Excess HSA Contribution

[Apples 521]

Hi,

I was on an HSA family plan this year Jan-Jul and then moved to an individual plan August 1.  I fully funded my HSA based on the 2022 family limits of $7,300 before August 1.  My understanding is that after downgrading to an individual HSA, the annual contribution limit for me would be ($7,300 max fam x 7months) + ($3,650 max individual x 5months) = $69,350 / 12 = $5,779 new max contribution.  This means I am overfunded by $1,521  ($7,300 - $5,779).

From my understanding I have two options.

1. I can submit an excess withdrawal form to my HSA bank and withdraw that excess $1,521 and let my employer know.  They will update my contributions so my year end W2 reflects the correct $5,779 max contribution.
2. I can let the excess sit in my account and pay a 6% excise tax on it each year it is not used up (either by contributions, or spending it)

My questions are

1. Is my understanding of the above correct?
2. If I do option 1 above and withdraw the excess- does my employer tax me on that withdraw, or am I taxed on that withdraw when I file my 2022 taxes?
3. If my wife gets an HSA plan in January and I move to that plan and we make contributions to her plan, do those contributions count towards my excess funding next year?
4. Based on my calculation that my new contribution limit is $5,779 and I’ve funded $7,300, what happens in the case I pay for medical expenses and my balance at year end is $2,000?  Is this $2,000 still an excess since I’ve drawn my balance down below my max contribution limit of $5,779?
5. Is there a dollar amount I can draw down to that wont require me to make a withdrawal or carry forward with 6% excise tax?  I’m assuming not since I’ll want my W2 to reflect my new max contribution limit.

[Mike9241]

7300*7/12=4258.33

3650*5/12=1520.83

total 5779.16

1. Is my understanding of the above correct? yes 
2. If I do option 1 above and withdraw the excess- does my employer tax me on that withdraw, or am I taxed on that withdraw when I file my 2022 taxes?  note that you not only have to withdraw the excess but also the earnings thereon so you must make clear to the administrator you're withdrawing excess contributions.  taxability depends on who is making the contributions. if its you through payroll deductions. the only the income is taxed becuase you get no deductionfor the excess. if it's your emloyer's contrbution it's taxable. 

1. If my wife gets an HSA plan in January and I move to that plan and we make contributions to her plan, do those contributions count towards my excess funding next year?  excess funding is a cumulative computation.  assume she starts a family plan on Jan 1 with a $7300 limit, less your $1521 from 2022 means she can contribute the $5779 and you get a total deduction for 2023 of $7300  
2. Based on my calculation that my new contribution limit is $5,779 and I’ve funded $7,300, what happens in the case I pay for medical expenses and my balance at year end is $2,000?  Is this $2,000 still an excess since I’ve drawn my balance down below my max contribution limit of $5,779?  you pay a 6% on the lesser of the excess contributions or the fair market value of the account 
3. Is there a dollar amount I can draw down to that wont require me to make a withdrawal or carry forward with 6% excise tax?  I’m assuming not since I’ll want my W2 to reflect my new max contribution limit. if you don't withdraw the excess, the only way to void the penalty ids to spend the entire account

[Apples 521]

Thanks Mike9241.  The contributions were 100% funded through payroll deductions.  My employer did not contribute anything.  A few follow up questions.

1. When I complete the excess withdrawal form for my administrator, do they calculate the excess earnings as well, or do I need to calculate that?

2.  I let my employer know I made a $1,521 excess withdrawal from my HSA- do they record that and tax me through my next paycheck?  Or do I pay income taxes on that when I file my 2022 taxes?

3.  Say my earnings on the excess is $3, do I include that amount when letting my employer know of the excess contribution withdrawal?

This brought up a few questions on a parallel subject.  My wife's employer reimburses her up to $1,800 for medical expenses (I believe it's an FSA arrangement, but the business just cut her a check for $1,800 after providing an itemized receipt of my surgery bill).  In her benefits package she was given $1,800 to spend on medical or childcare expenses, but required to submit itemized receipts for reimbursement.  They manage this themselves, not through a 3rd party.  Through her previous employer, she had an HSA which she contributed $100 Jan-Mar ($300 total for 2022).  Her total balance was $1,185.58.  She withdrew that entire $1,185.58 balance to pay for my medical bills and close her HSA account, which is now at $0.

1.  How does the $1,800 FSA reimbursement play into our taxes?  Does this affect my excess HSA funding in any way?

2.  Since she contributed $300 this year to her prior HSA, but reimbursed herself her entire $1,185.58 HSA balance for my medical bills, does this affect my excess contributions since her account balance is now $0.

3.  Based on this, does my excess contribution withdrawal of $1,521 originally calculated still apply now, or do I need to withdraw more?  How does this second part of my wife's FSA and HSA play into our taxes?

[Mike9241]

then I will change my answer. since all the contributions came from payroll deductions line 1 on your w-2 was reduced by the HSA contributions that means the excess will be taxable income - withdrawn or not

the institution computes the excess and you do not inform your problem.

the problem I see is that your wife has an FSA covering you.  depending on when it started you may not have been eligible to contribute to an HSA. 

maybe others will comment on this. if not consult a tax pro  

[Apples 521]

Thanks Mike9241.  I'm thinking I'll go the route of withdrawing the excess.

My wife's FSA was in effect April 1.  It may not actually be an FSA- her benefit packet called it a Section 125 Cafeteria  plan.  She gets $1,800 reimbursed for medical or childcare costs.  She doesn't (and can't as far as I'm aware) contribute anything to it, its just there as a use it or lose it benefit.

Thanks for your help and happy to engage any other advice from others.  

[Opus 17]

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@Apples 521 wrote:

Thanks Mike9241.  I'm thinking I'll go the route of withdrawing the excess.

My wife's FSA was in effect April 1.  It may not actually be an FSA- her benefit packet called it a Section 125 Cafeteria  plan.  She gets $1,800 reimbursed for medical or childcare costs.  She doesn't (and can't as far as I'm aware) contribute anything to it, its just there as a use it or lose it benefit.

Thanks for your help and happy to engage any other advice from others.  

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You need to get exact clarity on this.  If this is an FSA (flexible spending arrangement for medical care) then, by operation of law, she can use the funds for herself or her spouse or her dependents.  The employer can't exclude you. This counts as "other medical coverage" for you and absolutely bars you from contributing to an HSA, even if you don't actually use the funds for your care.

If this is an HRA (health reimbursement arrangement), then the employer is allowed to set the terms, including excluding a spouse.  If your spouse has an HRA that pay for employee expenses only and excludes spouse and children, then your spouse can't make HSA contributions but you probably can.