Previous year HSA excess contribution withdrawal

[Peter23]

In 2018 I over-contributed to my HSA by $130. Paid the 6% tax in order to take care of it in 2019.

In 2019 I over-contributed to my HSA by $10  

In Jan 2020 I completed "2019 Excess Contrib Withdrawal" with my HSA admin for $140 + earnings (already got the money back).

However, now Turbotax prevents me from entering more than $10 in "I will withdraw before April 15", and say "unfortunately prior year excess will be taxed with 20% penalty with you withdraw" without explaining how to do it. I believe I fixed my over-contributions with my HSA admin, but TurboTax prevents me for entering the information.  

[dmertz]

The deadline for removing the $130 excess contribution by return of excess contribution before the due date of the tax return was October 15, 2019.  Only the $10 excess contribution for 2019 was permitted to be returned in January 2020.  Although impermissible because it was more than your $10 excess for 2019, the HSA custodian thought it was making a return of $140 of your 2019 contribution.

Consequently, the HSA custodian issued a Form 1099-SA that does not match the reporting requirements.  The actual amount of the total distributed that is reportable as return of excess contribution for 2019 is $10, with the earnings being a proportionate amount indicated by the proportion of earnings indicated on the Form 1099-SA that you received.  In other words, the code 2 2019 Form 1099-SA should have had an dollar amounts for box 1 and box 2 equal to 10/140 = 7.143% of the amounts actually shown.  The remainder of the gross distribution should have been reported on a separate code 1 2019 Form 1099-SA with $0 of earnings.  To resolve the excess $130 contribution made for 2018, this code 1 Form 1099-SA needs to be reported as not used for medical expenses, subject to tax and early-distribution penalty.

You might try to get the HSA custodian to issue a corrected code 2 Form 1099-SA and a separate code 1 Form 1099-SA (or, if you made other regular distributions in 2019, correct the code 1 Form 1099-SA already issued.  However, HSA custodians are generally reluctant to do this, so you may need to just enter into TurboTax the Forms 1099-SA as they should have been prepared and mail your tax return along with a separate explanation statement to indicate why you are disagreeing with the way HSA custodian reported this distribution.

[Peter23]

Thank you very much dmertz for you quick valuable feedback. May I ask a follow up question?

I do not mind the 20% penalty especially if it helps me solve my issue. You said "To resolve the excess $130 contribution made for 2018, this code 1 Form 1099-SA needs to be reported as not used for medical expenses". I like your idea because I have a code-1 1099-SA (for medical expenses), so I could report a $130 portion of it as not medical. When I enter in TurboTax 'some of the distribution is not medical', TurboTax adds the 20% penalty (good), but does not reduce my 2018 over-contribution and still tells me to fix it. Do you know how can TurboTax associate a 2019 non-medical distribution to the 2018 over-contribution?

When removing same year over-contribution we have to remove earnings as well, but is it different for previous year over-contribution? 

When removing a 2019 over-contrib in 2020 before April 15. Does the HSA custodian send a 2019-1099, or a 2020-1099? Or do they send nothing?

Thank you

[dmertz]

Are you sure that Form 5329 is showing nonzero amounts on lines 48 and 49?  If you indicated that $130 of your code 1 distribution was not used for medical expenses, that amount should be present on Form 5329 line 44.  This is automatic in TurboTax.

Removing the earnings on the $130 and paying the 6% excess contribution penalty on the $130 are mutually exclusive.  Only the $10 distributed before the due date of your 2019 tax return needs to have had attributable earning included.  The "extra" earnings distributed are technically a regular distribution, not related to the distributions of the excesses.  If

The excess contribution for 2019 returned in 2020 would be reported on a code 2 2020 Form 1099-SA, not a 2019 Form 1099-SA; I failed to consider that correctly in my previous response when I was describing the form reporting the return of excess contribution.  I think I was under the impression that the return of excess contribution occurred in January 2019 instead of in 2020.  If the IRS ever digs into it, which is unlikely, that could detect a discrepancy between the amounts reported on your 2018, 2019 and 2020 Forms 5498, your 2019 tax return and the amounts on the code 2 2020 Form 1099-SA, demonstrating that you obtained a return of contribution of more than your actual excess.  I've never heard of the IRS catching this, but IRS guidance does indicate that the amount distributed beyond the amount of the excess and the attributable earnings is to be treated as a regular distribution.

