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user987654321-
New Member

HSA and Retroactive Medicare. Based on the details below, how might I go about amending my 2018 tax return to report an over-contribution and over-withdrawal from my HSA?

Quite simplified, the background is as follows. Applied for Medicare in February 2019 (approaching age 67, with retirement on the horizon). E?filed my 2018 tax return via TT on April 10, 2019. The next day, received a Medicare notice of award, albeit retroactive to August 2018. Using my HSA custodian’s form, quickly applied for and, before April 15, received a “return of excess contributions” (plus allocable earnings) that was was more than sufficient to remove all of the “excess contributions” from my HSA.

Realized after April 15, however, that my efforts to remove all of the "excess contributions" had given rise to a new problem, which was to figure out how to amend my tax return to report not only the custodian’s “return of excess contributions” from my HSA but also the “additional funds withdrawn” from the HSA and sent to me as well – that is, the funds that were “over-and-above” the actual amount of “excess contributions.”

Asked the custodian if I could return the “additional funds withdrawn,” either as a “mistaken distribution” or otherwise, but it declined, saying it was after April 15 and thus too late.  

Around May 8, the custodian sent me a Form 5498-SA, which shows the full amount of contributions in my HSA at the end of 2018 (right at my limit, but for the later application for Medicare and its retroactivity).  However, the custodian's filled-out Form 5498-SA doesn’t reflect any return of excess contributions or any other withdrawal or distribution of funds to me. 

Question:  How should I go about amending my return?  Specifically –

1.      Rather than treat all of the returned funds as “excess contributions,” should I break out the amounts that the custodian returned to me into (i) “excess contributions returned” (now subject to income tax), and (ii) “additional funds distributed” (likewise subject to income tax), and treat each of them differently?

2.      Can I properly reduce my income tax liability for either the “excess contributions returned” to me on April 11 (I suspect not), or for the “additional funds withdrawn” and sent to me on that date (after reading IRC 223(f) and IRS Pub. 969, page 9, I'm thinking 'yes'), by using one or the other of those two sources to “reimburse” myself for “qualified medical expenses” that I happened to incur in March, April and May 2019 and have already paid for out of my own pocket?

3.      Finally, once I’ve filed an amended return reflecting the return of “excess contributions” and “additional funds withdrawn,” should I write a letter to the HSA custodian describing what I’ve done, so that it will know how to prepare my Form 1099-SA at the end of 2019 and my Form 5498-SA in May 2020?


1 Best answer

Accepted Solutions
dmertz
Level 15

HSA and Retroactive Medicare. Based on the details below, how might I go about amending my 2018 tax return to report an over-contribution and over-withdrawal from my HSA?

Because section 223(f)(3) permits only actual excess contributions to be returned before the due date of your tax return, asking the HSA custodian to return more than the actual excess as a return of excess contribution presents a reporting problem.  Assuming that the custodian does not accept any of this back as a return of mistaken distribution, the custodian will likely report the entire amount distributed using code 2 in box 3 of the 2019 Form 1099-SA rather than splitting the reporting into a distribution of the actual excess plus allocable earnings and a separate regular distribution (code 1) of the remainder of the total distributed.  This presents a problem with reporting in 2018 TurboTax since TurboTax will not permit you to enter an amount returned that exceeds the actual amount of the excess calculated by TurboTax.  Properly reported for 2018, you enter the code W amount in box 12 of 2018 TurboTax's W-2 form.  In the HSA section you'll indicate that you were covered by Medicare for the last 5 months of 2018 and TurboTax will calculate the amount of the excess contribution and allow you to indicate that the entire excess was returned.  The entire amount contributed, the maximum permissible amount, will appear on line 9 of your 2018 Form 8889.  Since the excess was contributed through your employer and not included in box 1 of your W-2, the actual excess will be included on Schedule 1 line 21 as miscellaneous income.

If the custodian does not accept back as a return of mistaken distribution the amount in excess of the actual excess contribution plus attributable earnings, the 2019 Form 1099-SA for the return of excess contribution that must be reported on your 2019 tax return will not be accurate, so you'll need to enter into 2019 TurboTax a code 2 2019 Form 1099-SA for the actual excess plus attributable earnings and a separate code 1 2019 Form 1099-SA for the remainder.  Since the reporting on 2019 Schedule 1 line 21 (earnings attributable to the excess) and the amount reported on 2019 Form 8889 as a regular distribution will disagree with what the custodian reported, you'll need to provide a statement with your mailed tax return to explain the discrepancy.

