HSA and FSA Contribution Concern

[tprender627]

Spouse 1 (HDHP PPO Family Plan) entered into HSA (less $1,000) annually on January 1st, 2023 & Spouse 2 (HMO Individual Plan) during elections on July 1st, 2023 entered into FSA account (less than $500) for plan term through June 30th, 2024. It is understood that during the same Tax year cannot have both HSA and FSA accounts active and the interaction make HSA contributions ineligible.

With HSA contributions being ineligible it is understood that they are considered excess contributions and corrective distribution is required.

But at this time it is too late to make a corrective distribution on 1099-SA which needed to occur by December 31st, 2023. Are there steps to enter in excess contributions in Other income for 2023 within 1040 so that the HSA contributions can be taxed appropriately?

It is understood that this is done to avoid 6% excise tax due to ineligible HSA contributions because of FSA being active. 

Is this the correct interpretation of HSA and FSA interaction concerns?

IRS Publication: https://www.irs.gov/publications/p969#en_US_2023_publink[phone number removed]

[Mike9241]

• You can’t contribute to a Health Savings Account (HSA) and have a general purpose Health Flexible Spending Account (FSA) for overlapping months.

since the HSA contribution prorated per month (max per month 64) would only cover January and February and the FSA didn't start until July I see no problem with the HSA contribution provided the FSA does not cover medical expenses for the whole calendar year - only expenses for the fiscal year it uses) - never seen one that allows paying expenses incurred before enrollment but..................

from another source

1. HSA Contribution for January and February:

   • If you are eligible for a Health Savings Account (HSA) throughout January and February, you can contribute to your HSA during these months. The contribution limits for HSAs depend on factors such as your age and whether you have family or individual coverage.

2. Enrolling in Your Employer’s Fiscal Year FSA:

   • Your employer’s fiscal year FSA starts in July. If you choose to enroll in the FSA, you can do so even if you’ve contributed to your HSA in January and February.
   • The HSA and FSA can coexist in the same year.  

again this all depends on what period the FSA covers 2023 medical expenses. if starting in July your Ok if not.

asssuming the FSA does cover medical expenses incurred before it started 

making the HSA an excess,

if you find yourself with excess contributions in your Health Savings Account (HSA) due to Flexible Spending Account (FSA) coverage, here’s what you need to know:

1. Withdrawal Deadline:

   • You can remove the extra HSA contributions by withdrawing them from your account before the deadline to file taxes. Additionally, any income earned on the withdrawn contributions during the year they were made must also be taken out, and this income is also taxable

[dmertz]

Reiterating the most relevant point, the deadline for obtaining a corrective distribution of an excess HSA contribution made fore 2023 is the due date of your 2023 tax return, including extensions, not December 31, 2023.

[tprender627]

Thank you for initial feedback and thoughts on this topic. Some important points to identify:

• HSA extends from January 2023 thru Dec 2023
• HSA was again started in January 2024 per benefit election. Requested HSA contributions to be stopped as of March 1st 2024 due to HSA/FSA interaction making all HSA contributions in 2023 and 2024 now as ineligible. 
• HSA contributions in 2023 were below $1,000 (well below max limit for HSA) and in 2024 so far contributions were below $200. HSA custodian has a withdrawal form that identifies requesting an excess contributions for a specific amount and also indicate the Tax Year. So for 2023 & 2024 will need to request refund for all contributions. These contributions will need to be marked as Other income be taxed due to HSA/FSA interaction.
  • What is unclear is if HSA custodian will be able to refund in full or elect to just send over a corrected 1099-SA form with Box 2 marked as Earnings on Excess Contributions. Reason refund may not come back is because 2023 Gross distributions to pay for eligible health expenses were above the total 2023 contributed. There was more funds remaining than what was contributed in 2023 cause for HSA the funds carryover to new year unlike FSA which is use or lose it with only a portion that could be carried over.
• FSA extends from July 2023 thru June 2024. Unlike HSA, FSA has to complete its Term plan through June 2024. Contributions were for FSA were around $300 (well below max limit).

