023, since the amount in Box 12 code W would change?

4. Does she have to pay any excise tax or penalties?

5. If we have to file an amended tax return, do we have to file the state return also?

I don't believe that our state taxes will be affected by this change.

Thank you,

[dmertz · Accepted solution]

1.  To avoid a penalty and double taxation of the excess contribution for 2023, Yes, a return of the excess 2023 contribution must be obtained.

2.  Yes, the 2023 federal income tax return must be amended regardless of whether a return of excess 2023 contribution is obtained.

3.  No, the employer does not change the W-2 under these circumstances.

4.  Assuming that the filing of the 2023 tax return was timely, the deadline to obtain a return of the excess contribution made for 2023 is October 15, 2024, otherwise there will be an penalty on and double taxation of the excess amount.

5.  Generally, Yes, because the required addition of the excess amount to 2023 federal AGI will likely increase taxable state income.

[Boomhauser]

@dmertzThank you, so the HSA administrator is going to issue new 1099-SA or 5498 forms for 2023 tax year, and based on those forms we would have to file an amended 2023 return?

I'm thinking the only changes will be made to form 8889 and possibly 8880, am I right?

What would be the reason for the amended tax return?

Thanks,

[dmertz · Accepted solution]

No new or corrected forms will be issued for 2023.

When amending, in TurboTax you'll just revisit the HSA section, indicate Medicare coverage for October through December, then indicate that you'll remove the excess (which you will already have done by October 15, 2024).  You must also indicate at the top of the Form 1040-X that it is being "Filed pursuant to section 301.9100-2."  The excess will be added to income, so you'll owe the tax due to the increase in taxable income.  Line 9 of the 2023 Form 8889 will change to show the lower employer contribution, reduced by the amount of the excess that will be added as income.

Investment gains required to be distributed along with the excess will be taxable on your 2024 tax return.

[Boomhauser]

Thank you for your help, what a mess, I wish we knew all that before she applied for her SS benefits.

To be clear, my wife is still covered by the work group insurance until she retires in December 2024.

So, the excess contributions for October-December 2023 will be automatically done in turbo tax, right? I would just have to make adjustment when the HSA administrator sends her a check for the 2023 excess contributions?

If I understand correctly, if this was done manually, it would be reported on the Form  8889 Part 2 Line 16 as taxable contributions and then it would go to the Schedule 1 Line 8f and reported as Other Income?

How do I know how much investment gains I would have to report on our 2024 tax return, these are just cents amount, because this account is a bank account with very low interest, not an investment account. Why this is not reported on the 2023 1040-X form together with excess contributions?

Also, is the HSA administrator going to send any forms for all those 2024 excess contributions for January 2024-April 2024 period in early 2025?

Thank you,

[dmertz]

When you indicate to 2023 TurboTax in the HSA section that there was Medicare coverage for October through December, TurboTax will calculate the maximum permissible contribution based on only 9 months of qualifying coverage and will treat anything over that as an excess contribution that TurboTax will automatically add to 2023 taxable income.

HSA custodians should calculate the attributable earnings, but some decline to do so, require you to do the calculation and just distribute and report on Form 1099-SA (a code-2 2024 Form 1099-SA in this case which will likely combine the distributions for the two returns of excess contributions) the amount that you yourself determine to be the attributable earnings.  This would be done the same as was done for the return of the excess contributions made for 2024.  If the HSA custodian forces you to do the calculation, you should be able to determine the interest rate from the information on the monthly HSA statements and determine how much the October, November and December contributions earned.

The tax code requires that the attributable earnings be reported on the tax return for the year in which the earnings were distributed.  As I said above, in this case the form will be expected to combine the two returns of excess contribution on a single 2024 Form 1099-SA to be reported on your 2024 tax return.

[Boomhauser]

Thanks again, it looks like a huge headache for us now. I don't understand why they backdate Medicare coverage retroactively for six months. Last question, what would happen if we decided not to file the 2023 amended tax return. Is the IRS going to send us an adjustment and bill to pay, are they going to ask us to file an amended tax return? Her monthly HSA contributions were small, about $300 a month. so for three months in 2023 it was total about $900.

Thanks,

[dmertz]

The IRS won't correct this for you.  You must amend the 2023 tax return.

