In 2019, I had an excess HSA contribution in the amount of $X. I did not withdraw this distribution prior to filing my 2019 taxes, so I paid the 6% excise tax. I am now trying to correct my error by requesting a distribution of excess HSA contributions from my HSA provider.
a) I am told that I can request to withdraw $X for 2019, even though the 2019 tax year has passed. If I go this route, then how do I report this in turbotax? When asked to enter the amount from line 48 of my 2019 From 5329, which is the excess contribution from 2019, if put $X, then turbotax does not understand that I corrected things and still shows a 6% excise tax. Should I put $0 here then? I was informed by my HSA provider that the type 2 1099-SA will not be produced until after the tax deadline is over.
b) I was told that I am unable to correct for the 2019 excess contribution since 2019 tax season has passed. If this is the case, I can correct for the same amount, $X, in my 2020 HSA account. I have already maxed out my 2020 HSA account, so in order to roll over my excess 2019 contributions to count in 2020, I will have to withdraw $X from 2020. Again, how do I report this in turbotax? When asked to enter the amount from line 48 of my 2019 From 5329, which is the excess contribution from 2019, should I put $0, or $X? My W2 currently shows the max contribution was reached in 2020, so I don't know how turbo tax will recognize that the 2019 excess contribution is counting towards 2020. I was informed by my HSA provider that the type 2 1099-SA will not be produced until after the tax deadline is over.
c) Can I correct my excess contribution for 2019 by requesting to withdraw $X for 2019 from my HSA provider, even though the 2019 tax year has passed (i.e. option a)? Or must I request to withdraw $X for 2020 (i.e. option b)?
This is somewhat complicated but I will try to explain the order in which things should be happening.
It’s too late to remove the excess 2019 contribution as a 2019 excess. What you can do is apply the 2019 excess toward your normal 2020 limit. Then, if you over contribute for 2020, you now have a 2020 excess. It works like this:
Suppose you had a family HDHP, so your 2019 limit was $7000, but you contributed $8000. You have a $1000 excess contribution, and since you did not remove it, you paid the 6% penalty and you paid income tax on the extra $1000 as part of your 2019 return. Now for 2020, that $1000 excess counts as your first 2020 contribution. Then, you contributed the full amount for 2020 which was $7100. That means your total 2020 contributions were $8100, which is another $1000 excess. If you remove that $1000 excess before May 17 as a “return of excess contribution“, you will avoid any additional penalties. That would make your actual 2020 contribution equal to $6100, but you include the 2019 excess as a 2020 contribution so on the tax forms, you end up showing a 2020 contribution of $7100 which is within the limit.
So you are technically removing an excess 2020 contribution, not the excess 2019 contribution. Does that make sense?
The 1099 form can’t be corrected, because you contributed whatever you contributed in 2020. But the return of excess will be reported on your eventual form 5498 and when the IRS puts all the paperwork and all the numbers together, it will make sense to them and they will see what you did and that you have avoided future penalties. When you withdraw the excess 2020 contribution, you must also withdraw the earnings on that contribution. The HSA bank knows this, and as long as you request them to process a return of excess, they will send you the earnings as well. The earnings will be reported as income on your 2021 tax return since they will have been paid you in the 2021 calendar year.
Thank you so much for your help! It sounds like I need to do option (b) then, which is to reduce my 2020 contributions (since I maxed out already) by the amount of excess in 2019 such that it rolls over to 2020. However, I still do not understand how I report this in turbotax. You mentioned that "the return of excess will be reported on your eventual form 5498 and when the IRS puts all the paperwork and all the numbers together, it will make sense to them and they will see what you did and that you have avoided future penalties." My understanding is that I shouldn't have a penalty for 2020 taxes if I withdraw the excess in 2019 from 2020. How do I help turbotax understand that I have done this? The only way I can think to do this is that when asked to enter the amount from line 48 of my 2019 From 5329, which is the excess contribution from 2019, I should put $0. If I don't put $0, then turbotax thinks the excess is still in my HSA for 2020 tax season and I get penalized with the 6% excise tax.
