I retired in August 2024 and have excess ($3100) contributions to my HSA. I elected to have the administrator return the excess to me. How does this affect my 2024 taxes?

[bquizzer01]

I had a HDHP until retirement, but did not know the max contribution needed to prorated; hence the excess. TurboTax told me I have the excess. The $ was returned to me and I told TurboTax what I was doing. In addition to the effect on 2024 taxes, what will that do with 2025 taxes? Am I able to invest the excess contribution or deposit in a savings account?

[BillM223]

So TurboTax told you that you had $3,100 in excess contributions, and you withdrew that amount by telling the HSA administrator that you wanted to "withdraw excess HSA contribution's, right?

If so, this is what is going to happen in 2025.

Nothing.

Well, not exactly but close enough.

The $3,100 is yours, to do whatever you want with it. Have fun with it.

As you probably know, just because you can no longer contribute to your HSA, doesn't mean that your HSA goes away. Instead, you can continue to take money out of the HSA to pay for qualified medical expenses, until the HSA is exhausted.

And if you are 65+, you can take money out of the HSA for any reason at all with no penalty - you just have to pay income tax on the distribution. At this point, the HSA becomes like a funny IRA.

Note that in any year in which you take distributions out of the HSA, you have to add form 8889 to your return. You do this by going through the HSA interview. You will tell TurboTax that you have an HSA (true), don't have HDHP coverage (also true), and have to dance around an issue in the Federal Review, when TurboTax becomes confused about why you have an HSA but don't have HDHP coverage.

In the Review, TurboTax will ask you to enter Self-only or Family on Line 1 of the 8889 for whichever HDHP coverage you had. Of course, at this point you have neither but TurboTax won't let you continue until you choose one or the other.

In this case, choose Self-only. Since you indicated that you have no HDHP coverage elsewhere, the numbers on the rest of the 8889 are correct - you are doing this just to get around this roadblock in the Review so you can e-file.

And once you exhaust the funds in your HSA, you no longer have to report it or add the 8889.

Enjoy the $3,100.

[bquizzer01]

So if I use the entire excess for medical expenses, I won't have to pay taxes on that distribution?

I should get the notice from the HSA administrator showing the distribution.

Thank you.

[BillM223 · Accepted solution]

"So if I use the entire excess for medical expenses, I won't have to pay taxes on that distribution?"

No, that isn't what I said. I assume that the HSA contributions were made through your employer (either by your employer or by you through payroll deduction). 

If so, when your W-2 was printed, the code W amount (HSA contributions) was removed from Wages in boxes 1, 3, and 5. This means that the HSA contributions were not in your income and therefore not taxed.

However, excess HSA contributions are not allowed this privileged treatment; hence, they are added back to income to be taxed.

You asked if you spent the excess contributions withdrawn by you on qualified medical expenses, would these expenses render the withdrawn excess tax-free? The answer is No. You can certainly spend the excess any way you like - even on medical expenses - but you will still have to pay tax on the excess, because they were removed from Wages in the first place.

Of course, medical expenses not reimbursed by your HSA can still be placed on Schedule A as medical expenses.

And, yes, you should receive at some point a form 1099-SA from the HSA administrator reporting on the amount of the excess that was withdrawn as well as the earnings on the excess while it was in your HSA. This is why it is important to tell the HSA custodian that you are withdrawing "excess contributions" so that the custodian will know to calculate the earnings (regrettably not all do).

Note that you will not put this form on your 2024 return (now), but enter it into your 2025 return in early 2026.