Excess contribution to HSA

[DGrigg]

To Level 2;

Sorry I thought I had submitted my 2019 question as a brand new one.  Can you introduce it as a new question?  Sorry I missed how to use the web site for submitting new questions.

Regards,

[BillM223]

@DGrigg

It sounds like you were covered by an HDHP and had no conflicting coverage (Medicare) for only two months: January and February.

Your limit calculation is as follows (I am assuming that you had Family HDHP coverage):

2 months * $583.33 (which is $7,000/12)

This equals  $1,166.67

PLUS

2 months * $83.33 (which is $1,000/12 - this is the catch-up you get for being 55 or older)

This equals $166.67

Together this makes your limit $1,333.33. The only way you could get a limit of $2,000 is by mismarking March as a month covered by the HDHP instead of as by Medicare.

Medicare disqualifies you to contribute to an HSA, even if your HDHP policy is still active. And the coverage for the month is determined by the coverage on the first day of the month. You said that you began Medicare on March 1st, so that makes March a Medicare month, not an HDHP month.

Please go back into the HSA interview and change that entry.

As for your withdrawal of the excess question (now $2,666.67), the IRS has extended all 1040 returns to July 15th, and since the withdrawal of the excess contribution had to be done by the due date of the return as extended. this means that the date is extended to July 15th.

However, you have no incentive to wait that long. This is because your excess is accruing interest (presumably) all of which will have to be calculated and reported on your 2020 taxes. Why continue to let that amount increase?

If the money is in your HSA, go ahead and visit your HSA custodian's website and see if you can request online a "withdrawal of excess contributions" (otherwise speak to a customer service rep). Note that when your HSA custodian processes this request, they will send you the check for $2,666.67, so why wait?

[DGrigg]

Thanks for reply.  Just to clarify, I did have Family HDHP for three months through March 2019, so your explanation of why the software stated that I was limited to $2,000.

So, my only confusion is the interest owed point.  I need to withdraw the excess contribution of $2,000 (reminder I contributed $4000, so $2000 is considered excessive.  Anyhow I understand that my withdraw needs to be by the new July 15th date.  Since most of my HSA balance is invested in the market, and the market is way down, I want to withdraw the money later in the summer.  So.... my question is in reference to the "interest" that I have to pay?   My understanding from the software was to only withdraw the overfunding amount by the filing date.    

[BillM223]

"My understanding from the software was to only withdraw the overfunding amount by the filing date.   "

This is correct. You have no practical way to calculate the earnings on that excess while it was in the HSA, so that is why the IRS tells the HSA custodian to do it.

For this reason, please do not try to withdraw the earnings from the excess.

Instead, early next year, the HSA custodian will send you a 1099-SA with a distribution code of '2' that will show the earnings in question. When you enter this into the HSA interview (yes, because of the 1099-SA, you will have to declare that you have an HSA, even though for 2020 you are covered by Medicare every month), then the earnings will be added to Other Income on line 8 on Schedule 1 (1040). The excess itself, of course, was added to Other Income on your 2019 return.

Once you have entered the earnings next year, you will be done with this reporting, unless there is still some money in the HSA and you use it.

And you are correct that this year (only) you have until July 15th to withdraw the excess UNLESS you file an extension, in which case you have until October 15th to request the withdrawal (this is true every year). 

[Jhayden]