[Boomhauser]

@dmertzI was told today by HSA custodians that they are going to issue a new 1099 SA form with code 2 for 2023 after I file an Excess Contribution and Deposit Correction Request Form for contributions made in October, November and December 2023, is this correct? First, they were hesitant to correct 2023 contributions but I told them that we had to file an amended 2023 return so they agreed to correct those 2023 contributions and send a new 1099 form.

What would be the easiest way to deal with this problem in TT after we receive a new 2023 1099 SA form?

Can we start an amended 2023 return and just change the 8889 and 1099sa forms? Also, how to indicate that my wife was covered from October to December by Medicare and she was also covered by her employers high deductible family insurance, I don't think this is possible in TT. She is still covered by her employer's insurance until the end of 2024 when she retires. Thanks,

[dmertz]

When amending in TurboTax you'll revisit the HSA contribution section, indicate that you were covered by Medicare for October, November and December, then, when TurboTax indicates that you made an excess contribution, indicate that you will have the excess returned.  TurboTax will prepare Form 8889 with the correction to the contribution amount and Form 1040-X showing an increase in taxable income equal to the amount of the excess.  At the top of the Form 1040-X you'll need to write "Filed Pursuant to section 301.9100-2."

The code-2 2024 Form 1099-SA showing the amount of attributable taxable gains that accompany the distribution of the excess will be reportable on your 2024 tax return, not on your 2023 tax return.

[Boomhauser]

@dmertzThank you for your help and patience.

1. I just want to ask how TT will calculate her excess contributions because that amount can be different than the actual amount contributed by her. She contributed to her HSA in 2023 through her employer total $4,000 which included $1,000 extra contribution, contributed by her employer in January 2023. When we calculated excess contributions with her custodian the amount for October, November and December 2023 came up to $692.28 plus $0.20 earnings on her contribution, so as you can see they omitted the $1000 contributed by her employer in January because it was made in the first quarter of 2023. Is this going to be a problem or maybe $250 should be included in that calculation? When they sent her a check for he 2024 contribution ( from January to April 2024) they included that $1,000 bonus contribution because she had to remove all 2024 contributions.

2. So, she doesn't have to wait for any corrected 2023 1099sa  or 5498sa forms?

I hope my questions makes sens. Thank you,

[dmertz]

I'll assume that you yourself do not have family HDHP coverage and do not make HSA contributions.  Her maximum contribution for 9 months of eligibility over age 55 with self-only coverage is 9/12 of $4,850 = $3,637.50.  If $4,000 was the total amount contributed for 2023, the excess would be $362.50, the amount beyond $3,637.50.  The only way that I can imagine that $692.28 would be the correct amount of the excess is if my assumption about you not making HSA contributions yourself with family HDHP coverage is incorrect.

[Boomhauser]

This is a family HDHP coverage but she only makes contributions, I do not have a separate HSA account or insurance. Line 3 on our 2023 form 8889 is $7,750 and line 11 is $4,000. Her excess contributions for October, November, December 2023 due to medicare enrollment in April 2024 (6 month rule) were $692.28 plus earnings $0.20, according to her HSA custodian calculations (her actual contributions for those months). Her employer contributed extra $1,000 in January 2023 for total contributions of $4,000 in 2023. I hope it makes sense.

[dmertz]

For 9 months of eligibility, her maximum contribution is $6,562,50.  I don't see how there is any excess contribution if the total contributions for 2023 were only $4,000.

[Boomhauser]

Do those numbers even matter?  She contributed in October-November-December 2023 because she didn't know about this 6 month retroactive rule. Now we know she not supposed to make those contributions even if they're within the limit. Her medicare coverage according to the SS administration started in October 2023 (she filed her SS application in April 2024). I was told that she wasn't allowed to make any contributions to her Health Savings Account (HSA) once Medicare Part A (Hospital Insurance) or Part B (Medical Insurance) become effective (October 2023). These would be considered excess contributions. This rule applies to periods of retroactive Medicare coverage. Now, I'm really confused, do we have to file an amended 2023 return or not, even if her contributions for 9 months are less than allowable limit? We already requested those contributions for October, November and December 2023 to be refunded and her HSA custodian said these are considered excess contributions. I want to add, that she is older than 65.   @dmertz