HSA contacted us saying we overpaid HSA in 2020. Not enough funds in account to withdraw to correct. Already filed taxes. How should I fix this?

[Tiamus]

My wife and I were a part of a family HSA through my employer last year which included employee contributions. On Jan 1st, we switched to her employer's insurance. Since then, the HSA provider has closed our original account and moved the funds over to a new account. We have been trying to use all the funds in that account in order to consolidate.

I was notified by the HSA last week that apparently we overcontributed last year by ~$900. Currently there is $25 in the account. There's not enough to withdraw in order to correct the balance. I have already filed my 2020 taxes through TurboTax, but I didn't notice a warning about excess contributions at the time. Since I can't withdraw the funds, how should I correct this problem?

[BillM223]

Some thoughts:

"My wife and I were a part of a family HSA through my employer last year which included employee contributions. " - it is your HDHP coverage that is Family coverage (I assume that you had Family coverage). An HSA is always owned by an individual, either you or your spouse (and yes this means that each of you can have a separate one if you are under HDHP overage).

"Since then, the HSA provider has closed our original account and moved the funds over to a new account." - why did they do that? It's your account, just like how an IRA is yours and not any employer's. Are you saying that the HSA opened a new account in your name and moved your HSA money to it? 

As for your wife's new health insurance, is it also an HDHP?

"We have been trying to use all the funds in that account in order to consolidate." - if you find yourself with two HSAs, you can "consolidate" at any time by asking the first HSA custodian to do a trustee-to-trustee transfer of the funds in the first HSA to the HSA account held by a second trustee. This is often called a "rollover". You can do this at any time and it will not count as a contribution to the second HSA. Of course, if you want to spend all the money from the first HSA first, you can...it's just that if you want to consolidate in order to make your balance larger for investment purposes, all you need to do is call the first HSA custodian and asked that the money be transferred.

"I was notified by the HSA last week that apparently we overcontributed last year by ~$900." - I don't know what this means. The HSA custodian has no idea what your personal tax situation is so they actually should have no idea if you overcontributed or not. 

Was this supposedly for 2020? What were your "employer" contributions (i.e., the code W amount in box 12 on your W-2(s))? And how much did you contribute directly (i.e., not through your employer)? Did you carry over an excess HSA contribution from 2019? And did you have Family HDHP coverage for all of 2020? And what is the age of the person who owns the HSA?

We need to know a lot more about your situation before we can suggest any course of action.

[Tiamus]

Correct. My wife's plan is another HDHP that also offers an HSA with employer contributions. That's good information to know about the rollover HSA. I knew about that when it comes to 401k accounts, but didn't consider it for the HSA. 

Specifically they sent us a "Health Savings Accounts Excess Contribution Notice." The letter states that we "may" have over contributed. I called today to confirm the amount, and that's when I was told it was around $900. I'm assuming since my wife was a part of the account, maybe they just saw that the total contribution was over $7000? I'm not really sure what triggered the notice. When we were dealing with the HSA through the insurance provider, everything was much more clear. Now that it has been offloaded to another account, it has been harder to track things down.

Yes, this was for the 2020 year. The employer contributions were $6969.84 I thought that that's all we had last year... but as I was typing this I remembered we made a direct contribution of $1000 online to cover a charge that may have over drafted. I completely forgot about that contribution and didn't account for it on the 2020 taxes either.  So based on that, it would seem that it was indeed over. 

I'm not sure I fully understand the carryover question. We had funds left in the HSA after 2019, but we did not meet the contribution limit that year. We did have covered of the HDHP all year. Age is 29.

I'm happy to answer any questions... I'm just not sure what all details are needed. Thank you for all of your help though!

[Opus 17]

An HSA has only one owner.  I assume if the qualifying HDHP was through your employer, then the HSA was in your name.  If your medical insurance was a family HDHP and you had no other coverage that would disqualify you, your contribution maximum was $7100, or $8100 if you are age 55 or older.  How much did you contribute?  I suspect you did not actually over-contribute  because Turbotax would have alerted you.  I don't know how the HSA thinks they know this.

