excess HSA contribution withdrawal

[stalled]

I overcontributed to my HSA in 2019 by $29.  I have been paying the 6% penalty for 2019 and 2020.  In 2021, I withdrew the $29 from my HSA and received a 1099-SA with a distribution code of 2.  I entered this in turbo tax.  I retired in 2021 and no longer have a high deductible health coverage.  I had no contributions to my HSA in 2021.

In Turbo Tax on form 8889,  Part 1 correctly shows $0 on line 1 for contributions.  However on line 13 the directions say to enter the smaller of line one or line 12 (there is an amount on line 12).  Since line 1 is zero I expect to see zero on line 13.  Somehow there is $29 on line 13.

Second issue: on part ll of form 8889 line 14a correctly shows my distribution of $29.  However line 14B shows $29 withdrawn by the due date of my return.  It was withdrawn by the due date of my 2021 return but the excess is from a year prior to 2021 so I expect to have to pay the 20% penalty.  But since the $29 is on line 14b there is no penalty.  

On my 1040SR line 10, $29 is being deducted from my income.  Shouldn't it be added with a penalty?

[BillM223]

Did you have high deductible coverage for any month in 2021?

Your description makes sense if you had HDHP coverage for even one month in 2021.

[stalled]

I had high deductible coverage for 5 months in 2021.  I had no HSA contributions.

[stalled]

I was not allowed any HSA contributions because I had enrolled in Medicare part A

[BillM223]

When you came to the question of HDHP coverage in the HSA interview, what did you enter? Did you enter that you had Medicare for all 12 months? Or did you answer that "I had different types of coverage at different times" and then indicate that you had HDHP for the first 5 months?

[stalled]

Originally I indicated High deductible plan for 5 months and medicare/none for 7 months..  After this post I went back and changed it to Medicare all year.  That got rid of the $29 credit to my income which I believe is correct.   HOWEVER on form 8889 line 14a shows a distribution of $29 and 14B also shows $29.  I am getting NO 20% penalty for the distribution of the excess contribution.  Also turbo tax is showing on form 5329 that I am being penalized 6% for the excess contribution and it shows that I still have an excess contribution despite the fact that I withdrew it in 2021. This is a nightmare for only $29.  How do I get rid of this excess contribution?

[BillM223]

"it shows that I still have an excess contribution despite the fact that I withdrew it in 2021." - No, you did not withdraw it according to the rules. If you were going to withdraw a 2019 excess, you had to do it by the due date of the 2019 return (i.e., July 15, 2020). Once that date passed, you could no longer withdraw it, but you had to do something else.

When you have an excess that you do not withdraw, it carries over to next year. Under the covers, the excess reduces the annual HSA contribution limit for the next year, so you had better reduce your HSA contribution by that amount, so the carry over can be "used up" as if contribution were made in that next year.

However, the 8889 doesn't have a good way to show this. Instead, the carryover is sort of like an invisible personal contribution. That's why you see $29 on line 13. There is an invisible $29 on line 2 as if you had made a personal contribution, so whatever was in line 12, it had to be bigger than $29 and the program chose the lesser amount.

OK, I think that maybe you didn't have Medicare for all 12 months (did you?), so I would like you to do this:

1. Delete all your HSA data (because you have confused both me and TurboTax at this point) - see below.

2. Re-enter your HSA data, choosing the actual months you had HDHP coverage and did not have Medicare.

Then come back and tell me what you have.

**delete all HSA data**

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop***

3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one) 

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview. 

[stalled]

I did have Medicare part A for all 12 months of 2021. That covers hospitalization.  In addition I had an HDHP for 5 months to cover medical expenses and after that I had Medicare part B for the remaining 7 months.

[BillM223 · Accepted solution]

That's too bad. I thought we could eliminate that $29. 

Well, since it will just carry over every year and never get used up (because you are no longer eligible to contribute to your HSA), you will be dinged 6% of $29 every year until one of two things happens:

1. Your HSA balance goes to zero. This is because the penalty is 6% of the smaller of your excess carried over or the balance in your HSA(s). So, when your balance goes to zero, you can just ignore it.

2. You make a distribution not for medical expenses of $29. When the 1099-SA arrives with its distribution code of "1", you will tell TurboTax that you did not spend any of it on qualified medical expenses. TurboTax will then add the $29 to Other Income so you pay tax on it, and will penalize you 20% of the $29. Then the carryover will be extinguished for good.

Since you know what in your HSA(s), you need to work it out for yourself which way is better.

[stalled]

I think I already did #2.  I requested and received a distribution in 2021.  But my 1099-SA that I received for 2021 has a distribution code of 2.

[BillM223]

"has a distribution code of 2." This means that you told the HSA custodian that this was a withdrawal of excess contributions. They have to take your word for it, because they don't know what happening in your personal tax situation.

But we know that this was not a valid withdrawal of excess contributions, which is why TurboTax is not cutting off the carry over.

OK, did you go through the erase all HSA data and re-enter it? If so, you should now show a 6% penalty for the $29 yet again. And there should be a 5329 added to your return. 

To kill this permanently, you'll need to do #2 but not as a withdrawal of excess contributions, so that the 1099-SA that eventually shows up will have a distribution code of "1". This will stop the carryover once and for all.