How can I calculate the Earnings on Excess for an HSA Overcontribution. The NIA formula result seems high for a $76 overage.

[BillM223 · Accepted solution]

You don't need to calculate the earnings on an excess contribution to your HSA; let the HSA custodian do it.

When you call the HSA custodian (or do the form online) to report the request to withdraw the excess contribution, this will start a process at the HSA custodian. They will calculate the amount of earnings, and then send you the excess plus the earnings out of the HSA. This will be reported on a form 1099-SA.

Note that for 2020, the excess contributions will be added to line 8 of Schedule 1 (1040), if the excess was due to the amount with code W in box 12 on your W-2. So the excess is taxed in 2020.

However, you will not get the 1099-SA with the earnings until next year, to add it to your 2021 tax return.

So, ask the HSA custodian to withdraw excess (specifying the excess amount only); they will take care of the earnings - since some of the earnings belong to 2021, the IRS lets you defer taxes on all the earnings until 2021.

[adamnewman62]

Perfect! Thanks for the great explanation. 

[chickenfry69]

I went over this past year by $136.50. On my HSA Excess Contribution form, I put that amount on my excess amount. Now, do I just leave the “earnings on Excess” blank or put $0 there?? The answer I am replying to said to let the HSA custodian calculate the earnings, but when I called HSA, they told me they can’t tell me what to put there. So do I just leave the earnings on excess blank?? Thank You in advance for your response!!

[BillM223]

The HSA custodian will tell you what to put there...but next year. That is, while the excess contributions are reported as Other Income in the current tax year (TurboTax does this for you automatically), the earnings will be reported on a 1099-SA that the HSA custodian will send you for next year.

So if the current tax year is 2021, then sometime between now and early 2023, the HSA custodian will send you a 1099-SA reporting the earnings on the excess contributions, and you will add this to your 2022 return.

Please do NOT try to add the earnings on your current year return, and please do not try to calculate the earnings yourself...

" HSA Excess Contribution form" - what form is this? This is not an IRS or a TurboTax form, is it?

[Bradley_C]

HSA Bank has a form I have to fill out in order to process the overcontribution correctly. One of the boxes is 'Earnings on Excess: $___'. The lady I was talking to said that needs to be filled in. I asked her if she could help me calculate that and she said that they can't and that a tax advisor has to do that... so here I am.

[Bradley_C]

You say 'next year.' Maybe I waited too long but hopefully not. I overcontributed to mine back in March 2021 and now I am taking time to try to fix it now, yet the lady still told me she can't tell me what to put in the box.

[DianeW777]

The HSA financial institution should be calculating the interest/earnings on the amount of the distribution.  It's extremely unusual for them to expect you to do it.  They know what the earnings are and how to calculate them - believe me.  My advice would be to fill out the form and do not enter the earnings, add a note for them to insert the earnings after it has been calculated.  

According to our tax expert @dmertz, here is the link to calculate the earnings if you really need to. 

• CFR 1.408-11 describes the required calculation for determining the earnings on your HSA withdrawal
  • Net Income=Contribution×(Adjusted Closing Balance−Adjusted Opening Balance)/Adjusted Opening Balance.

​​​​​​​@Bradley_C

[dmertz]

I agree that it's odd that this major HSA custodian would require you to do the calculation unless the contribution was made to an HSA at a different custodian and was subsequently transferred.  In that case the receiving HSA custodian generally would not know when or how much was contributed at the old custodian, so could not do the calculation.

The instructions for Form1099-SA instruct the preparer to use the calculation described in CFR 1.408-11 to determine the amount of earnings attributable to the amount being returned.  It's lame of them to push this responsibility on to you, particularly when you don't necessarily know how the attributable earnings might change between the time you prepare the form and the time the distribution is actually made.  To be done properly so that the distribution conforms to the law, the calculation really needs to be done at the same time the distribution is being made.

[junglejordan]

After waiting on hold for well over an hour with HSA Bank, I got the exact same answer from them - "We can't tell you what to put on the form.  You have to consult a tax person."  Yet here in this community thread, the tax experts are saying that the HSA custodian is the only one who CAN figure it out for you and they do that at the time the excess contribution is distributed.  My inclination is to leave that box blank because my copious research on this topic has not yielded a clear answer.  The HSA Bank phone representative told me that it is okay to leave the box blank, but who knows what the person who processes the form will think of that.

[junglejordan]

Another thing that I find confusing about this topic is the earnings on excess vs the excise tax / penalty.  Are they actually two different things or are they two terms for the exact same thing?

Many people online seem to be mistaken when they say that, to paraphrase, "Earnings on excess is 6% of the excess amount."  Even the HSA Bank representative to whom I spoke a little while ago mentioned the 6% as probably being used to calculate the earnings on excess amount.

However, per IRS Publication 969, the 6% number seems to be a penalty amount rather than the earnings on excess:

Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
• 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.

If I understand it correctly, 6% is the excise tax that is assessed each year that the excess remains in the account.  If you want to avoid paying the excise tax, you have to withdraw the excess from the account before the income tax filing deadline.

And still, after sorting out the excise tax part of this equation, I have no idea how to calculate the earnings on excess!!

[dmertz]

The penalty on an excess contribution is the %6 excise tax.

When entering into 2021 TurboTax an excess HSA contribution made for 2021 and returned in 2022, when TurboTax tells you that you have made an excess contribution and asks how much of the excess you will ask to be returned, that's all you enter.  You don't need to know the investment gain or loss at this point, TurboTax isn't asking for that here. 

If you've received a Form 1099-SA reporting the return of the excess contribution, code 2 in box 3, box 2 will be the difference between the amount of excess contribution that you requested be returned and the amount distributed, but not less than zero.  If box 2 shows a positive number, upon entering that Form 1099-SA into TurboTax will include the box 2 amount on Schedule 1 line 8e.  If box 2 contains a zero or is blank, the form is indicating that there was no gain or that there was a loss.

[Anonymous]

Did leaving the excess earnings box blank work for you? 

I am having the same issue with HSA Bank. I have spent a crazy amount of time trying to figure out how to do the calculation correctly but I just don't trust myself. I am at the end of my rope so I am sending in the form with the box blank and hoping for the best. I may pay for TurboTax full service this year to help me.

[GeorgeM777]

The formula for determining the amount of the earnings from the excess contribution is as follows:

Net Income = Contribution x Adjusted Closing Balance - Adjusted Opening Balance

                                                               Adjusted Opening Balance

The "adjusted opening balance" is the fair market value of the HSA at the beginning of the computation period plus the amount of any contributions made to the HSA during the computation period (including the contribution that is distributed as a returned contribution).

The "adjusted closing balance" is the fair market value of the HSA at the end of the computation period plus the amount of any distributions made from the HSA during the computation period. 

The "computation period" is the period beginning immediately prior to the time the particular contribution is made to the HSA and ending immediately prior to the removal of the contribution being returned. 

If you prefer, you can follow-up with additional information regarding how you computed the excess earnings from the over contribution.  As a reminder, in any follow-up response, do not include personal identifiable information.  

@Anonymous

[HSAtaxproblems]

I used the formula above to calculate the earnings, but I am not sure where to put that into TurboTax. TurboTax knows the amount of my excess contribution, but it never asks me about the *earnings* on that excess contribution. When I leave "step-by-step" and go into the form view, it will not let me type into Form 8889 boxes 14a and 14b where it seems like that information should go per-IRS instructions.