Contributed to HSA but did not have a HDHP

[jacob5burton]

Once we discovered the mistake we withdrew the funds in January 2024 but can't get Turbo Tax to "understand".

[Mike9241]

how did you contribute - directly or through payroll deductions/employer match? the form is 8889

directly. the entries are made through the HSA link in the medical section. income,if any,  will be taxable in 2024

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direct contributions

1) enter contributions 

2) then answer question "no" about having a HDHP

3) you should get to a screen where you can indicate you'll withdraw the full overfunding by 4/15/2024.  

there will be no 8889/5329 in your return assuming you did not withdraw any amounts for medical expenses and did not have an HSA in 2022

******

payroll deductions - item 12w on your w-2.

1) do not enter the payroll deductions/employer match as personal contribution

2) then answer question "no" about having a HDHP

3) you should get to a screen where you can indicate you'll withdraw the full overfunding by 4/15/2024.  (income will be taxable in 2024)

4) check none for type of HDHP on 12/1/2022

there's a bug in Turbotax. in this scenario even though you had no HDHP coverage Turbotax wants either self-only or Family coverage checked on the 8889. actually an IRS forms issue because there is no option on the form for none

the only workaround i could find because the error check will bring this up is to check-self-only coverage but in the detail for each month check none

form 8889 will be in your return but not form 5329. the excess will be taxable income appearing on schedule ! line8f

the contributions will appear on the 8889 on line 9

[jacob5burton]

Yes, we contributed directly.

The steps you gave us to follow, work, however, we were not able to withdraw the full amount of overfunding because the account had $79 LESS in it than what we contributed on form 5498-SA.

This was due to a distribution in January, which was when we caught our error. So, the account is closed, but the forms 5498-SA and 1099-SA from our Bank do NOT reflect this $79 discrepancy.

Do you think it's worth splitting hairs over the $79 if the IRS audits us?

[jacob5burton]

I think I understand now...when the TurboTax wizard goes through and wants me to state if Sasha had coverage during 2023 for a HDHP and I select "Self-Only" it does what you said it would do, and prompts me to choose an entry for each month of coverage during 2023, which I set to "None" from January-December.

This is what it allowed me to do after I opted to "not withdraw funds by 4/15/2024" in the prior steps of the wizard, which accurately reflects our inability to withdraw the remaining $79 ....cuz it ain't there, lol.

It lowers our refund a couple hundred dollars, but I think that would satisfy the IRS, don't you? I'd rather play it safe than sorry.

[BillM223]

Why did you close the HSA? 

TurboTax is not the problem, you are. When you have an excess contribution, you are encouraged to withdraw the entire amount of the excess by the due data of the return. When you can't, the balance becomes an excess contribution which carries over to the next year.

Note that the HSA is not a savings account from which you can willy-nilly remove dollars; that's why TurboTax will not let you remove more than the amount of the excess. TurboTax calculates what the excess is, and that's all you should remove as an excess.

And if that's more dollars than you have, then you will carry the balance over to 2024 and deduct that amount then as a personal contribution (line 2 on the 8889). That is, remove what ever you can, and carry over the balance.

And as for as "when the TurboTax wizard goes through and wants me to state if Sasha had coverage during 2023 for a HDHP and I select "Self-Only" it does what you said it would do, and prompts me to choose an entry for each month of coverage during 2023, which I set to "None" from January-December." where did you de this? Or, more accurately, there are several places in the HSA interview where this can happen - which one was it? It makes a huge difference to how we respond to it.

[jacob5burton]

The HSA account is still open. I'm not sure what else we could have done. We consulted with our bank, when we discovered the error, and followed their instructions to remove the over-contribution, which left us with a $0 balance.

No one told us we had to wait for TurboTax and as long as the funds are withdrawn prior to 4/15 this is a moot point. 

So, while this normally has a pretty simple resolution, the problem, is a January 2024 distribution (prior to knowledge of this error).

Now, on to the problem. This is all taking place in the "Deductions and Credits" section of TurboTax. Here's a step-by-step:

1) We filled out the required info where you state you had an HSA, but not a HDHP. So far, so good.
2) On the page "You may want to withdraw money from your HSAs" we appropriately select "We'll withdraw some of the excess contribution by April 15, 2024" and enter the amount we withdrew (which happens to be ALL of it).
3) On the page "What's the total value of all your HSAs?" we enter the amount we withdrew (which is the same as what's on the pertinent forms given by the bank).
4) The next few pages ask questions about 2022 which are all easily handled as that year was covered by a HDHP.
5) At the end of the process it says there is "1 Detail for you to review".
6) It has us check each month (covered by a HDHP for 2023) on form 8889-S (Line 3 Smart Worksheet) with either "None, Self-Only, or Family" to which we obviously answer "None" on each month.
7) This seems to be the correct approach, if I'm not mistaken, so thank you for this part of your response:

"When you have an excess contribution, you are encouraged to withdraw the entire amount of the excess by the due data of the return. When you can't, the balance becomes an excess contribution which carries over to the next year."

[BillM223]

OK, you have gotten to #7, and you cannot withdraw the total excess. The balance is carried over to 2024.

You will no longer have a HDHP in 2024 (is that right?), so now you have a choice (assuming you will never go under HDHP coverage again).

1. Continue to carry over the amount year after year, paying 6% a year on the carryover, or

2. Letting the balance in the HSA decline to 0 because of medical payments and service changes, in which case, the penalty falls to zero (the penalty is actually 6% of the smaller of the balance at the end of the year or the amount carried over).

3. If you don't want to be bled to death (#2), you can make a distribution for the amount of the carry over, say that it is not for medical expenses, then when you enter the 1099-SA into TurboTax, the box 1 amount will be added to Other Income, and a 20% penalty will be added on top of that. But, at least, the carryover will be finally dispensed with.