Tracking that in the HSA section of turbo tax based on how HSA interview questions are answered then will prompt you to enter excess contributions in an effort to avoid 6% excise tax penalty by have contributions taxed. Still will need the corrected 1099-SA tax form  from HSA custodian which may require an extension for tax return if do no received the corrected tax form before April submission deadline.

Below is addition information have been looking to make sense of for this topic. 

• IRS Publication 969

• Turbo Tax Community Feedback: https://ttlc.intuit.com/community/tax-credits-deductions/discussion/contributed-and-used-both-fsa-sp...

[tprender627]

Thank you for feedback on time frame that deadline for obtaining a corrective distribution on ineligible HSA contributions being prior to due date of 2023 tax return.

When reached out to HSA custodian I was advised there is a withdrawal form that indicates a section to request a HSA excess contributions refund by indicating specific amount and tax year. Would need to complete this for 2023 & 2024 contributions. Then should receive a corrected 1099-SA tax form (tied to HSA) and then Box 2 should be marked as earnings one excess contributions.

What is unclear is if HSA custodian will be able to only send corrected 1099-SA or if can provide refund since 2023 gross distributions exceeded the total 2023 contributions. Gross distributions being funds in HSA account utilize for eligible health expenses and there were more funds from carryover from prior year.

[BillM223 · Accepted solution]

"HSA extends from January 2023 thru Dec 2023" - your HSA is an independent financial instrument that has a life similar to an IRA. That is, the HSA belongs to you or your spouse, not to your employer. And once it is created, it will continue to exist, even if it goes empty.

So, "HSA was again started in January 2024 per benefit election." is not true - the HSA continues to exist unless YOU close it. An HSA is not like an FSA. See link at bottom of this post.

"These contributions will need to be marked as Other income be taxed" - please do NOT do anything about this. Once you have done the HSA interview, indicating that you did not have valid HDHP coverage for those months you were covered by the FSA, TurboTax will automatically add the excess contributions back to income. Please don't try to help TurboTax..

You will file a request to withdraw excess HSA contributions (if you haven't already), and as dmertz notes, you must do this before the due date of the return. I suggest now because there is that 6% penalty if you miss the deadline. 

The HSA custodian will take your completed form (note that it is often available online at the website), and return to the excess to you. Yes, you'll have to pay tax on it, but you'll have the cash to do it.

If it turns out that you don't have enough cash in the HSA to cover the excess, then withdraw what you can. The excess will carryover to next year, with a possible 6% penalty. Then NEXT year, the carryover will be applied as a "personal" HSA contribution (line 2 on the 8889) so be sure to reduce what you would ordinarily contribute to allow the carryover to be used up.

Did I cover your issues (you had a lot of issues 🙂 )? Post again if you have another question.

Personally, I think that the HSA is a far better vehicle for covering medical expenses than an FSA. See this blog entry at TurboTax about HSA versus FSA.

[Opus 17]

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@tprender627 wrote:

Thank you for feedback on time frame that deadline for obtaining a corrective distribution on ineligible HSA contributions being prior to due date of 2023 tax return.

When reached out to HSA custodian I was advised there is a withdrawal form that indicates a section to request a HSA excess contributions refund by indicating specific amount and tax year. Would need to complete this for 2023 & 2024 contributions. Then should receive a corrected 1099-SA tax form (tied to HSA) and then Box 2 should be marked as earnings one excess contributions.

What is unclear is if HSA custodian will be able to only send corrected 1099-SA or if can provide refund since 2023 gross distributions exceeded the total 2023 contributions. Gross distributions being funds in HSA account utilize for eligible health expenses and there were more funds from carryover from prior year.

---

Stop.  

There is no excess for 2023.

There is no current excess for 2024.