Then, I assume your HSA bank did a rollover to a new HSA with them.  Presumably your employer-sponsored HSA had lower fees or did not charge a monthly fee, so the HSA bank rolled you over into a private-owner HSA that charged a monthly maintenance fee.  I'm not sure it was legal to do this without your permission, or at least giving you warning.  Did they?

Once you have money in an HSA, you are allowed to spend it for qualified medical expenses at any time, even if you no longer qualify to make new contributions.  You can hold the account indefinitely, subject to whatever monthly maintenance fee they might charge.  

For 2021, it sounds like you are contributing to an HSA in your wife's name through her employer.  I have some thoughts on this as well, but let's get 2020 straightened out first.

[Opus 17 · Accepted solution]

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@Tiamus wrote:

Correct. My wife's plan is another HDHP that also offers an HSA with employer contributions. That's good information to know about the rollover HSA. I knew about that when it comes to 401k accounts, but didn't consider it for the HSA. 

Specifically they sent us a "Health Savings Accounts Excess Contribution Notice." The letter states that we "may" have over contributed. I called today to confirm the amount, and that's when I was told it was around $900. I'm assuming since my wife was a part of the account, maybe they just saw that the total contribution was over $7000? I'm not really sure what triggered the notice. When we were dealing with the HSA through the insurance provider, everything was much more clear. Now that it has been offloaded to another account, it has been harder to track things down.

Yes, this was for the 2020 year. The employer contributions were $6969.84 I thought that that's all we had last year... but as I was typing this I remembered we made a direct contribution of $1000 online to cover a charge that may have over drafted. I completely forgot about that contribution and didn't account for it on the 2020 taxes either.  So based on that, it would seem that it was indeed over. 

I'm not sure I fully understand the carryover question. We had funds left in the HSA after 2019, but we did not meet the contribution limit that year. We did have covered of the HDHP all year. Age is 29.

I'm happy to answer any questions... I'm just not sure what all details are needed. Thank you for all of your help though!

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Yes, you made an excess contribution.  It sounds like you also forgot to report the excess contribution on your tax return, you need to go back and do that now, by filing an amended 2020 tax return.

The effect of the excess contribution is that the amount you contributed in excess is not allowed to be tax deductible so you will pay income tax on it.  But if you forgot to report the contribution, you already paid income tax on it, so filing the amended return won't change your tax much.

Then, the amount of excess contribution is also subject to a 6% penalty unless you remove the excess.  If your account balance is too low to remove the entire excess contribution, then the 6% penalty is charged on the balance as of Dec 31, 2020.

You said you have $25 remaining?  Go ahead and take that out as a "withdrawal of excess contributions" and close the account.  Some part of the withdrawal may be the interest on the excess contributions, that interest will be taxable income on your 2021 tax return and you should expect a 1099-SA from this HSA bank reporting that income even though you closed the account.  In Turbotax, when you report the additional $1000 contribution, it will tell you that $870 was excess and ask if you removed the excess before April 15, 2021.  You will indicate you made a partial removal ($25, or whatever the amount is) and you will be asked for the year ending balance.  Turbotax will calculate your penalty that you will pay when filing the amended return. 

[Tiamus]

Then, I assume your HSA bank did a rollover to a new HSA with them.  Presumably your employer-sponsored HSA had lower fees or did not charge a monthly fee, so the HSA bank rolled you over into a private-owner HSA that charged a monthly maintenance fee.  I'm not sure it was legal to do this without your permission, or at least giving you warning.  Did they?

Not that we ever saw. When I went to the doctor earlier this year, the HSA card was being declined. When I called the next day, they said that the account was closed and was being moved into a private account and we would be receiving cards soon. They mentioned we should have received a letter informing us of this... It arrived about a week after the cards were turned off. And you're correct, the new account does have a monthly maintenance fee that they told us about on the same day we received the letter about the excess contributions (different letters).