"I am told that I can request to withdraw $X for 2019, even though the 2019 tax year has passed. If I go this route, then how do I report this in turbotax?"
Be careful of your terminology. As you and Opus note above, you can no longer "withdraw the excess" for tax year 2019, so don't even use the phrase in conjunction with the tax year 2019 amount.
Instead, now you have two ways to fix the excess for 2019:
1. As Opus noted, your excess from 2019 rolls over (if you didn't withdraw it in time) to tax year 2020. If you do not reduce your regular 2020 HSA contributions, then this will cause an excess for tax year 2020. HOWEVER, this is not an excess that you can withdraw for 2020 - it is still the 2019 excess.
2. You request a distribution from your HSA for the amount of the excess in 2019. This will be sent to you on a 1099-SA (possibly on the same 1099-SA as your distributions for qualified medical expenses). When you enter it though, you indicate that some or all of it was not for qualified medical expenses.
For #1, you can try to wipe out the 2019 excess in 2021 by sharply reducing your HSA contributions. If you can't apply it all to 2021 (because you have already made too much in contributions), then roll over the remaining part to 2022, and be disciplined in your regular HSA contributions to use it up in 2022.
Note that if you try to withdraw what you think is the 2020 excess, TurboTax will catch you and tell you that while you have $X excess for 2020, $Y is from 2019 and cannot be withdrawn.
For #2, when you enter the 1099-SA and indicate some (or all) are not for qualified medical expenses, then the amount that was not for qualified medical expenses (presumably the original 2019 excess) will be added to Other Income by TurboTax, and TurboTax will add a 20% penalty. At this point, the 2019 excess will be finished.
Here is what my HSA provider said:
“In order to remove any contributions from a prior tax year, you should complete the Distribution of Excess HSA Contribution Form. You'll enter the tax year as 2019, and the total amount of excess contributions made to the tax year. Since you have already maxed your contributions for tax year 2020 and 2021, you could choose to have the funds distributed from your HSA to correct the excess contribution.”
The above sounds a lot like option 2 that you outlined. I would prefer to do option 1 since it avoids the 20% penalty. However, since my 2020 contributions have already been maxed, I would need to withdraw the excess contribution from 2020 in the amount of $X, where X is the excess contribution from 2019. Since my 2019 excess contribution automatically rolls over towards 2020, this would ensure that my HSA does not have excess contributions for 2020. However, I would still pay the 6% excise tax for the 2019 excess contribution. Why is this, if reducing my 2020 contributions such that X + 2020 contributions = the max contributions ($3550)?
Let’s say that I do what is outlined above and pay the 6% excise tax on the excess 2019 contributions when filing my 2020 taxes. Then, when I file my 2021 taxes, since 2020 will not have had an excess, will I officially have this cleaned up?
Additionally, they said:
“there is type 2 1099-SA produced for situations like this. They are produced after the tax deadline is over. While you will still want to file the accurate numbers, the forms will be sent you you and the IRS on your behalf.”
Does filing the accurate numbers mean I enter a 1099-SA into turbo tax as if I received it when filing my 2020 taxes, or do I wait until filing taxes for 2021 once I have the actual 1099-SA?
"The above sounds a lot like option 2 that you outlined."
Yes, it is.
"I would need to withdraw the excess contribution from 2020 in the amount of $X, where X is the excess contribution from 2019"
As I explained above, TurboTax will not let you do this. It's easy to think of the 2019 excess rolling over and causing an excess in 2020 which you could withdraw, but you can't. Even if TurboTax tells you that you have an excess in 2020 (I am assuming it is saying this), when you tell TurboTax how much you will withdraw, it will stop you from withdrawing the amount of the excess caused by 2019. Try it, you'll see.
"Why is this, if reducing my 2020 contributions such that X + 2020 contributions = the max contributions ($3550)?"
The law lets you withdraw excess contributions up until the due date of the return (as extended). If you just carried over the excess to the next year, then withdrew the excess the following year by that year's due date, that would defeat the clear intent of the law - this is why you can't withdraw 2019's excess in 2021.