Do you have an excess HSA contribution?  I don't think so.  Your eligibility to contribute to an HSA is determined based on your medical coverage as of the first day of each month.   If Spouse 1 was

a. enrolled in a qualifying family HDHP and had no other "coverage" for January through June 30, and

b. became "covered" by a spouse's FSA starting July 1, then

they would be eligible to contribute up to $7750÷12=$646 per month x 6 months eligibility = $3875.  If spouse 1 contributed $1000 there is no excess, and in fact, spouse 1 could contribute up to an additional $2875 as long as the retroactive contribution is made before April 15, 2024, and the HSA bank knows it is a 2023 contribution.  The limit is for the whole year, you can make contributions after you are ineligible as long as the total for the year is not more than your allowed total. (An HSA is a bank account that you own, you can make contributions directly to the bank if you choose to, not just through payroll.)

Furthermore, the limitation is on contributing to an HSA, not having an HSA.  Once you own an HSA, you can withdraw money for qualified medical expenses at any time, no matter what your current medical coverage is.  Your medical coverage only controls whether contributions are allowed. 

"HSA was again started in January 2024 per benefit election. Requested HSA contributions to be stopped as of March 1st 2024 due to HSA/FSA interaction making all HSA contributions in 2023 and 2024 now as ineligible. "

This is wrong two ways.  An HSA is a bank account or investment that you own, like a savings account or IRA.  You can start or stop contributions, but you always own the account, unless you close it for some reason.  Second, your 2024 contributions are NOT ineligible and there was no need to stop them.  

It is correct that you are not eligible to contribute while covered by the FSA.  But as long as you plan to not renew the FSA, then there are two ways to calculate your 2024 HSA contribution eligibility.

1. Using the standard rules, if spouse 1 is covered by a family HDHP, and has "other coverage" from January-June 30, but no other coverage from July 1-December 31, spouse 1's contribution limit for 2024 will be $8300÷12 = $692 x 6 months eligible = $4150.  These contributions can be made any time, even now, as long as you don't exceed the overall total.

2. Using the last month rule, spouse 1 can contribute the full $8300 for 2024, as long as they have 

a. family HDHP on December 1, 2024

b. no other coverage that would disqualify them

c. they plan to keep their family HDHP for all of 2025

d. they won't have other disqualifying coverage in 2025. 

[tprender627]

Thank you for your feedback much appreciated. A few follow up clarification questions relating to this part of feedback, "These contributions will need to be marked as Other income be taxed" - please do NOT do anything about this. Once you have done the HSA interview, indicating that you did not have valid HDHP coverage for those months you were covered by the FSA, TurboTax will automatically add the excess contributions back to income. Please don't try to help TurboTax.

1.) If FSA started in July 2023 for Spouse and I had HSA for all of 2023 under HDHP Family Plan would January thru June be considered as having valid HDHP coverage and then July thru December as not having valid HDHP due to having HSA and FSA active at same time?

I followed steps in HSA interview as mentioned in posts (very helpful). But later on Turbo Tax mentioned there were errors on Tax Form 8889-T and it asked to provide a checkbox for each month in 2023 that had HDHP plan.

2.) If HDHP plan is valid between January thru June? Would the the excess or invalid contributions in HSA only be what was contributed between July through December?

Just want to make sure I do not have to ask for contributions in 2023 to be refunded. Also if July through December then can request only those amount contributed during that time frame.

3.) HSA and FSA limits were not exceeded during 2023, but as understand the interaction by having them open at same the makes the contributions invalid and thus have to be refunded/withdrawn by deadline for Tax return April 2024 to avoid 6% penalty.

[BillM223]

1. Yes, your annual HSA contribution limit is the limit for your HDHP policy ($7750 Family) time 6 months divided by 12 ,(so, $3,875) assuming that your spouse who owned the HSA was under 55.

2. Yes, again. You could contribute to the HSA before you had the FSA coverage, but note that that the limit is on an annual basis. If you contributed the whole $3,875 on July 1st, TurboTax would be none the wiser, and not report the excess.

3. Yes. Understand that you don't make any contributions to the FSA (your employer does), so there is nothing for you to refund here.

I see that I was answering another question than what you asked. Opus was right to catch that you did not contribute enough to cause an HSA excess in 2023.

