@emmpenn wrote:
Thank you for your response! My benefits are from January 2023-December 2023 and my husbands are from February 2023-January 2024. So based on your response, maybe we can contribute to his HSA in January 2024, and I will not elect to have an FSA.
This past year my husband had an HSA and I had my FSA at the same time. Do you know what all we need to do in order to rectify that for tax purposes?
All your husband's 2022 contributions are impermissible. If you leave them in the account, they will be subject to regular income tax plus a 6% penalty.
You have the option to remove the contributions by April 18 (the tax deadline). This is not a regular withdrawal, it is a special procedure and may require a special form, probably called something like "distribution of excess contributions." If the contributions are removed, you pay regular income tax on them (because they are not deductible) but there is no penalty.
If you spent part or all of the money, withdraw as much as you can of the remaining funds as a removal of excess contributions. The penalty is based on the actual excess, or the account balance, whichever is lower. So if you contributed $6000 but spent $4000 and can only withdraw $2000, the penalty will be zero because the balance is zero.
If the excess contribution includes earnings (interest, dividends, etc.) the earnings must also be removed. They are taxable as 2022 income even though you would not receive them until 2023 and won't get a 1099 for them for 2022. You can report them as interest income without a 1099.
In Turbotax, answer that your spouse had a qualifying HDHDP but also had other insurance, the program should tell you that all your contributions are not allowed, and the program will ask "Have you removed the excess or will you remove it before April 18?" and you indicate the amount of excess that you removed.
If you leave the excess in the account, you will pay 6% now plus an additional 6% ever year the excess remains in the account. You would pay the penalty again in 2023, unless you spend the money for medical costs and reduce the year end balance. If the money was still in the account in 2024 and he was eligible to contribute for 2024, he could consider the remaining excess as part of his 2024 contribution. In other words, if there was $2000 excess in the account, and the 2024 limit was $7800 for a family HDHP, he could contribute $5800 of new money and count the $2000 excess as an additional contribution which would make it allowable going forward.
If the excess for 2022 came from an employer, it does not have to be returned to the employer. When you remove the excess and pay tax on it, it becomes your money at that point and you can do anything you want.