"Then, when I file my 2021 taxes, since 2020 will not have had an excess, will I officially have this cleaned up?"
2020 will say it has an excess, but in fact, you did not over contribute in 2020, but in 2019. So, in a way, you are right that 2020 did not have per se an excess, but the 2019 excess is carrying forward.
So in 2021, when you sharply reduce your HSA contributions (probably to nearly zero), then, yes, the 2019 excess that has been carried over twice will be applied against the 2021 HSA contribution limit, and the carryover will be gone.
However, have you already been contributing in 2021? Or were you able to stop in time?
"there is type 2 1099-SA produced for situations like this. They are produced after the tax deadline is over."
There is only one type of 1099-SA; what they meant is that it would have a distribution code of "2". If I am following your situation correctly, I don't think you will be able to withdraw any excess for 2020, so you won't get a 1099-SA for option 2. And if all goes well, in 2021, you will be able to charge all of the 2019 excess off against the 2021 HSA contribution limit, which means that there won't be a an excess to withdraw in 2021 anyway.
And normally, when you withdraw the excess in a timely manner, you don't need a 1099-SA for the current year, because TurboTax automatically adds the amount of the excess (whether or not you withdraw it) to Other Income, and the following year when the 1099-SA is sent reporting the earnings on the excess, this is entered for that following year.
You normally don't get a corrected 1099-SA unless you made a "mistaken distribution", which is not the case here.
Now, have I thoroughly garbled up everything?
Regarding "The law lets you withdraw excess contributions up until the due date of the return (as extended). If you just carried over the excess to the next year, then withdrew the excess the following year by that year's due date, that would defeat the clear intent of the law - this is why you can't withdraw 2019's excess in 2021."
If I have already paid taxes on the excess (as it was reported as other income on my 2019 tax return) and paid the 6% penalty, it seems that I would be sufficiently penalized for keeping the excess from 2019 in my HSA. In this case, I'm not sure what the intent of the law is.
I have already maxed out my contributions for both 2020 and 2021. Below is what I think the source of my confusion may be:
I'm inclined to think the following would make me whole:
1) I take a distribution of excess contributions in the amount of $X from my 2020 HSA
2) I pay the 6% excise tax when filing my 2020 taxes since as you've said, the 2019 excess is still in there.
3) Post 2020 tax season, I receive a type 2 1099-SA for the distribution of excess contributions I took for 2020.
4) When I file my 2021 taxes, it sees the excess from 2019, but I also enter the 1099-SA and it makes me whole. I may or may not have to pay the 6% excise tax once more, but I should be cleared up for tax season 2022.
From what you've said, it sounds like the above is not correct, and instead this is what will occur:
Excess from 2019 rolls over and essentially becomes a reduction in the amount I am able to contribute in 2020. However, since I have maxed out my HSA for 2020 already, withdrawing the excess from 2020 does me no good. The only way this would have worked (i.e. made things right) is if I had not maxed out my 2020 contributions in the first place, since it shows up on my W2. Since I have maxed out my HSA in 2021, the same will occur; I can't withdraw the excess from 2019 in 2021--I should have contributed in 2021 only to the amount of $MAX_2021 - $X, where MAX_2021 = the max HSA contribution for 2021 and X = excess from 2019. So, the way to clean this up is to not withdraw excess from 2020 or 2021, but in 2022, to ensure that I only contribute $MAX_2022 - $X, where MAX_2022 = the max HSA contribution for 2022.
Am I understanding this correctly?
Key things to note:
- I have maxed out my HSA contributions for 2020 and 2021.
- I correctly reported my 2019 excess contribution when filing my 2019 taxes. I paid the 6% excise tax and income tax as the excess was counted as other income.
- I have not invested any of the HSA contributions.
- The reason it was an excess in 2019 is that I was a dependent on my mother's tax return in 2019.
At this point, I'm wondering if option 2 might be better. Will I be paying both the 6% excise tax AND income tax (if the excess is reported as "other income") for 2020 and 2021 if I do option 1?
Thank you for all of your help!
OK, let me try again. Apparently some of my thinking on this was wrong.