"But later on Turbo Tax mentioned there were errors on Tax Form 8889-T and it asked to provide a checkbox for each month in 2023 that had HDHP plan." Please tell us exactly what the error said, because TurboTax can become confused in the Review abut your HDHP coverage, but what you seem to have entered should not have caused it.

[Opus 17]

@tprender627 

"I followed steps in HSA interview as mentioned in posts (very helpful). But later on Turbo Tax mentioned there were errors on Tax Form 8889-T and it asked to provide a checkbox for each month in 2023 that had HDHP plan."

That's normal.  For each month indicate the type of coverage you had on the first day of the month.  For January-June that would be "family HDHP" and for July-December you would click "Other" (because of the FSA). 

"2.) If HDHP plan is valid between January thru June? Would the the excess or invalid contributions in HSA only be what was contributed between July through December?"

No.  What counts is your total contributions for the year against your eligible amount.  The IRS does not care when the contributions were made.  If you were eligible for 6 months your maximum contributions are $3875, and you could even make them now, in 2024, as long as you contribute before April 15 and your total contributions are not more than $3875.

3.) HSA and FSA limits were not exceeded during 2023, but as understand the interaction by having them open at same the makes the contributions invalid and thus have to be refunded/withdrawn by deadline for Tax return April 2024 to avoid 6% penalty.

Your understanding is incorrect.  The addition of the FSA makes you ineligible to contribute for the months of July-December, but you are still eligible to contribute for January-June.   And in fact, the date of the contribution does not matter, as long as you don't contribute more than your adjusted limit based on your change in coverage.  

[Opus 17]

3.) HSA and FSA limits were not exceeded during 2023, but as understand the interaction by having them open at same the makes the contributions invalid and thus have to be refunded/withdrawn by deadline for Tax return April 2024 to avoid 6% penalty.

Your understanding is incorrect.  The addition of the FSA makes you ineligible to contribute for the months of July-December, but you are still eligible to contribute for January-June.   And in fact, the date of the contribution does not matter, as long as you don't contribute more than your adjusted limit based on your change in coverage.  

[tprender627]

Thank you for continued feedback much appreciated: @Opus 17 & @BillM223 .

HSA contributions in 2023 was $850 and 2024 in $115 in so far, well below contribution max for time frame. So while contributions were ineligible for 6 months due to FSA they still did not exceed max limit.

For the HSA interview question when prompted looks like would still need to answer didn't have HDHP plan for full year and then make sure to mark for Jan-June as HDHP and July-Dec as Other. Turbo Tax prompted 8889-T to check boxes to confirm which months had what type of plan.

But sounds like based on feedback shouldnt have to get refund from HSA custodian, Turbo Tax software wont mention have excess contributions and shouldn't 6 months after filing incur 6% excise tax penalty or another penalty from IRS cause didnt report as “Other Income” correctly.

Ultimately trying to avoid penalty by filing return right the first time.

[BillM223]

"HSA contributions in 2023 was $850 and 2024 in $115 in so far, well below contribution max for time frame. So while contributions were ineligible for 6 months due to FSA they still did not exceed max limit." - Correct

"For the HSA interview question when prompted looks like would still need to answer didn't have HDHP plan for full year and then make sure to mark for Jan-June as HDHP and July-Dec as Other. Turbo Tax prompted 8889-T to check boxes to confirm which months had what type of plan." - On the screen "Was [name] covered by a High Deductible Health Plan (HDHP) in 2023", answer, "I had different plan types at different times of the year." The next screen will ask you what type of coverage you had for each month of the year - Self, Family, or None. Answer None for those months with FSA overlap.

Then you will have to press Calculate Max Contribution Limit to get the max limit at the bottom of the screen, the n hit Continue to continue.

"But sounds like based on feedback shouldnt have to get refund from HSA custodian, Turbo Tax software wont mention have excess contributions and shouldn't 6 months after filing incur 6% excise tax penalty or another penalty from IRS cause didnt report as “Other Income” correctly." - If I understood you, correct. TurboTax will not calculate that you had an excess HSA contribution, so no excess will need to be withdrawn, and there will be not carryover to 2024, so no 6% penalty.

Did we cover everything?