Determining the maximum allowable contribution for my HSA if I was on an HSA for part of the year

[tommirasol]

I'm over 55 and was on my company's HSA (family plan) from Jan-Jun 2020. I retired in June 2020, and moved to a PPO plan. Pre-tax  contributions to my HSA were made through monthly payroll deductions. By June 30, 2020 I had made $4750 in pre-tax contributions. Additionally, while still employed with my company, I made a one-time after-tax contribution of $3350 to bring my total contribution to $8100 ($7100 + $1000 catch-up). 

I later found out that I had exceeded the maximum allowed limit and was told that since I was on an HDHP for 6 months of the year, my contributions must match a 6-month period not 12-months. I've been told that the $1000 catch up is not pro-rated therefore, my max allowable contribution for 6 months is $7100 / 2 = $3550 + $1000 = $4550. Therefore, my excess contribution is $3550.

Of this $3550, $200 is pre-tax contributions through payroll deductions and $3350 is from after-tax money from my savings account. I am assuming the $200 is considered other income and is taxable in 2020, while the $3350 is not taxable since it is after-tax money and I don't have to report it in my 2020 return. I am also aware that the gains attributable to the excess ($3550) must also be withdrawn before May 17, 2021 to avoid excise taxes on them, although, once withdrawn I do believe I will need to report the gains as "other income" in my 2021 return since the withdrawal will occur in 2021.

Is my understanding correct? If not, I would appreciate guidance from those in the know.

BTW, TurboTax 2020 comes up with a maximum contribution limit of $4050, not the $4550 I calculated. How did TT  comes up with $4050?

Thanks.

[BillM223]

"BTW, TurboTax 2020 comes up with a maximum contribution limit of $4050, not the $4550 I calculated. How did TT  comes up with $4050?"

TurboTax came up with this because - contrary to what you were told - the $1,000 "bonus" for 55+ is prorated by the number of months. So you have $7100 / 2 = $3550 + $500 = $4050.

"I do believe I will need to report the gains as "other income" in my 2021 return since the withdrawal will occur in 2021."

No, if any part of the excess was "employer" contributions (i.e., the code W amount in box 12 on your W-2), the TurboTax automatically added it back to Other Income on your 2020 return (look at line 8 on Schedule 1 (1040)).

What you will report in 2021 are the earnings on this excess - you will receive a 1099-SA for this purpose in early 2022 to put on your 2021 return.

"I am assuming the $200 is considered other income and is taxable in 2020, while the $3350 is not taxable since it is after-tax money and I don't have to report it in my 2020 return."

The $200 is actually $700 (because of the pro-rated $1,000 "bonus" above) - but otherwise you are substantially correct.

Note that TurboTax will take care of this automatically. Your entire personal contribution is removed from the return, and enough employer contribution (the $700) is added to Line 8 on Schedule 1 (1040) to make up the difference.

So once you notify your HSA custodian to withdraw the excess of $4,050 (8,100 minus the max contribution of 4,050), then you will be done. NOTE: look for an online form at your HSA custodian's website.

[tommirasol]

I understand where I made the mistake and have made the adjustments in my spreadsheet and it matches with your analysis.  Thank you.