Excess HSA contribution 2023

[DK210]

In 2023, our son contributed $13 to his HSA in order to correct an overdraft. (He had a medical bill for $120 but only had $118.08 in the HSA.) The $13 came from his checking account, so post-tax dollars, and he made no other HSA contributions in 2023 (or 2024 for that matter). Also, the HSA is not in any investment, so no earned income. Thus, the HSA has a current balance of $11.08. On his 2023 tax return, he filed Form 8889, leaving Line 1 blank (because he wasn’t in a single or family HDHP) and putting the $13 on Line 2. Fast forward to today, in preparing his 2024 taxes (no contributions or withdrawals from the HSA in 2024), we are beginning to think the 2023 $13 HSA contribution was an “excess contribution” and need to know what to do about it now.

In calling Optum Bank, they referred us to their Excess Contribution & Deposit Correction Form, but in the Withdrwal/distribution type, they insist he check the box 2 for ‘Correction for a previous individual contribution deposited in error’ versus box 1, ‘Excess contribution amount.’ Their rationale is that box 1 is only used for the refund of money deposited in excess of his maximum contribution limit. I explained that he didn’t have an HDHP at the time (thus any contribution would be excess) but they said it didn’t matter. They also said along with mailing them the form indicating the box 2 ‘correction,’ he would need to include a check for $1.92 so that coupled with his $11.08 HSA balance, they would send him a check for the entire $13, thus correcting the error. Does this sound right?

Next, how should he proceed with his taxes? The deadline is looming and we’re not sure what to do. When we called the IRS hotline, they said they don’t answer HSA questions. It’s unlikely the $13 will be withdrawn from the HSA by April 15th. Should he file his taxes without addressing this issue, then amend his 2023 return by attaching Form 5329 to report the excess contribution? Or does he address this now somehow? Or does he do nothing about it given the small amount of money involved in the $13 excess?

[BillM223]

Actually, your son would have been best served by paying the $118.08 out of the HSA and $1.92 directly from his checking account to the medical bill, leaving the HSA out of that last part.

They also said along with mailing them the form indicating the box 2 ‘correction,’ he would need to include a check for $1.92 so that coupled with his $11.08 HSA balance, they would send him a check for the entire $13, thus correcting the error. Does this sound right?

Actually, this is quite correct. 

It is not clear to me what type of HDHP coverage your son had in 2023, and how much he contributed, either directly or through his employer. Please me know. Then will we know if amending the 2023 is called for.

"Thus, the HSA has a current balance of $11.08. On his 2023 tax return, he filed Form 8889, leaving Line 1 blank (because he wasn’t in a single or family HDHP) and putting the $13 on Line 2."

What does this mean? He had NO HDHP coverage in 2023? Then he should not have made the $13 contribution. But the $118.08 was already in the HSA from a prior year?

Anyway, it looks like if he can do this corrected contribution, the way the HSA custodian says, that would be great. Then there would be no excess in 2023 and no need to amend.

He should file 2024 on time in any case, because you are required to file something by April 15th (even if it is just an extension request). Of course, the amount he owes is due on April 15th, even if you file an extension. And if his 2023 contribution is "corrected", then there is no excess and no reason to worry about it on his 2024 return.

[DK210]

To clarify:

- He did not have an HDHP in 2023 (therein lies the problem). He was out of the HDHP at the end of 2021, beginning a new plan 1/1/2022 onward that is not an HDHP.

- No contributions were made to his HSA by him directly or by his employer in 2022.

- The only contribution made to his HSA in 2023 was the $13 by him directly to ‘fix’ the overdraft. (Yes, he SHOULD have paid the $1.92 from his checking to the medical biller directly, not to the HSA.)

- The $118.02 mentioned below was his HSA carryover balance from yearend 2022, noted as the fair market value on his 2022 5498-SA, which also noted $0 total contributions.
- The 2023 5498-SA notes $13 in the contribution box & $11.08 in fair market value.

- Part I of his 2023 Form 8889 just has $13 on line 2. As stated, he didn’t check a box on Line 1, because he didn’t have an HDHP. Lines 3-13 are zeros.

Hope that helps.

[BillM223]

OK.

The HSA custodian is going to give his money back as a "Correction for a previous individual contribution", and send him a check for $13.

There is no contribution in 2023, so no excess to worry about. The $13 is no longer in his HSA, right?

Hmmn, this means that if the employer succeeds in doing to return of the mistaken contribution, then your son will need to amend his 2023 return. 

He will go through the HSA interview, which will change the entries on the 8889. Please do not make entries on the 8889 yourself (or himself), because that causes errors, negates the Tax Accuracy Guarantee and often makes it impossible to e-file.

Did he get a 1099-SA in 2023 for 2024 for this $13? He should have. He should enter this 2023 distribution on his 2024 return. Since I assume it was for qualified medical expenses, it will not cost him anything except to force the creation of an 8889 for 2024.

NOTE: when a taxpayer has an HSA but does not have any HDHP coverage, then in the Review TurboTax gets confused and wonders why the taxpayer is in the HSA review when he/she does not have any HDHP coverage. So in the Review, TurboTax insists on knowing which type of HDHP the taxpayer has. 

If the taxpayer correctly said that they did not have any HDHP coverage, then the numbers on the 8889 will be correct. Therefore when the taxpayer gets hung up on this question in the Review (enter Self or Family on line 1), just enter either one - it won't matter since the numbers are already correct with no HDHP reported earlier.

P.S. You do not have to wait to file your 2024 return until the 2023 is amended. Just file your 2024 return and do the 2023 when you get around to it.

[DK210]

Let’s reset the situation as we are still not on the same page.

1. The withdrawal from his HSA is in process now, so it will be completed in 2025.

2. The immediate issue is his 2024 Tax Return. On which line of Form 5329 does he report the $13 excess HSA made by him directly in 2023? Would it be on ‘Line 42: Enter the excess contributions from line 48 of your Form 5329’. This seems like the right place, but given he has not amended his 2023 tax return yet, technically there is no Form 5329 for 2023. Do you see the dilemma? He doesn’t want to have to revise his 2024 tax return in order pay the 6% tax he owes in 2024. He ought to be able to pay it now.

3. He will amend his 2023 Tax Return after filing his 2024 Tax Return.

[RobertB4444]

Line 42 is correct even though there isn't a 5329 for 2023 yet.  There will be as soon as he amends the 2023 return and everything will be fine.

@DK210 

[DK210]

Great. So completing the 5329 line 42 & beyond to pay the 6% excise tax ($1 rounded up on his minor excess) should take care of this issue on the 2024 return. I assume there is no need to file Form 8889 with his 2024 return because he had $0 contributions as shown on his 2024 5498-SA & $0 distributions as well, so he did not receive a 2024 1099-SA.

[LindaS5247]

Yes, that is correct.

You must always file a Form 8889 in any year you or an employer contributes money to your HSA or you make withdrawals from the account.

Click here for What Is Form 8889?