dependent with 2 HDHP coverage

[NTT8]

I'm doing my daughter's tax return and am stuck at 8889 form. My daughter is a full time student and can be claimed as our dependent. For the whole year 2023, she was covered under our family HDHP but during the 3 months when she was at her summer internship, she was also enrolled in the HDHP offered by her company. She did not make any HSA contributions but according to the W-2, her company contributed some $300 to her HSA, which we didn't know existed. For the purposes of Form 8889 smart worksheet line 3, what kind of insurance does she have for each month of the year? Also, does it mean the $300 HSA contributions from her company should be taxed? Where do I enter this information? In addition, it seems like Turbo Tax was saying the $300 wouldn't be taxable if we could use up the $300 before April 15, 2024. Is that correct?

[RobertB4444]

No, she had a HDHP and the $300 went into an HSA.  So it's a legit deduction.  You can enter that she had an HDHP for herself and that $300 can sit there earning interest waiting for her to use it for medical expenses.

However, you can also withdraw it for medical expenses at any time and she can use it without paying tax on it.  If she withdraws it for any other reason it'll be taxable.

@NTT8 

[dmertz · Accepted solution]

Neither dependents nor full-time students are eligible to make HSA contributions, so the $300 contribution made by the employer on your daughter's behalf for 2023 is an excess contribution that is subject to penalty unless returned to your daughter by a return of excess contribution.  Contact the HSA provider to obtain the corrective distribution.  The $300 is taxable on your daughter's 2023 tax return and any investment gains required to accompany the returned $300 contribution will be taxable on your daughter's 2024 tax return, reported on a 2024 Form 1099-SA.

[NTT8]

Since I posted my initial question, a few things have happened. My daughter contacted her employer's HR department and was told they would reverse the $300 contribution and issue her a corrected W-2. So we filed an extension in order to wait for the W-2 (c). Turned out it never came and after a few back and forth with both the HR and Benefits departments, they decided not to do anything. In the meantime, we received the 5498-SA form from the HSA bank, stating the $300 contribution and the FMV ($288 due to $12 fees) of the account. 

Questions:

(1) Can I still remove the excess contribution and designate the distribution for tax year 2023 since we filed an extension? If the HSA bank can accommodate us to designate it for 2023, then what distribution code should this be on the 1099-SA form? Does she also get a corrected 5498-SA? Also, the distribution amount won't be the same as the $300 contribution on her W-2, but I just add the $300 as "Other Income" to the 1040.

(2) Let's say the HSA bank does not agree to put the distribution under 2023, and my daughter won't be eligible to have an HDHP for a few more years, what is the best and fastest way to resolve this and dissolve the account?

Any help would be much appreciated.

[NCperson]

@NTT8 faster way to solve this: just liquidate the account without any medical expenses and pay the tax / penalties involved.  I think that would be 20% of the $300 as the penalty (plus any income tax, which if she earns less than $14,600 in 2024 , there would be no income tax.)

[dmertz]

1)  Yes, the timely filed extension request extends the deadline to October 15, 2024 to obtain a return of the excess contribution.  Since the funds in the account are entirely attributable to the excess contribution, a return of the $300 contribution would be accomplished by the distribution of the remaining balance.

2)  The distribution cannot be anything but a 2024 distribution, reportable on a 2024 Form 1099-SA.  The form will have code 2 in box 3, the amount distributed in box 1 and $0 in box 2.  Because there are no taxable gains, entering this into 2024 TurboTax will only be for recordkeeping purposes.  The 2024 Form 1099-SA will have no effect on the 2024 tax return.  The distribution corrects the excess for 2023, so no 2023 (or 2024) Form 8889 will be filed.  The timely return of contribution makes it as if the contribution was never made.  The only thing that appears on the 2023 tax return is the $300 of income on Schedule 1 line 8f.

Taking a normal distribution of the balance does not actually eliminate the excess and would result in the 20% extra tax that NCperson mentioned.  Having a zero balance only eliminates the penalty on the excess.  If Form 8889 is followed precisely, a Form 8889 would have to be filed every year showing the excess that carries forward from the previous year even though the zero balance eliminates the penalty each year.