First, how did you already max out your 2021 contribution? By separate payment or by payroll? My employers have all wanted me to make contributions that were more or less equally spread out. Did you do a large salary reduction agreement for just a few pay periods then cancel it?
I think the simplest thing is to pay the penalty for 2020 and 2021 and fix the problem in 2022.
1. The excess of $X was subject to a penalty in 2019, you said you already paid it.
2. Because you contributed the max for 2020, you lost the opportunity to apply the $X overage toward your 2020 contribution. So the $X is still considered an excess, and still subject to the 6% penalty.
The only way to fix this on your 2020 return is to have spent down your account to zero on medical costs (which defeats the purpose of maximizing your contributions), or take a corrective distribution and paying 20% tax. 20% is a lot more than 6%. So just pay the 6% penalty instead.
3. If you already maxed out your 2021 contributions via payroll reduction, they will show on your W-2, and you will be maxed out for 2021. That means you will pay another 6% penalty on $X from 2019.
4. In 2022, contribute $X less than your maximum eligibility, that will close out the mess.
You will have paid 12% penalty on the money (plus the 6% that it is too late to fix). The alternative is to take a corrective distribution in the amount of $X and pay 20% tax on it, and 12% is less than 20%.
However, if you paid your 2021 contributions from your own funds, you can request a return of $X before December 31. It won't count against you on your 2021 tax return if it was your own money returned by December 31, in the way that it does count against you if it was payroll contributions returned after the end of the year, and would be able to zero out the excess in 2021 instead of 2022.
You could also consider asking your employer if they will help you correct the problem. If you withdrew $X as an excess contribution for 2021 (not 2020), and returned it to your employer, and they then added it to your regular pay and taxed it accordingly, your W-2 at the end of the year would show the smaller amount that would allow you to clear the penalty. But this would be a lot of paperwork and it would take a special employer to agree to help you out in this way.
@Opus 17 All of my HSA contributions from 2019-2021 are through payroll deductions. My employer allows me to specify one time HSA contributions, as well as recurring contributions. My thinking was to max out my HSA early and then invest it (I am currently not investing any HSA funds). If I go the route you outlined of clearing this out in 2022 by contributing $X less than my maximum eligibility, then I might as well invest the funds now.
It is shocking to me that this cannot be corrected until 2022 (unless I take the 20% penalty or my employer works some paperwork magic), given that the 2019 excess has already been taxed as income tax, a 6% penalty excise tax was payed, and the funds have not been invested so there have been no gains.
Thank you for helping to explain things to me!
@wag1 wrote:
@Opus 17 All of my HSA contributions from 2019-2021 are through payroll deductions. My employer allows me to specify one time HSA contributions, as well as recurring contributions. My thinking was to max out my HSA early and then invest it (I am currently not investing any HSA funds). If I go the route you outlined of clearing this out in 2022 by contributing $X less than my maximum eligibility, then I might as well invest the funds now.
It is shocking to me that this cannot be corrected until 2022 (unless I take the 20% penalty or my employer works some paperwork magic), given that the 2019 excess has already been taxed as income tax, a 6% penalty excise tax was payed, and the funds have not been invested so there have been no gains.
Thank you for helping to explain things to me!
The problem is that the excess (disallowed) contribution is taxed every year that it remains in the account. This is probably to negate the investment gains. Otherwise, a person could make a disallowed contribution, pay the income tax and the one-time penalty, and then have indefinite tax-free growth into the future all from a disallowed contribution.
Maybe you can earn more than 6% this year, depending on luck and the market, and offset the effect of the penalty. Good luck.
I have similar situation as the original post, just offset to year 2022 (actually 2021) as to when the excess HSA contribution was mistakenly made. Between the original questions by @wag1, and very informative responses by @Opus 17 and @BillM223, you all have helped me understand the options. I am hoping even if the last post in this thread was back in 2021, it is still open and I can ask about my situation. Here it is:
1) I switched in 2021 from regular PPO insurance to HDHP which allows HSA contributions. I only started using TT for filing tax year 2022, before I was doing my taxes manually. When I manually filed for tax year 2021 in 2022, my old manual spreadsheet did not have HSA in the picture so I did not take an HSA deduction. When I filed for tax year 2022 in 2023, I amended my 2021 return to claim the HSA deduction. My mistake was I claimed as deduction my entire $2,900 contribution; it should just have been $1,000 HSA deduction. For some reason, IRS accepted the amended return and gave me additional refund.
