Advice for 2018 HSA over contribution

[chompchomp]

I enrolled in a HDHP in 2018 and contributed the maximum amount ($3450) to my HSA over a period of 5 months (8/2018-12/2018). I changed insurance plans the following summer, however, and thus did not fulfill the last-month rule testing period, which I just realized this year. I've calculated my excess contribution as $2012.50, based on my 5-month eligibility for 2018.

Since I can no longer withdraw this excess, I'd like to roll it over to my HSA for 2021 (I have since re-enrolled in a HDHP), and I've already planned to limit my additional contributions for this year accordingly.

The IRS guidelines say that you need to pay an excise tax for the year in which you failed to fulfill the testing period, which would be 2019 for me, so I was not going to amend my 2018 return. I'm a little confused, though, because they also say that you should report the over contribution as taxable income for that year -- is this required if you plan on rolling over to a following year?

I'm assuming I'll need to amend my 2019 tax return to pay an excise tax + interest, pay an additional excise tax for 2020, and then report the rollover from 2018 on form 8889 for 2021 -- is this correct?

Thank you for the help! I've read through many forums but I'm still unclear about this issue.

[BillM223]

"thus did not fulfill the last-month rule testing period, which I just realized this year. I've calculated my excess contribution as $2012.50, based on my 5-month eligibility for 2018."

This is not considered an excess contribution, at least, not in the way you think.

The way this is rectified is like this:

1. TurboTax realizes that you didn't have HDHP coverage for every month this year (2019) (the testing period).

2. In response to a question ("What type of High Deductible Health Plan did [name] have on December 1, 2018?"), TurboTax realizes that you could have used the last-month rule in the previous year (2018).

3. TurboTax asks you what you contributed in the previous year (2018) and what kind of HDHP coverage you actually had in the previous year (2018).

4. From this TurboTax calculates how much you should have been able to contribute, had you not used the last-month rule.

So far, this is the calculation that it sounds like you have already done manually.

HOWEVER, TurboTax should have noticed the problem on the 2019 return (did you do your 2019 return with TurboTax?). TurboTax would have told you that it was going to add an extra $2,012.50 as income on line 8 of Schedule 1(1040) with the text of "Form 8889 Health Savings Accounts" AND a 10% penalty of $201 or so on line 8 of Schedule 2 (1040) with the text of "HDHP".

Then you would have been done with the problem.

So, first, if you did your 2019 return with TurboTax, go back for Schedules 1 and 2 and see if those amounts are there. If so, you are done with the issue.

If you did not do your 2019 return with TurboTax, then you need to amend your 2019 if these lines and schedules were not present.

To learn more information on how to amend your return, please see this TurboTax FAQ.

Questions?

P.S. please look at form 8889 lines 18, 20, and 21 for the source of the amounts on Schedules 1, and 2.

[chompchomp]

Thank you so much!

Those amounts are not included in my 2019 tax return -- I did use TurboTax but it's possible that I may have overridden the prompts, so I'll need to amend it.

Just to clarify, it sounds like if I pay the additional income tax and penalty tax in 2019 then I can leave that money in the HSA without having to pay additional excise tax in following years, and I can still contribute the maximum amount to my HSA in 2021?

[BillM223 · Accepted solution]

"it sounds like if I pay the additional income tax and penalty tax in 2019 then I can leave that money in the HSA without having to pay additional excise tax in following years, and I can still contribute the maximum amount to my HSA in 2021?"

Yes and Yes.

You see it is not treated as a simple excess contribution issue. Instead your tax benefit (the deduction for the contributions) is reversed line 8 on Schedule 1, and the 10% penalty is in lieu of removing the "excess".

The Tax Code is penalizing the failure to maintain HDHP coverage differently than it does excess contributions. 

[chompchomp]

Thank you!