Excess HSA contribution rollover to next year

[jianglai]

We over-contributed our HSA in 2020 and asked the HSA provider to roll over the excess amount to 2021. How can this be properly entered in TurboTax? The W-2s show excess contribution and if I choose "I will withdraw the excess amount", that amount gets taxed in 2020. What I expect to happen is that we contribute less in 2021 to stay under the limit and we don't pay taxes on HSA contribution in either year. Do we need the employer to issue a corrected W-2 to show new HSA amount? Will 2021 W-2 reflect the rolled over amount?

I guess we should have just done the withdrawal instead of the rollover, but now I just want to know how to deal with this situation.

Any help would be appreciated.

[dmertz]

[Edit:  See the follow-up replies below since this does actually sound like a return of excess contribution is being done.]

If you choose to simply apply the excess as part of your 2021 HSA contribution, on your 2020 tax return the excess will be treated as taxable as income (because is was excluded from the amount in box 1 of your W-2) and it will be subject to a 6% excess contribution penalty.  With you apply the excess as part of the HSA contribution for 2021 that you are eligible to make, it will be treated as a personal contribution and you'll receive a deduction on Schedule 1 for this personal contribution.  [However, upon a second reading of the question, it seems that this is not the approach being taken.]

Your W-2 is correct as issued.

To avoid the 6% excess contribution penalty you can obtain a return of the excess contribution before the due date of your 2020 tax return and then just make normal HSA contributions for 2021.  [It appears that this is the approach that is being taken, with the amount distributed as a return of excess contribution being used to make a normal personal HSA contribution.]

[Opus 17]

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@dmertz wrote:

To avoid the 6% excess contribution penalty you can obtain a return of the excess contribution before the due date of your 2020 tax return and then just make normal HSA contributions for 2021.

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The customer may be thinking of a situation where the HSA bank makes a return of excess contribution for 2020, but instead of sending a check back to the account holder, they keep the money and re-deposit it into the account as a 2021 contribution.  (In other words, 2 separate transactions. but the money never gets to the customer in between).  (This is not a "rollover" as that term has a different meaning.)

In this case, how is it handled on the tax return?

[dmertz]

I see.  If that's the case:

1. 2020 TurboTax needs to be told that the excess will be removed.  2020 TurboTax will then include this amount as other income on Schedule 1 and there will be no excess contribution penalty.
2. You'll get a code 2 2021 Form 1099-SA that will need to be reported on your 2021 tax return next year to include in income the amount of earnings distributed with the returned contribution, shown in box 2 of the Form 1099-SA.
3. You'll need to report as a personal 2021 contribution the gross amount reported in box 1 of the 2021 Form 1099-SA.  This will cause TurboTax to include an HSA deduction of this amount on your 2021 Schedule 1.

[jianglai]

Thanks for the prompt reply, yes when we (my wife) inquired the HSA provider they provided a "Distribution of Excess HSA Contribution Form" which contains three options:

1. Change tax year to 2021.

2. Check.

3. One time electronic fund transfer

And we chose option 1. So from what you said my understanding is that the excess contribution will be taxed this year but in next year we will get an extra deduction on the excess contribution amount? The earnings on the excess contribution will also be taxed next year. Is this correct?

[dmertz]

Correct.  Just remember that with this option the entire gross amount (excess plus earnings) will become a personal contribution for 2021, not just the excess amount.

[Opus 17 · Accepted solution]

Since there is no standard procedure called “change tax year to 2021”, I am guessing as to what the bank is doing. You will have to confirm this with the bank if you have questions.

What I am guessing the bank is doing is withdrawing the excess from your account for 2020, putting that money in their pocket for a minute, and then taking the money out of their pocket and putting it back in your account as a 2021 contribution. Two separate transactions with the exact same result as if they mailed you a check for the excess and you mailed them a separate check for a 2021 contribution,  without the hassle of actually mailing checks.

In that case, you will tell TurboTax that you withdrew the excess for 2020. At the end of 2021, you would expect to receive a 1099–INT statement for the interest earned by the excess amount. You would report this interest income on your 2021 tax return. You would also include the re-deposited amount as a 2021 HSA contribution along with any other HSA contributions you make during 2021.  

Just remember that you may need to reduce your other 2021 contributions so that your total contributions including the redeposited amount don’t exceed your 2021 limit.

[dmertz]

Code 2 Form 1099-SA, not Form 1099-INT.

[jianglai]

Thank you both!