2) After tax deadline of Apr 2023, I received an IRS notice flagging the overcontribution in 2022 by $1,900. I assume that came from my amended 2021 return claiming $2,900 HSA deduction less the $1,000 correct deduction, so the excess is $1,900 in 2021, but now rolled over and being classified as excess in 2022.
3) The IRS notice just stated the 6% excise tax, which I paid in 2023. It did not further advise that I should take out that excess, so I did not. Clearly, a newbie mistake; had I dug more into the TT help and community board, I could have been warned.
4) Now filing tax year 2023, having used TT to file 2022, the $1,900 excess in 2022, which I did not withdraw before Apr 2023, was automatically retrieved from last year TT filing, again appears as excess for 2023, and is again being subjected to 6% excise tax.
From you all previous posts, my takeaways are:
1) I cannot withdraw excess from 2022 since it is from prior year and the deadline of Apr 2023 had passed.
2) That $1,900 has rolled over to my 2023 contributions but not aware of this rollover consequences, I maxed out my 2023 limits, so I am again in excess of $1,900. It seems @BillM223 from his previous post that if left unwithdrawn in the original year it was contributed (2019) and the following year (2020), both after respective tax deadlines, it effectively gets carried over twice in 2021 (?). So in my case, is the excess originally from 2021 now $1,900 x 2 = $3,800 for filing tax 2023? I seem to have read some posts that rolled over excess doubles, not sure if that is a technical glitch in TT software or that is how it is supposed to be.
3) I infer from previous post, that since excess in 2022 has rolled over to 2023 (but I had maxed that as well), I may be able to withdraw the excess amount from my 2023 contribution because it is still before Apr 2024. However, the interactive help in TT indicates however that cannot be done because it was from a prior year. Even if it can be done, the 20% penalty seems rather hefty, I'd rather leave it there and just pay again the 6% excise tax.
4) The best option is to reduce my 2024 contributions by the excess amount (either $1,900 or $3,800 if indeed carried over twice). I am hoping my employer/HSA custodian can allow me to do this even though I specified the max limits during our Open Enrollment in Nov 2023.
My lingering questions are:
1) If I am able to reduce my 2024 contributions, will that eliminate that excess when I file tax year 2024 next year?
2) What other form corrections do I need to do?
3) A complicating factor is that my HSA is invested in the available funds in the HSA custodian. If earnings from the excess contribution has to be taxed, is it even possible to track what earnings came from the excess and what from the within-limits contribution?
Sorry, my post is rather long-winded. I would appreciate any advice.
@raom1024 , you seem to imply that you've been HSA-eligible from some time in 2021 to the present, but that's not entirely clear. Have you been HSA-eligible continuously since some time in 2021? If so, it appears that you have made no excess contribution. If you were HSA-eligible on December 1, 2021, your contribution limit for self-only coverage was $3,600 under the last-month rule.
If I've misunderstood something:
For which months between 2021 and the present have you been HSA eligible?
Is your HDHP plan a self-only plan and you do not have a spouse with family HDHP coverage?
How much did you contributed for each year? Do your Forms 5498-SA reflect that?
Are you under age 55?
Thank you @dmertz for the clarifying questions.
I have actually been HSA eligible since 2020, continuously till the present. My HDHP plan was for self only.
For 2021, I was under 55, so my contribution limits was $3,600 but my employer contributes $700 so my employee contribution was $2,900.
Not aware that I can deduct HSA contribution, I did not do so for 2020 and 2021 filing. When I became aware of such option in 2022, I tried to amend my 2021 return manually (it was too late to amend the 2020 return). However, I should have just deducted $1,000 of my contribution, but instead I deducted my entire $2,900 contribution. So I think that's what the IRS flagged as my excess contribution of $1,900, although the notice said it was excess contribution for 2022.
