My spouse removed $2200 from his HSA to try to remedy our excess contribution for the year 2017. He did it online, and he checked "education expenses" as the reason. As I understand it, it needed to be an "excess contribution." When he contacted the HSA bank, they would not let him change it. How will this affect our total amount contributed at the end of the year? (will it still show that 2200 as a contribution?) What is the penalty for removing for educational versus removing for excess?
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If not removed by the proper procedure for a return of excess contribution, it's treated as a regular distribution. If not applied to qualified medical expenses, the distribution is subject to tax and, if your spouse is under age 65, to a 20% early-distribution penalty. Not only that, the excess contribution remains in the account subject to a 6% excess contribution penalty. There is no penalty exception for using an HSA distribution to pay educational expenses, at least those that are not medically necessary, say, due to traumatic brain injury. (Why would "education expenses" even be a choice on an HSA distribution request form? Are you sure that the account is actually a Health Savings Account?)
If it has been less than 60 days since your spouse received the distribution, the distribution can be rolled over either back to the same HSA account or to another HSA account belonging to your spouse (except in the case where it would be a violation of the one-rollover-per-12-months rule because it has been less than 12 months since a previous HSA distribution by your spouse was rolled over). The excess contribution will still need to be corrected by a return of contribution from the HSA account to which the excess contribution was made.
Although the custodian would not change the type of distribution (and really cannot because a return of contribution requires a special calculation to account for any investment gain or loss while the excess contribution was in the HSA), it might be possible to get the custodian to accept the return of this money to the HSA account as a return of mistaken distribution. However, the circumstances don't really fit the normal justification for a return of mistaken distribution. A return of mistaken distribution is usually done when a medical expense is paid from the HSA under the belief that the expense will not be reimbursed, but some or all of the expense actually does end up being reimbursed.
If not removed by the proper procedure for a return of excess contribution, it's treated as a regular distribution. If not applied to qualified medical expenses, the distribution is subject to tax and, if your spouse is under age 65, to a 20% early-distribution penalty. Not only that, the excess contribution remains in the account subject to a 6% excess contribution penalty. There is no penalty exception for using an HSA distribution to pay educational expenses, at least those that are not medically necessary, say, due to traumatic brain injury. (Why would "education expenses" even be a choice on an HSA distribution request form? Are you sure that the account is actually a Health Savings Account?)
If it has been less than 60 days since your spouse received the distribution, the distribution can be rolled over either back to the same HSA account or to another HSA account belonging to your spouse (except in the case where it would be a violation of the one-rollover-per-12-months rule because it has been less than 12 months since a previous HSA distribution by your spouse was rolled over). The excess contribution will still need to be corrected by a return of contribution from the HSA account to which the excess contribution was made.
Although the custodian would not change the type of distribution (and really cannot because a return of contribution requires a special calculation to account for any investment gain or loss while the excess contribution was in the HSA), it might be possible to get the custodian to accept the return of this money to the HSA account as a return of mistaken distribution. However, the circumstances don't really fit the normal justification for a return of mistaken distribution. A return of mistaken distribution is usually done when a medical expense is paid from the HSA under the belief that the expense will not be reimbursed, but some or all of the expense actually does end up being reimbursed.
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