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Health savings accounts

I mistakenly contributed to my HSA after I became medicare eligible,
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Accepted Solutions
MichaelDC
New Member

Health savings accounts

The IRS instruction forms for 5329 and 8889 indicate that your 'excess contributions will be treated as if they had not been contributed if you do 3 things.

1. Withdraw your the 2016 tax due date (April 18)

2. Do not claim a deduction on the excess - no problem TurboTax knows this already

3. Also withdraw income earned on the excess contribution.

You can avoid all penalties by removing the excess contributions (and any of their earnings) from your HSA and treating them as normal taxable income. Per the IRS:

"You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.
1) You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
 2) You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings."

The IRS spells it out pretty clearly there, but the removal of the excess contributions and the earnings on those excess contributions must occur before your tax due date. The removed is taxable since HSA tax benefits do not apply. Earnings on excess contributions occur if your HSA is invested or earning interest. Removing those seems fair, since those investments shouldn’t have been made in the first place. The IRS solves all of this by saying just remove them, don’t deduct (i.e. pay tax on ) the excess amounts, and declare any earnings as other income.

It'is a little hard to determine exactly which investment they were put into and from where they should be removed. This makes it difficult to determine the exact earnings for the dollars specifically declared excess contributions. Thus, the IRS permits an “average” determination of the gains of the HSA during that time, and the pro rata share of those average gains that can be attributed to excess contributions.

Forms for Removing Excess Contributions

You will need to specifically inform your HSA trustee of a correction and that you wish to remove an excess contribution to your HSA. This triggers them to classify the transaction separately, as opposed to a normal withdrawal for qualified medical expenses. They will proceed to file an additional Form 1099-SA showing the excess contribution being distributed from the HSA with a distribution code of “2”. Be sure to remove and identify any earnings on the excess contribution as well. This form will be provided to you to indicate 1) a distribution from the account that 2) was for excess contributions.

The other thing that should occur is your HSA trustee will correct your Form 5498-SA which shows HSA contributions for the year. While they initially would have included your excess contribution (they didn’t know it was excess), once you alert them and withdraw it, they will remove it from Form 5498-SA. That means that your Form 5498-SA will be accurate for the year and should not include any excess contributions.

 


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1 Reply
MichaelDC
New Member

Health savings accounts

The IRS instruction forms for 5329 and 8889 indicate that your 'excess contributions will be treated as if they had not been contributed if you do 3 things.

1. Withdraw your the 2016 tax due date (April 18)

2. Do not claim a deduction on the excess - no problem TurboTax knows this already

3. Also withdraw income earned on the excess contribution.

You can avoid all penalties by removing the excess contributions (and any of their earnings) from your HSA and treating them as normal taxable income. Per the IRS:

"You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.
1) You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
 2) You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings."

The IRS spells it out pretty clearly there, but the removal of the excess contributions and the earnings on those excess contributions must occur before your tax due date. The removed is taxable since HSA tax benefits do not apply. Earnings on excess contributions occur if your HSA is invested or earning interest. Removing those seems fair, since those investments shouldn’t have been made in the first place. The IRS solves all of this by saying just remove them, don’t deduct (i.e. pay tax on ) the excess amounts, and declare any earnings as other income.

It'is a little hard to determine exactly which investment they were put into and from where they should be removed. This makes it difficult to determine the exact earnings for the dollars specifically declared excess contributions. Thus, the IRS permits an “average” determination of the gains of the HSA during that time, and the pro rata share of those average gains that can be attributed to excess contributions.

Forms for Removing Excess Contributions

You will need to specifically inform your HSA trustee of a correction and that you wish to remove an excess contribution to your HSA. This triggers them to classify the transaction separately, as opposed to a normal withdrawal for qualified medical expenses. They will proceed to file an additional Form 1099-SA showing the excess contribution being distributed from the HSA with a distribution code of “2”. Be sure to remove and identify any earnings on the excess contribution as well. This form will be provided to you to indicate 1) a distribution from the account that 2) was for excess contributions.

The other thing that should occur is your HSA trustee will correct your Form 5498-SA which shows HSA contributions for the year. While they initially would have included your excess contribution (they didn’t know it was excess), once you alert them and withdraw it, they will remove it from Form 5498-SA. That means that your Form 5498-SA will be accurate for the year and should not include any excess contributions.

 


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