I only became aware of excess contribution (arising from the amended 2021 return) which IRS is counting towards my 2022 return after the tax deadline of Apr 15, 2023. The notice only mentioned the excise tax, not about taking off the excess. So I still maxed my 2023 contribution of $3,650. The excess $1,900 from 2022, which remained unwithdrawn up to now, is counted as prior year excess so cannot be withdrawn now, per TT interactive help.
So that's my question, how to resolve the excess contribution arising from incorrectly amended 2021 returns that's being counted as excess contribution in 2022.
Thanks.
@raom1024 , I still don't understand how there was an excess contribution for 2021. If you and your employer contributed only $3,600 on your behalf for 2021, reported with code W in box 12 of your 2021 W-2, you made no excess contribution. Only if you contributed some amount for 2021 in addition to the $3,600 contributed via your employer would you have an excess contribution.
@dmertz , According to the IRS notice, I did overcontribute, and I can only attribute it to the amendment of my 2021 return deducting my entire $2,900 contribution instead of $1,000. I did call IRS last year about this, but I didn't jot down notes so I am vague now about how it exactly it came about.
Regardless of how it came about, I just wanted to know how to remediate this. My path-forward is to reduce my 2024 contributions by that excess amount. So my original questions were:
1) If I do this reduction for 2024 contributions, will that resolve the excess contribution in 2019.
2) What other forms do I need to correct?
3) Do I need to pay taxes on whatever earnings for that excess contribution (as my HSA is invested), even though, the $1,900 was not really contributed, rather taken as extra HSA deduction (so it wasn't really invested).
You still have not explained how you have an excess contribution. You have only stated your conclusion, correct or not, that you made an excess contribution. If no more than $3,600 was deposited into your HSA as contributions for 2021, you have no excess contribution for 2021.
What is shown in boxes 2 and 3 of your 2021 and 2022 Forms 5498? If you don't have these forms in hand, they are available from the IRS in your Wage and Income transcripts for these years.
@raom1024 wrote:
Thank you @dmertz for the clarifying questions.
I have actually been HSA eligible since 2020, continuously till the present. My HDHP plan was for self only.
For 2021, I was under 55, so my contribution limits was $3,600 but my employer contributes $700 so my employee contribution was $2,900.
I am beginning to have a suspicion. The way the tax law works, all contributions made by payroll deduction are treated as employer contributions. Essentially, you agree to a salary reduction, and your employer makes a contribution equal to the reduced salary (plus any match). These are recorded on your W-2 in box 12 with a code W. (There can be other items in box 12 with different codes, we are focusing only on code W.)
Later in the program, when asked about additional contributions, you only enter direct contributions you made to the HSA bank out of pocket, and not through payroll. Adding your workplace contributions as if they were additional out of pocket contributions can result in you taking an illegal tax deduction and also a false report of excess contributions.
Your first mistake may have been amending to claim a deduction that it sounds like you shouldn't have taken. Your second mistake was paying a penalty that you probably didn't really owe without doing a deeper dive into what the problem was. It is now possible that, depending on what you did and what you claimed, you have claimed excess (unallowed) deductions and owe back taxes with interest, or you paid a penalty you don't owe, or both, and you may need to file several years of amended returns (including second-amended returns, which is tricky).
Depending on your comfort level, you may be able to do this yourself or you may need professional assistance.
To start with, you need to look at your original 2021 return, your as-amended 2021 return, your 2022 return, and the IRS letter to see what was really being claimed and what you paid. You should also get your full tax return transcripts from the IRS to see what they have on file for you and what adjustments they have made for you.
@Opus 17 Thanks much for the response.
Yes, many mistakes committed along the way. Should have been TT customer much earlier.
At this point, I just want to move on, if IRS considered it excess contribution, so be it. If paying excise tax and reducing the 2024 contributions would resolve it, then I'm ok with that.
Thanks for the link on the transcripts. That's really useful reconciling my records with what are on my file.