Excess HSA Contributions after Rollover

[Bigg00221]

I had an HSA for 2 months in 2021. I joined a spouse’s PPO insurance plan on March 1. I did not realize that the annual contribution limit was limited to the months you were HSA eligible, so I made a full year contribution to my HSA out of my checking account (not through payroll). In preparing my 2021 taxes, I’ve realized that I was only entitled to a $600 contribution, and so I will need to remove the excess amount.

The complicating factor is that in the meantime, I left my job and rolled my HSA balance from my prior custodian to Fidelity. Fidelity has a form that is easy to fill out for a return of the excess. I’m just wondering if there is anything special I need to do since my account balance switched custodians? Will all of the paperwork line up so that it zeroes out?

Also, since I had the money invested in my HSA for most of the year, what is the method for determining the net income attributable to the excess? If my math is correct, my excess amount is $3,000 ($3,600 contribution - $600 allowable contribution ($300/month x 2 HSA eligible months)), but I’m not sure how to attribute the correct gain to that so as to ensure my HSA is not tainted with excise taxes and penalties moving forward. Thanks for any advice!

[BillM223]

"rolled my HSA balance from my prior custodian to Fidelity" - What sort of account did you roll it into at Fidelity? An HSA? 

"rolled my HSA balance"  - did you close the old HSA or did you just empty it and not close it ?

Do the following:

In TurboTax, in the HSA interview, enter the two months that you had HDHP coverage. In the following screen(s), TurboTax should tell you that you made excess contributions (of about $3,000). Tell TurboTax that you will withdraw the entire excess ($3,000) before the due date of the return

You should be left with about $600 in your new HSA. You can spend this on qualified medical expenses from now until, well, forever.. HSA expenses are not tied to the year of donation of the dollars. Spending dollars out of an HSA does not require you to have HDHP coverage - only being able to make contributions does.

1. Contact Fidelity and ask for the withdrawal of the excess contribution ($3,000). 

2, Early next year (2023), Fidelity should send you a 1099-SA, reporting your earnings on the "excess" (really the whole amount rolled over into the Fidelity HSA) before it got withdrawn as an excess. - NOTE, enter this 1099-SA on your 2022 tax return, because that's when it is due to be reported. DO NOT try to calculate the earnings yourself and add it to your 2021 return.

3. If the old HSA still exists, then close it (I assume there is no money left in it, correct)?

Note: this isn't the "right" way to do this, but you probably can't do it the right way because your old HSA is probably already closed, and I imagine that the old custodian is not going to re-open it just so you can do the paperwork right. So just pretend the new HSA is the only one.

You should be left with this:

• $600 or so in the new HSA
• $3,000 or so as Other Income on line 8 on Schedule 2 (1040) (TurboTax will add this automatically when you say that you will withdraw the entire excess before the due date of the return - go look)
• A 1099-SA coming to you in the future for your 2022 return.

BE AWARE: you will not have paid the earnings on your excess in the old HSA. This means that if you are ever audited, the IRS auditor may discover this and assess you a small amount of tax and penalty and interest. Be prepared for this. The problem is that the current IRS regs don't address your situation (that you had an HSA, made excess contributions, then rolled over the old HSA to a new HSA, now want to sort this all out). 

The point is that you tried as best you could to report the income that you were supposed to, within the constraints placed on you (i.e., that your old HSA is probably closed and the old custodian won't reopen it). And if they charge penalty and interest, ask for an abatement based on your best efforts.

You have a complicated situation. Please respond if some part of it doesn't make sense or if I have made a wrong assumption.

[Bigg00221]

Thank you for taking the time to provide such a thorough explanation! In reviewing your analysis, just one piece of if appears to be incorrect, but I think it’s significant. I did not close my old HSA account — I simply rolled the funds over to a Fidelity HSA by filling out the Fidelity HSA Rollover form and mailing it to my former custodian, which initiated a direct transfer (i.e., I never received the funds).’

I assume that the prior custodian will eventually close the account now that it has a zero balance (and won’t receive further contributions), but does that change your analysis in any way?

@BillM223 

[Bigg00221]

I should also add that the rollover was approximately $7500. $3550 of that were funds that were contributed through payroll deductions and employer contributions in CY 2020. The funds I contributed in 2021 were some small employer contributions, and then the rest was a lump sum deposit of approximately $3400 of post tax money (for which I had never taken a tax deduction). Would that still be included as “other income?”

