I made excess HSA contributions in 2018 due to only being on a HDHP for partial year. I'm making an excess contribution withdrawal. How/when is that withdrawal taxed?

[BMcCalpin · Accepted solution]

The answer depends on how you contributed the amounts that were considered in excess.

IF the excess contributions came through your employer (i.e., from your employer PLUS from you by payroll deduction), then the excess contributions will be added back to Other Income on line 8 on Schedule 1 (Form 1040). This is done automatically by TurboTax; you do not need to do anything.

Excess contributions are considered taxable by the IRS. Since these were contributions through the employer, the excess is added back to Other Income on line 8 on Schedule 1 (Form 1040).

Why is this done? Because when your W-2 was printed, the employer removed the code W (HSA contributions) amount in box 12 on the W-2 from Wages in boxes 1, 3, and 5. That's how you get a tax benefit from employer-based HSA contributions - the contributions are removed from your income so you never pay tax on them in the first place.

But if some of your contributions were in excess, then they need to be taxed. Since the excess has already been removed from Wages, the solution is to add the excess back to your income - in line 8 in this case.

IF, on the other hand, the excess contributions come from contributions you made directly to the HSA (not through your employer), then the excess is simply removed from the deduction that you would have had on line 12 on Schedule 1 (Form 1040).

[Edited 3/20/2020 3:44 pm CDT - updated for 2019]

[deladron1]

Thank you!  One clarifying question: since these excess contributions were due to partial year enrollment in a HDHP I wasn't over the full-year limit of $3,450 (just over my prorated limit based on months eligible) and thus the excess contributions aren't actually indicated on the tax forms that I received from my HSA provider.  So when you say "This is done automatically by TurboTax; you do not need to do anything" is that because TurboTax will ask about the number of months that I was eligible for a HDHP and then reduce my personal HSA contribution limit accordingly?  

[deladron1]

I'm going through the HSA section of TurboTax now and when i indicated that I had HSA coverage for just Sept-Dec it is saying that my maximum contribution limit is $3,450.  I believe that it is reaching that conclusion based on the "last month rule".  But my understanding is that rule only applies if I continue to be on a HDHP for the entirety of 2019, which I'm not.  Thus, it seems to me that TurboTax is not accurately calculating my maximum contribution and thus not automatically taxing my excess contribution.

[BMcCalpin]

OK, let me restate what I hear you saying. You were not under HDHP coverage for every month in 2018, but you were under HDHP coverage for the months of September to December, correct?

Yes, the last month rule states that if you were covered by an HDHP on December 1, 2018, then you are entitled to use the full annual HSA contribution limit. When you talked about the excess, I assumed that you meant that you had received the message from TurboTax, but apparently you did not.

You are correct that using the last month rule requires that you stay under HDHP coverage for all of 2019. However, 2019 is not yet finished. If indeed you leave HDHP coverage (and it sounds like you already have), then on your 2019(!) tax return in early 2020, TurboTax will ask you some additional questions to determine what your HSA annual limit should have been in 2018, and will assess you according. You do not make any adjustments in 2018, even if already you know that you will fail the "testing" period in 2019.  

[deladron1]

That makes sense - thanks!