How to handle HSA excess contribution in TurboTax?

[rollerwhale]

I had an excess contribution in 2022 and have recently withdrawn the money from my HSA account. When I selected the "OK, I'll withdraw the full excess contribution by April 18, 2023" in the HSA section in TurboTax, there was a message "unfortunately, some of your excess contribution is caused by a prior year excess contribution. While it's too late to remove a prior year contribution, you can still remove the $2534 contributed for 2022".

I'm confused about the "caused by a prior year excess contribution" statement and wonder how to work around this.

Additionally, the amount I withdrew from my HSA account was $60 more than the excess contribution amount. In this case, can I report it as an "other income"?

[BillM223 · Accepted solution]

You evidently had excess contributions for tax year 2021. If you don't withdraw them by the due date of the 2021 return, then you are unable to "fix" the excess as easily as just withdrawing the excess.

The usual way to address this is to reduce your HSA contributions in a future year so that your excess (now referred to as a carryover) plus your current year is less than the annual HSA contribution limit for that year. The carryover acts like a personal contribution in that future year.

Because people do not realize this and still maximize their regular HSA contributions, they end up perpetuating the excess from year to year.

So, you can't fix this immediately, but can fix this even for 2023 if you ask your employer to cut back on the HSA contributions for this year (if you need to).

[rollerwhale]

Thank you for the quick response! I actually started my first HSA account in Feb 2022, so I did not make any HSA contributions in 2021. Is Feb 2022 still a part of tax year 2021?

[BillM223]

You (and your employer) are permitted to make HSA contributions to the previous tax year up to the due date of the return. So while Feb 2022 is not part of the 2021 tax year, you could still make contributions then to 2021.

The thing is that the HSA custodian will default to assigning a contribution to the current year UNLESS you get them to understand that the contribution is for the previous tax year. So your employer must have made the contribution and told them it was for the previous year. Did you "have" HDHP coverage in 2021?

[rollerwhale]

I didn't have HDHP coverage in 2021.  I started having HDHP coverage and a HSA account in Feb 2022. I wonder how Turbotax determined that I had excess contribution in 2021 given that I only uploaded W2 forms for 2022. 

[rollerwhale]

The prior issue was probably a glitch - I restarted the HSA section several times and now it's allowing me to choose the "I'll return the full amount by April 18, 2022".

But I just realized that I withdrew $60 more than I should. In this case, can I report the extra withdrawal as an "other income"?

[BillM223]

One way is for your 2021 return to show an excess that gets carried over to 2022. A second way is for you to answer the question in the HSA interview, "Did you overfund your HSA in 2021?" (You should have answered NO.)

Is there a chance that there was a code W on your 2021 W-2, which would set up the excess in 2021 (even if you did not realize what was happening)?

[BillM223 · Accepted solution]

"In this case, can I report the extra withdrawal as an "other income"?"

Yes. This is a convoluted situation, since you never should have been allowed to contribute to an HSA at all. Add the extra dollars as Miscellaneous income and document what you did and why, in case anyone ever asks.

[rollerwhale]

Thank you! I'll report the extra withdrawal and document what I did.