@BillM223 

Hi Bill

I've fallen into the trap where I made an excess contribution in 2018 of 4,000.  My HSA is old as it predates the requirement of an HDHP.  I haven't had an HDHP for years but still had the HSA as it had funds in it.  We were using it for medical bills so the balance was declining.  We decided in 2018 to make a contribution and let it sit in the HSA and not touch it so it would grow for us to use in our retirement.  When we did that in TT 2018, it told us about the 6% penalty if we didn't remove the contribution from the HSA.  We figured the $229 penalty would be worth the tax free growth of the HSA funds that got invested until we retired down the road.  So we kept the excess contribution in the HSA and paid the penalty on our 2018 return as shown on form 5329 row 49.   Then I'm doing my 2019 taxes in TT and it asked me if I overfunded in 2018.  I said yes but thought it was odd to ask me since I already paid the penalty.  Then I researched and found out that as long as the excess is in the account, it's counted as an excess every year and penalized.  Doh!  So to avoid recurring penalties we decided we'd remove the excess.  But when i checked off the box to say we'd remove it by Jul 15 2020, TT told me "unfortunately, all of your excess contribution is caused by a prior year excess contribution.  It is too late to remove this excess contribution".  So it seems like TT is telling me I'm stuck with the penalty until I die.  That can't be right.  Any thoughts on why TT seems to want to put me in an endless loop and not be ok with me saying we'll remove the excess contribution?

Thanks in advance

James

[ThomasM125]

You can remove the excess, but you need to do it before the close of the tax year. You can't wait until the due date of the tax return. That only applies to the first year you over-fund the account, since often that is a mistake so the IRS allows you some extra time to correct it. Once you realize the mistake since it is reported on your tax return, the IRS requires you to correct it by the end of the current year.

[Jhayden]

Hi Thomas

I understand that but the problem is that I did not remove the excess last year.

Upon further digging around and the fact that I was able to use the "LEARN MORE" button on my TT return for this particular item (it wasn't working before), I learned I have three options to deal with the excess..

1. Change my insurance back to an HDHP next year which I won't since I have many kids and need a regular plan

2. Take a non qualified w/d from the HSA and pay the tax and a 20% penalty.  Yikes

3. Spend down the whole HSA balance with qualified medical expenses to get it to a zero balance.  Luckily there's no time limit so I could submit bills from years ago as long as they weren't already reimbursed by another source like and FSA.

I tested the scenario in TT by making my EOY balance on the HSA $0.00 and it worked.  So we'll find bills to get reimbursed for and then on next years return, I can put the EOY balance as $0.00 since that will be what shows on the 5498-SA I'll get.  

THanks for your help though

James

[BillM223]

@Jhayden

"Any thoughts on why TT seems to want to put me in an endless loop and not be ok with me saying we'll remove the excess contribution?"

Please do not blame TurboTax, these are the rules under which HSAs are handled by the IRS.

As Thomas noted above, excess contributions have to be returned by the due date of the tax year for which the excess was generated. Usually this works out OK because you discover the excess after the end of the tax year as you are doing your return, which is before the due date of the return (we hope). And if you file for an extension, that just moves the due date of the return (and the date to withdraw the excess) to October 15th.

You are correct that the 6% penalty is based on the lesser of the amount of the excess or the value of your HSA at the end of the year. 

You have two choices:

1. Accept the 6% penalty every year until your HSA value runs to zero (remember the HSA custodian may be charging you maintenance fees), or

2. Ask your HSA custodian for a distribution equal to the excess which you will NOT spend on qualified medical expenses. When you enter the 1099-SA next year, then this will be added to your Other Income (line 8 on Schedule 1(1040) as well as have a 20% penalty - but the long-running excess will finally be cut off.

You will have to look at your spending plans for your HSA as well as the maintenance fees and number of years in which you might be expected to pay the 6% penalty, and work out which choice is better for you.

[ius77]

Thanks,   I solved the problem.

[Maynard G Crebs]

I have an HSA and Turbo Tax is saying I am overfunded by $3,000.00 and it has to be withdrawn? But I have not overfunded my HSA. I read that support can send an update to my desktop or support can push my tax return through

[MayaD]

Usually, your HSA contribution is reported in box 12 of your W-2 with the code W.

 Make sure that you don't enter that amount anywhere else on your return. 

To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements.

• You are covered under a high deductible health plan (HDHP),  on the first day of the month.
• You have no other health coverage except what is permitted under Other health coverage.
• You aren’t enrolled in Medicare.
• You can’t be claimed as a dependent on someone else’s 2022 tax return.

For more information, check: Why am I showing an excess HSA contribution?

IRS.gov