Does TurboTax allow redepositing of excess HSA contributions?

[papajohn72]

My wife and I have separate HSA accounts through our employers. My plan is a family plan (myself plus our two children) and hers is a self-only plan.

In 2022, I contributed the maximum amount into my HSA ($7,300). My wife contributed $1,800 into her HSA. As a result, we are now $1,800 over the maximum amount allowed by the IRS.

Instead of making a withdrawal of the excess contribution(s), my HSA company has another option for redepositing excess contributions… “Redeposit the full amount of the excess contribution made in a prior year plus earnings back into this HSA as a contribution for the current year.”

I would prefer to choose this option. However, TurboTax doesn’t seem to support this. It only allows me to withdraw all or part of the excess contribution(s) or not make a withdrawal and pay an extra 6% excise tax.

How should we approach this? We would prefer to not have to withdraw the money from one or both of our HSA accounts.

[dmertz]

“Redeposit the full amount of the excess contribution made in a prior year plus earnings back into this HSA as a contribution for the current year.”

This redeposit has nothing to do with your 2022 tax return.  It becomes a personal HSA contribution for 2023 that is reportable on your 2023 tax return.

[BillM223 · Accepted solution]

The 8889 is not well designed to describe this situation. dmertz is correct that the option you are describing is a sneaky way of withdrawing the excess in 2022 and recontributing it in 2023. But if you did nothing in TurboTax for 2022, then this is what would happen anyway.

You would pay 6% excise tax on the rollover amount - you will have to do this on any amount that you do not withdraw.

If you do nothing, and not withdraw the excess, then the rollover will appear invisibly on line 2 on next year's 8889, that is, the rollover amount will not print but will act like a personal contribution (i.e., not through your employer). I describe it this way because next year, line 2 (8889) will often be blank, yet on line 13, there is the instruction, "Enter the smaller of line 2 or line 12". If line 12 is $500 and the invisible amount on line 2 is $1,000 (your carry over from the previous year), then taxpayers do not understand why the amount on line 12 is chosen - surely the $0 on line 2 (surely a blank line stands for $0) is less than line 12. 

As I said, the 8889 is not designed to handle this situation.

"It only allows me to withdraw all or part of the excess contribution(s) or not make a withdrawal and pay an extra 6% excise tax." Simply put, you will pay 6% on anything you do not withdraw. TurboTax is handling the situation - just do nothing and the result will be what the HSA custodian wants you to do: all the money will remain in the HSA, less the 6% penalty.

Let's put it another way - you ARE going to take some of your money out of your HSA: it will be either some or all of the excess, or 6% of the excess. There is no option to keep all your money in the HSA.