HSA excess contributation, amount to allocate is less that the excess why

[Majesty82]

My husband and I didn't realize that we could only contribute the total Family amount to our HSA in 2021 and 2022. We Contributed 2800 excess in 2021 and didn't withdraw it and took the penality tax 6%. For 2022 we still didnt fully understand the limit to see had an additional 2785. We also now realize the 2800 from 2021 was applied to our 2022 limit so we had a total excess of  5585  from 2021 and 2022. In 2022 I contributed  3485 and my husband contributed 6600 which put us over the 7300 limit by 2785, then the 2800 excess from 2021. . We are filling out a form with our HSA to withdraw the 2785 for 2022. We have also stopped contributions in 2023 to limit the remained excess and possibly eliminate it by 2023. 

On the page Who made the excess HSA contribution?

it says "You contributed $5,585 more to your HSAs than you were allowed. From this amount, you may allocate $4,885 of excess contribution between you. Who should we treat as having made the excess contribution of $4,885?" We split this number evenly between the my husband and I. 

Were does the 4885 come from? it's $700 less than the excess.  i can't figure out how they determined 4885. Last year we split the 2800  excess evenly so both had 1400 in excess contributation in 5329 form. 

Later in the process it says i can withdraw 1043 which makes sense 2443(excess from 2022 for me) - 1400 (excess from 2021 for me). my husband can withdraw 700 more. 1742 which is the remained of our total excess 5885 - 2800 (from 2021 which we can't withdraw) and my excess of 1043. Just not sure why they automatically detmined he gets the additional 700 to width draw. 

[BillM223 · Accepted solution]

Ready? Take a deep breath...

You had $1,400 in excess for each of you rollover from 2021 (total of $2,800). (remember that you split this evenly)

There are various theories on how this affects the next year (2022) - the IRS is not very clear on this - but what TurboTax does is take the carryover (the $1,400 for one taxpayer) and place it as a phantom number on line 2 on the 8889-T. Yes, TurboTax is changing this for the primary taxpayer (your husband?). It's got to start somewhere.

Line 2, as you may know, is the "personal" contribution to the HSA. By "personal" we normally mean a direct contribution made to the HSA that was not through the employer. So, in essence, the "employer" contribution (not by the employer but through the employer) is converted to a personal contribution so that this contribution can be used up in 2022 (the only way to do it, because you can't change your W-2 to suit).

So on your 8889-S (in the example below), your $1,400 has become a personal contribution and TurboTax is going to try to "use it up" in 2022.

Now TurboTax needs to address the phantom personal contribution of $1,400.

Now, this brings us a problem. TurboTax occasionally like to hang on to numbers. HSA excesses that are withdrawn are one of them. That means that the next time you go through the HSA interview, this number is still there and is added to whatever you do on this pass. You might notice this as you go through the HSA interview again and notice that the HSA Summary has changed. The amount on line 8f of Schedule 1 (1040) keeps getting bigger.

To fix this on your part is a certain amount of work, so let me tell you what you are aiming for first.

I am entering a W-2 for your spouse that has $6,600 for the code W amount in Box 12. Next I enter a W-2 for you that has a code W value of $3,485. (as a reminder to myself, I added $1,400 in excess carryover from 2021 for each of you on the Carryover Worksheet for which you need to have the CD/download software). 

Now I go to the HSA interview. I indicated that your husband has Family coverage and you have Self-only.

"Who made the excess HSA contribution?" You (plural) made an excess contribution of $5,585. Of this you can allocate $4,885 of the excess between you. Who made the excess of $4,885? You, your spouse, or both?

By this point, there is a $700 difference because there is an intermediate calculation that cuts the $1,400 in half (but that will disappear soon).

Now let's allocate all the 2022 excess to your husband. The next screen should show $1,400 of excess for each of you from 2021.

Now it says that Blank has an excess of $5,885, and he is going to withdraw the entire amount by April 18, 2023. Oops, you can't withdraw more than $4,185 because of the $2,800  from 2021. So now your husband knows how much to ask from his HSA custodian.

Next you are asked what the value of your HSAs are on December 31, 2022. This is to calculate the penalty for the carryover - it's 6% of the smaller of the carryover or the values in your HSA at the end of the year.

So the final result - for this pass - is that line 13 of Schedule 1 (1040) will be $1,400, so $1,400 of the $2,800 from 2021 is now used up (forget the $700 above - as I said, all the pieces are moving). And the $4,185 that was withdrawn will appear on line 8f (1040). So all this means that you need to "use up" only $1,400 in 2023 - that it, reduce your HSA contributions by this amount or act like your annual HSA contribution limit is $1,400 less than you think it is.

And I have told you all this because every time you run through the HSA interview, this numbers are likely to change (print off the 8889s to see).

So how do you start fresh each time? You do what I call an HSA reset:

***HSA Reset***

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop***

3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one) 

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview. 

[Majesty82]

Thanks for the explanation. After running the numbers few times last night before I got your reply, Ilk,mmmmmm also conluded the best way to dispurse the excess was to put it toward my huband and be able to withdraw 4185.