Employer Contributions to HSA Not Reported on W2

[Patty_21]

I retired prior to Jan 2023.  Therefore I do not receive a W2 from my previous employer. However, that employer continued to make contributions to my HSA in 2023; I received form 5498 showing the employer's contributions.  The amount contributed on form 5498 equals the amount distributed on the 1099-SA.  I was not on medicare and was covered by the employer's High Deductible Insurance Plan for the entire year.  When I enter the 1099-SA and check YES, I spent the distribution only on medical costs, it still increases my Federal Tax Due by 22% of the distributed amount.  From everything I've read and been told by a TT accountant, I should not be taxed on this distribution.  I cannot find anywhere in TT to enter Employer HSA Contributions when you do not receive a W2 from the Employer.  Please advise.

[BillM223]

So, your employer contributes to your HSA, but does not give you any taxable income?, not even a 1099-R or 1099-MISC?

How do the HSA contributions get reported as income, unless you entered one of this forms?

OK, you will have to treat this as a "personal" contribution.                               

As you go through the HSA interview, you will see the screen, "Let's enter [name]'s HSA contributions". Back when you were still employed, your employer's contributions would appear on the first line. The second line is (normally), "any contributions you personally made (not through your employer).

Despite the wording, you will put the employer's HSA contributions here. Otherwise, you won't get credit for it.

[Patty_21]

Thank you for your response.  No, my prior employer did not provide me with any other income in 2023.  The amount they contributed showed up as income only AFTER I had entered the 1099-SA.  I did as you suggested and entered the amount as if I had contributed it.  This reduced my Federal Tax Due to the amount it was prior to entering the 1099-SA.  This seems erroneous to me since I didn't contribute it??  How will this hold up in an IRS audit?

[BillM223]

Don't worry about it seeming to be wrong to report and employer contribution as your own.

In fact, you are required to report all HSA contributions, no matter where they come from. And in this case, you don't have the mechanism of a W-2 to report it, so the way I told you is the correct way.

HOWEVER, you can't take it as a deduction (on line 13, Schedule 1 (1040)), if you did not report it as income. 

What is on the 1099-SA? What was it for? Did you report it as qualified medical deductions? I don't understand how you got it reported as income, the first time.

[Patty_21]

Thank you again for responding.  The 1099-SA shows the amt in column 1 as Distributed Amount.  As I said, I went through the HSA questionaire and answered YES that the distributed amt was used for Medical Expenses.  At the point of entering the SA form, the Federal Tax Due jumped 22% of the Distributed Amount.  So I'm not sure what else to tell you.  Looking at the 1040 form in TT, nothing shows on line 13 of the form.

[BillM223]

"At the point of entering the SA form, the Federal Tax Due jumped 22% of the Distributed Amount.  "

Ah, this is a case of watching the Refund Meter too closely. Yes, the IRS considers the HSA distribution to be taxable UNTIL you show that it was qualified (i.e., for medical purposes), which you did on the next screen. Did you not notice that the distribution was removed from income as soon as you answered the question about the distributed amount was used for Medical Expenses?

So as soon as you entered the 1099-SA, the income increased, per the IRS, and on the next screen, after you enter your answer about Medical Expenses, the income went right back down.

OK, now that I know why you think the 1099-SA was taxable income, we can address the real situation.

You received income from your former employer, although he/she did not send you any forms for it (they really should have). So to do this correctly, you should do the following:

1. Go to Wages & Income->Less Common Income->Miscellaneous Income, 1099-A, 1099-C, and click on Start.

2. Go down to Other Reportable Income on the next screen.

3. Say YES to Other Taxable income.

4. On the next screen, just enter as description, "HSA contributions" and the amount.

This will be added to Other Income on your 1040 (through Schedule 1 (1040)), so that it will be OK for this amount to be removed from your taxable income on Line 13 on Schedule 1 (1040). Now you have reported both the employer's contribution and the appropriate deduction.

[Patty_21]

The income did NOT decrease after I entered that I had used the distributed $ for medical purposes only.  I removed the entry you had instructed me to make yesterday - where I entered the distributed $ amt in the amount I contributed to the HSA.  Then I followed your most recent instructions.  The result was a jump in Fed Tax Due of over $500!!!  This is worse than if I had left things as they were when I submitted my initial question.  At this point, I am not sure what to do.

[BillM223]

You have me totally confused.

Are you saying that the amount on the 1099-SA is the same as the amount of HSA contributions from your former employer?

That is simply not right, because the 1099-SA reports distributions from your HSA, not contributions to your HSA.

Who sent you the 1099-SA? Your employer or the HSA custodian?

[Patty_21]

Good morning,

The 1099-SA distributed amount matches the amt contributed to the HSA by my employer.  I had medical expenses in excess of the deposited amt last year; so I withdrew the full contributed amount to cover these medical expenses.  The 1099-SA was issued by the HSA administrator; my employer did not provide any 1099 showing their contribution.  All I have that shows this is form 5498 which does not get entered in TT.  When I initially posted my question on TT, I had simploy entered the 1099-SA info, answering YES to the question as to whether all the distributed amount was used for medical expenses only.  The amount contributed by my employer was not entered anywhere because I couldn't find a place to enter it.  This resulted in $220 in add'l federal tax due.  I have followed your instructions for the two solutions you have suggested thus far:

1) Entered the employer contributed amount under Amount I Contributed on the HSA questionaire.  This results in 0 add'l federal tax due which is what would be expected since there should be no tax on the HSA $.