[Tiamus]

It makes sense to need to do an amendment. That was a complete memory problem on my part. It looks like the form to do amendments through TurboTax isn't available until 3-25-21 though.

So to summarize

1. Withdraw the remaining funds from old HSA ~$25
2. Amend tax return for 2020 once it's available on 3-25
   1. Report the individual $1000 contribution
   2. Claim a partial withdraw of <the amount in step 1>
   3. Input the year ending balance. Would this be on the 1099-SA or a different form from the HSA?

Thanks again for all your help!

[Opus 17]

Potentially, your employer should’ve notified you as part of your separation interview.  It doesn’t affect the tax position at all.

Now, it is worth knowing that if your wife is covered by a qualifying family HDHP and you have no other disqualifying coverage, then you are considered to be covered by an HDHP and you are allowed to contribute to your own HSA even though the insurance is not in your name.  Your overall family contribution limit is still $7200 for 2021.  Contributions made by your wife through payroll tax deduction are exempt not only from federal income tax, but also from Social Security and Medicare tax, so you will save about 7% more by making payroll contributions than you would save by making your own contributions to a private HSA.  However, it may be an option you wish to consider, since each HSA account belongs to a single owner and you might have financial reasons to keep an account separate from your spouse, and you can’t do a rollover or transfer from your spouse’s account to your account.  You can open a private HSA at many different banks and if you shop around, you may find one with lower fees or better customer service.  Just to be aware of.  

[Opus 17]

You will have to obtain your year end balance from the bank (a monthly statement or your online account records). 

[Tiamus]

I think we're good with the one account for now. Honestly when we changed insurances to be through her employer, it never occurred to us that it would be a completely new HSA account. All of this has been a massive headache between cancelled cards and accounts we can't access for weeks. Currently we have her payroll deductions + employer contributions into the HSA to amount to roughly $7100 by end of year. I don't think we would have need for the private account. I like your advice of withdrawing the funds and closing it. Put that company far behind us.

[blondbetsy]

Where do you report the excess HSA contribution in Turbo Tax?

[DawnC]

 Enter your W-2s making sure to enter all of the Box 12 amounts.   Then go through the HSA interview,   When it asks about contributions in that section, do not enter the amounts from your W-2, those have already been included.  If made additional contributions not through payroll, those get entered.   When you are done with that section and if you have an excess contribution, TurboTax will alert you.   Then we will ask if you removed the excess by the deadline.   .

Search for HSA and use the Jump to HSA link in TurboTax to get to the interview.    @blondbetsy

[blondbetsy]

My spouse had an FSA between Jan and Feb in 2020 while I simultaneously had an HSA. My spouse's employment with that company as well as the FSA ended in Feb 2020. I realized later that the FSA made us ineligible for the HSA during Jan and Feb.  Unfortunately, I have already filed my  taxes not taking this into account. The HSA custodian corrected the ineligible contributions made by my employer by removing them from my HSA account and returning them to me. How do I account for this in an amended return?

[Opus 17]

If you or your spouse will remain in an eligible HDHP for all of 2021 and not have other disqualifying coverage, then you would have been allowed to use the “last month rule“ to contribute up to the maximum amount for 2020 even though you were ineligible for part of the year.

Unfortunately, because you did remove the money, it will now be mandatory that you file an amended return. It is too late to return the contribution for 2020, because this would have to be accomplished by the end of business on Monday, May 17, and I don’t think you will be able to get the process completed in time, because most HSA banks take a couple of days to process a deposit.

When you launch the amending process, go into the HSA section of the medical expenses interview on the deductions and credits page and indicate that you did not have qualifying coverage for the entire year; indicate no coverage for January and February, and eligible coverage for the rest of the year.  TurboTax will then tell you that you had an excess and will ask you what you did with it, and you will say that you removed it.  You will pay regular income tax on the removed excess but you should not have to pay a penalty.  (You should answer that you did not have eligible coverage, because even though you had eligible coverage you were disqualified by the FSA.)