Attributable Earnings on Excess contribution to HSA account - very tricky and unique scenario

[ajc3po]

I have a unique and tricky situation and am looking for an answer on how to calculate earnings attributable to excess contributions to an HSA.  I have two HSA accounts:

• one at ABC Bank with a substantial balance. It was an account from an old employer from when I was younger.  I do not contribute to it, nor do I withdrawal anything from it. It simply sits and earns interest/dividends.
• one HSA at XYZ Bank through my current employer

In 2023, I was eligible to contribute to the HSA through my current employer for 2 months.  I switched healthcare plans from a HDHP to a different (non-HDHP) in March 2023.  I made $475 of excess contributions to the XYZ HSA in 2023.  However, because we had a lot of medical expenses in 2023, I spent the balance of the XYZ HSA account down to $0 by the end of 2023.

My understanding is, because I technically still have funds available in an HSA (via my ABC Bank HSA account) I still need to withdrawal $475 from my ABC Bank HSA - to correct the excess contribution.  However, how do I calculate the earnings on the excess contributions given I spent the value of XYZ HSA down to $0 by year-end?

My understanding is earnings = excess contribution * ((AOB-ACB)/AOB)).  Should I be calculating the Adjusted Opening and Adjusted Closing balance on the value of just the XYZ HSA, or should I calculate it on the balance of the ABC HSA - or the combination of both?

[Mike9241]

why not just tell the trustee/custodian you want to withdraw the excess contribution of $Y and the income earned theron. They should be fully capable eof calculating the amount. 

[dmertz]

You have the formula wrong.  It's

earnings = excess contribution * ((ACB-AOB)/AOB))

The distributions made after the excess contribution was made must be added to the closing balance to get the Adjusted Closing Balance, so ACB in this case is just the amount distributed from XYZ after making the excess contribution since the year-end balance was zero.

earnings = $475 * ((distributions-AOB)/AOB))

For example if the HSA contained $5,000 before the $475 excess contribution was made and the distributions afterwards were $5,675, the calculation would be:

earnings = $475 * (($5,675-$5,475)/$5,000) = $475 * $200 / $5,000 = $19

You would then obtain a return of the $475 contribution from the other HSA with the distribution being $494 of which $19 would be taxable earnings.

[ajc3po]

@Mike9241 

There’s $0 in the account that received the excess contribution. My assumption (fully acknowledge it may be incorrect) is that the custodian won’t be able to calculate anything given the $0 balance in the account.  There’s no way for them to remove the excess contribution.  That said, I will call them and see if there’s someone that can help with the calculation given @dmertz ’s response. Thank you!!

[ajc3po]

@dmertz Thank you for catching my typo! You are correct.  

This is very helpful - it wasn’t clear to me exactly how to calculate ACB. Your example makes sense, and I have all the records of balance and transactions needed to make this calculation. I’ll give it a shot and see what I come up with.

i will also contact the custodian per @Mike9241 ’s recommendation now that I know I misunderstood the ACB formula (I.e, $0 balance doesn’t really matter). Will reply with what I learn. 

[dmertz]

The method for calculating the attributable earnings is in CFR 1.408-11:

https://www.law.cornell.edu/cfr/text/26/1.408-11

Good luck getting an HSA custodian to do the calculation, particularly in a situation like this.  Posts in these forums indicate that many HSA custodians simply refuse to do the calculation for you and rely on you to do the calculation.

[ajc3po]

@dmertz  When the customer service rep I spoke with didn't understand how to calculate a pro-rata contribution limit given 3-months of eligibility, I knew I wasn't going to get far... *sigh* worth the shot.

I will do my best with the calculation and will thoroughly document my approach, sources, etc.