What are tax implications when HSA custodian refuses to return earnings on excess/mistaken HSA contributions and what can be done to correct this on my tax filing?

[Puff]

My HSA custodian (HealthEquity) does not have a form or process in place to calculate and return earnings (interest + investment gains) on mistaken/excess contribution. I’ve tried to ask them to calculate and return the earnings based on my mistaken HSA contribution form I submitted. They returned the mistaken contribution to me but not the associated earnings.

so I asked them why that hasn’t happened and then they said I’m supposed to calculate the earnings and use the same HSA Mistaken Contribution Form to submit the earnings amount. 

so I used the NIA formula by IRS and submitted a request to withdraw the earnings. Now they’re now saying they can’t return my earnings because I’ve already withdrawn the contribution excess (which earnings is beyond that) and that they don’t have the form for just earnings on mistaken contributions. Basically, they’re refusing to return the earnings on mistaken/excess contributions.

what happens when an HSA custodian refuses to return the earnings on mistaken contribution? What would happen for my tax filing? Anything I can do to correct things on my end so I don’t get penalized?

[KrisD15]

The easiest (and maybe only way at this point) for you to end this is to claim the amount of earnings as a non-qualifying distribution. 

So, in other words, if the earnings on the excess is 10.00 and you made a distribution of 100.00, (all used for medical) enter the 1099-SA for 100.00 and report that only 90.00 was used for medical.

You pay the penalty on the 10.00 earning, but it will end the year after year carryover. 

[Puff]

Thank you for this tip. It’s more useful than any answer or attempts I’ve been trying to make with HealthEquity.

Does that work in my case if I don’t even have the distribution? HealthEquity is not even allowing me to distribute or withdraw the money. So the earnings are stuck in the HSA account. Could I still report that as an unqualified distribution?

follow up, what if come 2025 (time to file for tax year 2024), HealthEquity reports a 1099-SA and reports the earnings on box 2, but it’s the amount they didn’t let me withdraw in 2024, how do I report that in my taxes since the form clearly states the amount as earnings?

[KrisD15]

No, you do need to make a distribution and really use it for a QUALIFING purchase, then report the amount as non-qualifying.  If you didn't use the HSA for 2023, you'll need to purchase some aspirin or something to get the money out. 

Because you use it for a qualifying purchase, but claim you used it for a non-qualifying purchase, you are taking the earnings out and claiming the penalty. If you take a nonqualifying distribution, you would owe a penalty for that and still owe the penalty for the earnings on the excess contribution. 

I would claim the amount of the earnings as non-qualifying and show the plan administrator your Form 8889 line 17 which reports the distribution of the earnings and the 20% tax.  That should be good enough to remove the earnings and adjust the balance of your HSA account. 

If they won't adjust the earnings reported on your 1099-SA, tell them you are going to roll it over into a different HSA account. 

[Puff]

To summarize and make sure I’m understanding the steps (thank you for your patience btw!):

1. Make a qualifying HSA purchase equal to the exact amount of the earnings on the excess HSA contribution.

2. Claim that amount as nonqualifying distribution so I pay penalty on that for just the one tax year but at least avoid the year over year carryover.

3. Show the filed tax form 8889 to HealthEquity to let them know I already distributed the amount of earnings as no qualifying distribution and as such have them zero out the earnings in box 2 in the 1099-SA. 

Since HealthEquity is not even allowing a return in earnings on excess/mistaken HSA, which should have been a straightforward thing, I’m not convinced they have the process in place to correct their tax forms.

Is telling them I’m rolling over to a different HSA more about influencing them to act or is that for me to figure out how to correct things with the next HSA administrator? 

if that is the case, should I go ahead and rollover and switch to a new HSA administrator now to avoid all this headache? (Context: HealthEquity has already been sending me in circles for three weeks and refusing to return the earnings on my mistaken contribution.)

thank you, Kris!

[BillM223]

Yes, there are many HSA custodians out there, and you have no need to stick with a custodian who doesn't know the rules. Remember that the HSA is YOUR account so it moves with you like an IRA.

In the meantime, you might as well start looking to see if they allow trustee-to-trustee rollovers.

[dmertz]

HealthEquity indeed has a specific Distribution of Excess HSA Contribution Form, available for download from General Forms when logged in to their website.  This form has a place to enter the excess contribution amount and mentions that the excess contribution and attributable earnings must be distributed to correct the excess, implying that the will do the necessary gain/loss calculation.  This form has a $20 processing fee.