2) Removed that I had contributed to the HSA and instead, entered the Employer Contributed Amount under Other Taxable Income.  This results in over $500 add'l federal tax due.  This is not a good solution.

Yesterday, I removed the entry made in #2 above and went directly to form 8889-S.  I went to Line 9 Employer Contribution Smart Worksheet and entered on line E (Other employer contributions for 2023 not reported above) the amt they contributed (which equals the amt distributed since I used it all).  This results in that same amt appearing on Line 9 of the form.  Section 14's Smart Worksheet section shows the correct amount on lines A and D; G is 0.  Below the Smart Worksheet section, lines 14a & 14c show the correct distributed amt; line 15 (Qualified Medical Expenses paid using HSA distributions) shows the same amount. All of this appears to me to be correct.  The result of all of these entries is the same as when I began with federal tax due increasing by $220.

I hope this makes everything clear.  I've tried all along to be as precise in my descriptions of the scenario as possible.  I appreciate you trying to help me. 

[BillM223]

I appreciate your efforts. I was confused that the distribution from the HSA was exactly the same as your former employer's contribution to your HSA. This is not wrong, but it is unusual...except in your case 😉

Two things should go together:

1. Entering the HSA contribution from your employer as Miscellaneous Income, as I noted above.

2. Entering the HSA contribution from your employer as a PERSONAL contribution, as I noted above..

When you do both of the things, and delete anything else you have done in this area, there is no way that your tax will increase, because step #1 will increase your taxable income, and step #2 will reduce it right back down.

And please don't watch the Refund Meter too closely - what matters is the final answer...

[Patty_21]

Well, I'm not sure what you mean by not watching the refund meter too closely because the bottom line is that after doing as you have suggested, the federal tax due did increase by $220 and these were the last entries made on our TT for 2023.  So the two entries did not cancel themselves out.

[BillM223]

$220 compared to what? When you entered the HSA amount as a deduction but did not enter the HSA contribution from your employer as income?

That would not have been an accurate tax return, because you would have been taking a deduction on dollars that you never declared as income.

In other words, you should not be comparing your results to an invalid tax return.

[Patty_21]

Based on hours of research and a conversation with another TT expert several days ago and my previous employer, the Employer Amount Contributed to an HSA is not taxable and therefore is not to be entered as taxable income.  So it makes no sense to me to enter it as Other Taxable Income.  And to report that I made the contribution just doesn't sit well with me because it is untrue.  If it had been reported on a W2 in box 12, it would have had a code W.  IRS instructions for that code say to report the amt on form 8889 Health Savings Accounts under Employer Contributions.  Doing this results in the same $220 increase in federal tax due so I guess I'm just stuck with this outcome.  It stinks that I'm being taxed for using the HSA $ for qualified expenses, but I guess that's just what it is.  Thank you again. 

[BillM223]

If you would enter BOTH items that I told you to do (the income item and the deduction item), then the employer HSA contribution would not be taxable; you are being confused because you entered the deduction without entering the income, artificially lowering your tax.

In fact, if you didn't enter either one, you would be no worse off...except that your 8889 would be incorrect. But, I would rather than you do that than just enter the deduction, because you can't enter deductions for items that were never declared as income.

"And to report that I made the contribution just doesn't sit well with me because it is untrue." You misunderstand how the HSA works. On line 2 of the form 8889, the instructions say, "Line 2 Include on line 2 only those amounts you, or others on your behalf, contributed to your HSA for 2023." You must report ALL contributions to your HSA, no matter who made the contributions. Please don't get hung up on this idea that if you didn't make the contribution, you don't have to report it.

Furthermore, you misunderstand the IRS instructions about code W. This refers to ANY contributions made by or through your employer, whether the employer made the contribution or you did by means of payroll deduction.

The IRS speaks English the same way that lawyers speak English (and for the same reason), the actual meaning is not obvious to the average English speaker. And TurboTax is stuck using the IRS' terminology.

"It stinks that I'm being taxed for using the HSA $ for qualified expenses," - this is simply not true. It's because you don't understand how the HSA works. I am sorry to be so blunt, but the TurboTax people that you spoke to were answering a different question than what you thought you asked. And the $220 that you keep referring to is an artificially low tax number caused by double-dipping (you taking an HSA deduction without declaring the contributions as income).

[Patty_21]

Sir, with all due respect, the TT expert I spoke with initially was trying to answer EXACTLY the same question that I began with in this string of posts.  And I DID make the two entries as you instructed me.  I entered the employer's contributed amt as Other Income with a description of "HSA Contribution".  Then I went through the HSA questionaire and entered that amt again on the screen that asks if I contributed to the HSA.  I'm not sure what else to say to you to make you understand that I have followed your instructions to the letter, and the result was the same increase in Federal Tax Due as it was when I had entered only the 1099-SA.  So if the result of making the entries you suggest is the best that I can hope for, then I guess there is nothing more to discuss.  I do appreciate your time and input. 

And