[dmertz]

I've added to my previous reply.

[Peter23]

I heard back from my HSA custodian regarding my excess contribution for 2019 returned in 2020. Like you said, they confirmed I would not get the related 1099 form until next year (2020 form). However, they mentioned it would be a 1099-R, not 1099-SA code 2 as you describe. As you say, I hope and don't think the IRS would cause problem for the amount distributed being larger than the amount of the excess, especially for such a small amount of $130 discrepancy, and especially if I pay tax on it for year 2020.

I did not get the chance yet to see in TurboTax the outcome for entering a $130 portion of my 2019 code-1 1099-SA in order to fix my 2018 $130 over-contribution. 

I will update you when/if I solve this. 

Thank you again @dmertz for your very valuable feedback. 

[BillM223]

"However, they mentioned it would be a 1099-R, not 1099-SA code 2 as you describe. "

The HSA custodian told you incorrectly. Distributions from HSAs are reported on the 1099-SA, as dmertz said. 

No doubt, when you see it, it will be on the 1099-SA, despite what they told you.

[Peter23]

Thank you @BillM223 and @dmertz.

Your guidance regarding the 1099-SA code-2 that I will receive for year 2020 makes me think of another strategy:

Instead of removing now my 2018 over-contribution of $130, I could keep it in my HSA account, pay the 6% tax (for 2019) and address this issue on my 2020 return. 

However, will TurboTax allow me in 2020 to match the $130 1099-SA code-2 that I will receive to the 2018 $130 excess contribution? 

And if not, how will TurboTax process the $130 (+earnings) 1099-SA code-2 that will not match my excess contribution return reported on my 2019 tax return? 

Another way to ask the same question, will the 1099-SA code-2 that I will receive next year make it easier to fix my 2018 over-contribution then, or should I take care of it now?

[BillM223]

Are you talking about taking a distribution of $130 and saying that it is not for qualified medical expenses, in order to clear your $130 excess contribution from 2018?

I have not been keeping up with this discussion, but the way that the 5329 Part VII works is that if you show excess contributions that are carried over AND you show the same amount as a distribution not for medical expenses, then the form zeroes out the excess, but not until it adds the $130 to Other Income and penalizes you 20%. But, at least, the excess will be done with.

You don't have to worry about matching 1099-SAs to the year.

[Peter23 · Accepted solution]

I was able to solve my 2018 (previous year) excess contribution of $130: 

Out of my 2019 1099-SA code-1, I said that $130 of the total is not for medical expense. 

- I verified form 8889 line 16 = 130  (taxable distribution)

- form 8889 line 17b = 26   (20% penalty)

- form 5329 line 42 = 130   (2018 excess contribution)

- form 5329 line 44 = 130  (taxable HSA distrib from form 8889 line 16)

- form 5329 line 46 = 0  (prior year excess contribution is now zero)    i.e. Problem Solved! 

I was initially confused by the TurboTax statement, but after checking the actual forms form TurboTax 'print center', as recommended by @dmertz , it made sense to me. The confusion is with TurboTax saying:

   - Prior year excess contributions $130      (my 2018 excess contribution)

   - Excess employer and payroll contributions $10    (my 2019 excess contribution)

   - Amount withdrawn by April 15, 2020 $10.

   - We'll remove these amounts from your return. The remaining amount will be taxed the extra 6%.

This last statement is what was confusing to me. After checking the tax forms in 'print center', I was able to confirm that there is no remaining amount taxed at the extra 6%. But the way it is presented, it make it sound $130 remained to be taxed at 6%.

TurboTax should add a line confirming the prior year excess contribution is taken care of by the taxable distribution (it did not mention anything), and should calculate the "remaining amount taxed at 6%", in this case zero, but was not obvious the way it is presented by TurboTax.

[T10]

Explain excess withdrawal from 2020 or previous year?  Not aware of this happening.  How to bypass so I can finish return.

[Peter23]

Not sure I understand your question.

Did you contribute in excess? If yes, which year? 
Did you already remove your excess contribution? 

[BillM223]

T10: Please rephrase your questions from scratch, since we do not understand what you are asking.

@T10