[BillM223]

That's good to know.

OK, since you reminded me that your 2021 contribution was after-tax dollars sent straight to the HSA (i.e., not through your employer), the excess is not added to line 8e on Schedule 1 (1040), but instead is subtracted from what would have been on line 13 on Schedule 1 (1040). That is, the line 8e amount is added to your income because of the presumption that you made the contribution through your employer (most people do); since the code W amount in box 12 on your W-2 is subtracted from Wages in boxes 1, 3, and 5 on your W-2 before it is printed, if any amount of this is excess, then the excess has to be added back to income as Other Income.

However (I hope I haven't totally confused you), direct contributions are subtracted from tour adjusted gross income on line 13 on Schedule 1 (1040), so if some of that amount was excess (not a valid deduction), then TurboTax will just reduce the line 13 amount by the excess. In your case, if I have the numbers right, you will probably see $400 ($3,400 minus $3,000) on line 13.

The "problem" is that you have earnings on excess contributions from two HSAs - the old one from the time you made the $3,400 deposit to the date of the rollover, and the new account from the date of the rollover to the date you ask for the withdrawal of the excess. The closer the contribution date is the the rollover date, the less discrepancy there will be, because there will be less earnings reported by the old HSA.

What is the date of the contribution and the date of the rollover?

[Bigg00221]

The contribution ($3319) was February 11, 2021 and the rollover was completed on January 10, 2022. Before transferring the funds to the fidelity HSA I liquidated the investments and transferred cash, so the money is currently sitting in e core position at Fidelity I invested. Does that help negate any potential earnings on that amount since it’s just siding idly? If so I imagine I’ll wait to invest the account until the excess is removed and sent back to me. 

[BillM223]

The way to get your old HSA custodian to calculate the earnings on the excess contributions is for you (and send you the 1099-SA) would be to contact the old HSA custodian and report the excess contribution of $3,000 for tax year 2021. This will cause the old HSA custodian to calculate the earnings through to the date of your request and send it on a 1099-SA.

The thing is that if you tell the old HSA custodian that there was an excess contribution, then they will try to send you the excess (the $3,000) out of that HSA...which, you have noted, is empty. So we have to figure out a way to get that $3,000 back into the old HSA. You can't just send the old HSA $3,000, because that will look like a contribution, which you are no longer eligible to make (and for 2021, you have hit the annual contribution limit anyway).

So let's do this:

1. Go through the TurboTax program and make sure that TurboTax agrees that the excess contribution for 2021 was $3,000.

2. Quickly do an HSA rollover from the new HSA to the old HSA of the full amount in the new HSA.***

3. Contact the old HSA custodian to make a request for the withdrawal of excess contributions of $3,000 (it would help to make sure the rollover in #2 has completed).

4. TurboTax, as noted above, will reduce your line 13 deduction (Schedule 1 (form 1040)) by $3,000.

5. The old HSA custodian will send you a check for $3,000.

6. The old HSA custodian will send you a 1099-SA in early 2023 reporting your earnings on the excess in 2021 in order to report them on your 2022 tax return. They will also send you the amount of the earnings (because you will be taxed on it in tax year 2022).either with the excess being withdrawn or by a separate transmission.

7. This means that you should end up having about $3,500 in your old HSA, all of which was legally contributed. You can expect a 1099-SA in early 2023 for tax year 2022.

***we are doing this because the old HSA has to send you not only the excess but also the earnings on the excess -which we don't know (we want the old HSA custodian to calculate the earnings). Rather than guess the earnings, just roll the whole amount back. Once you have finished with the withdrawal and your 2021 tax return, you can choose to continue using the old HSA (you have no requirement to close your HSA from a former employer - it's your HSA, not your employer's). Or you can rollover whatever remains in the old HSA after all this action to the Fidelity HSA, if that is more convenient for you.

Your old HSA custodian's calculation should be approximately correct, because they had the full HSA  funds though all of 2021 (the rollover took place on January 10, 2022).

If this all makes sense, this will be approximately correct in terms that what you should end up with.

NOTE, this all will not be obvious to either HSA custodian because this is an unusual situation. So when you contact the custodians, be nice - you don't want either one placing obstacles in your plan.

Oh, and document what you did and save with your other tax papers, so that you can explain to someone you did and why you did it.