To determine the amount of actual attributable earnings, multiply the custodian-reported attributable earnings by the actual excess divided by the amount of excess you requested to be returned.  For example, if you requested that $2,000 be returned and the custodian distributed $2,100 ($100 of earnings on $2,000), yet the actual excess was only $1,854, the true attributable earnings would be $100 * $1,854 / $2,000 = $93.  Your code 2 Form 1099-SA would then have $1,947 in box 1 and $93 in box 2.  Your substitute code 1 Form 1099-SA would have $152 in box 1 to be treated as a regular distribution that can be applied to qualified medical expenses.

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4 Replies
dmertz
Level 15

HSA and Retroactive Medicare. Based on the details below, how might I go about amending my 2018 tax return to report an over-contribution and over-withdrawal from my HSA?

The custodian's reporting on the 2018 Form 5498-SA is correct and proper.  The fact that you made an excess contribution or had any amount distributed in 2019 has no effect on what the custodian was required to report on the 2018 Form 5498-SA.

How was the contribution made, though your employer and reported with code W in box 12 of your W-2, or by you personally?  This affects how things get reported.
user987654321-
New Member

HSA and Retroactive Medicare. Based on the details below, how might I go about amending my 2018 tax return to report an over-contribution and over-withdrawal from my HSA?

The former -- that is, all of the contributions that went into my HSA in 2018 were made by or through my employer alone (an initial oversized company contribution in January and then, according to my biweekly pay advices, via before-tax payroll deductions for the rest of the year).  And yes, all of the contributions were reported on my W-2 for 2018 with code W in box 12.  In other words, I personally made no contributions directly to the HSA on my own.
Hope this makes sense.
dmertz
Level 15

HSA and Retroactive Medicare. Based on the details below, how might I go about amending my 2018 tax return to report an over-contribution and over-withdrawal from my HSA?

Because section 223(f)(3) permits only actual excess contributions to be returned before the due date of your tax return, asking the HSA custodian to return more than the actual excess as a return of excess contribution presents a reporting problem.  Assuming that the custodian does not accept any of this back as a return of mistaken distribution, the custodian will likely report the entire amount distributed using code 2 in box 3 of the 2019 Form 1099-SA rather than splitting the reporting into a distribution of the actual excess plus allocable earnings and a separate regular distribution (code 1) of the remainder of the total distributed.  This presents a problem with reporting in 2018 TurboTax since TurboTax will not permit you to enter an amount returned that exceeds the actual amount of the excess calculated by TurboTax.  Properly reported for 2018, you enter the code W amount in box 12 of 2018 TurboTax's W-2 form.  In the HSA section you'll indicate that you were covered by Medicare for the last 5 months of 2018 and TurboTax will calculate the amount of the excess contribution and allow you to indicate that the entire excess was returned.  The entire amount contributed, the maximum permissible amount, will appear on line 9 of your 2018 Form 8889.  Since the excess was contributed through your employer and not included in box 1 of your W-2, the actual excess will be included on Schedule 1 line 21 as miscellaneous income.

If the custodian does not accept back as a return of mistaken distribution the amount in excess of the actual excess contribution plus attributable earnings, the 2019 Form 1099-SA for the return of excess contribution that must be reported on your 2019 tax return will not be accurate, so you'll need to enter into 2019 TurboTax a code 2 2019 Form 1099-SA for the actual excess plus attributable earnings and a separate code 1 2019 Form 1099-SA for the remainder.  Since the reporting on 2019 Schedule 1 line 21 (earnings attributable to the excess) and the amount reported on 2019 Form 8889 as a regular distribution will disagree with what the custodian reported, you'll need to provide a statement with your mailed tax return to explain the discrepancy.

To determine the amount of actual attributable earnings, multiply the custodian-reported attributable earnings by the actual excess divided by the amount of excess you requested to be returned.  For example, if you requested that $2,000 be returned and the custodian distributed $2,100 ($100 of earnings on $2,000), yet the actual excess was only $1,854, the true attributable earnings would be $100 * $1,854 / $2,000 = $93.  Your code 2 Form 1099-SA would then have $1,947 in box 1 and $93 in box 2.  Your substitute code 1 Form 1099-SA would have $152 in box 1 to be treated as a regular distribution that can be applied to qualified medical expenses.

View solution in original post

dmertz
Level 15

HSA and Retroactive Medicare. Based on the details below, how might I go about amending my 2018 tax return to report an over-contribution and over-withdrawal from my HSA?

I've made some tweaks to my answer for clarification.  Please reread it.

If the custodian does not accept a return of mistaken distribution, you might still be able to get them to split their reporting as I described and as you suggested in #3 of your questions, but it's doubtful.
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