Excess HSA Contribution Question

[Andy M]

In late 2023 I got my notice of excess contributions from my employer for $4,850 and the appropriate form. 

I retired as of December 31 2023, and received vacation and bonus payouts, as well as a$500 addition to my HSA from my employer.  I was covered by my employers retiree health insurance plan at this time.

In February, before I had a chance to do my taxes, I was in the hospital for a month, and did not get taxes going until I returned at the end of March, and I did not get a chance to remove the funds before the deadline.  My total in the HSA was $24,806.

In March, I turned 65, and due to an error on my part in getting Medicare Part D so that my employer Medicare PPO would kick in, I was not covered for the month of March with ANY insurance.  During that month, I accrued over $50,000 in medical bills.  In May (after getting the statements for my care) I used the funds from my HSA, plus savings, to pay down the bill.   There were zero funds left in the account at this point.

While doing my taxes this year, my 2024 1099-SA shows my gross distribution of $24,806 in box 1, $0 earnings in excess in box 2   While doing my 2024 taxes, and filling in the section for 1099-SA, it showed my maximum contribution limit to be $858, and pulled my $4,850 over from my 2023 return, and gave me a new excess contribution total of $4,492 that will be charged at 6%.

I do not see a selection that handles my situation in the sections below asking how I would like to handle the situation:   

1 - Withdraw the excess contritbution by April 15th:  There is nothing left to withdraw.

2 - Withdraw some of the excess contribution by April 15th:  See above

3 - No, I'm not going to make this withdrawal:  which is true, but implies I HAD a choice!

What I believe I need is an option 4 - All funds were used for medical necessity during 2024 with no funds remaining!

Do I just go ahead and use  option 3? Not really sure where to go from here on the HSA item.

[BillM223]

I don't understand how your problem started - your employer normally doesn't know if you made excess HSA contributions, because there are things that affect your annual HSA contribution limit that your employer may not know about.

Well, no matter. Your situation is not unusual -

1. You carried over excess contributions to an HSA from previous years.

2. You've run your HSA out of cash.

3. You now are under some form of Medicare (It doesn't matter which part), so you cannot contribute anything more to the HSA.

OK, tell TurboTax that you will NOT withdraw the excess (since you can't anyway).

What will happen is this:

A. The excess will be carried over to 2025

B. You will be assessed an excise tax (penalty) of 6% of the LESSER of the excess carried over OR the value of your HSA at the end of the tax year. Of course, that is now zero.

C. See line 49 of your 5429, make sure it is now zero.

OK, this means that form 8889 will be attached to your return for the rest of your life. Unfortunately, you must file form 8889 if you made any contributions to or took any distributions from your HSA during the tax year. The excess that is carried over counts as a contribution, because TurboTax is going to try to use it as a personal contribution (line 2, 8889) in the next year.

This is a silly situation that, so far as I know, the IRS has never specifically addressed.

If you don't care that the 8889 is attached to your return, then do nothing, since it will not cost your anything in additional tax. Personally, I might be inclined to go into your list of forms (Forms mode in CD/download) or Tax Tools->Tools->Delete a Form in Online) and just delete the 8889.

The only other thing that I wonder about is this situation about your employer telling you that you had excess contributions. As I said, the employer shouldn't know that, because they can't be sure of what your calculated annual HSA contribution limit is.

Do you mind telling us if you has Family or Self HDHP coverage in 2023, and what your code W amount was, and if you made any direct HSA contributions (i.e., not through your employer)? It not too late to amend your 2023 return if we find an error.