HSA contribution applied to prior year is increasing my tax liability

[kva]

I started my HSA and high-deductible health plan in 2019. My HSA account allowed me to "jumpstart" my balance by making a contribution from my checking account (post-tax), and applying it to the 2018 year. In TurboTax, when entering this information (and noting that I did not have an HSA in 2018) it appears to instead be applying an additional 6% tax on that contribution. This seems very strange, since I already paid taxes on the money when it was counted as income. Now when putting it into my HSA, I would expect to get a tax credit, or at the very least not be taxed again.

[BMcCalpin · Accepted solution]

In order to be eligible to make a 2019 contribution to an HSA that doesn't exist yet in 2018, you have to have had at least one month of HDHP coverage in 2018. Part of the HSA interview in TurboTax is asking you which months you had what type of HDHP coverage in order to calculate the annual HSA contribution limit.

If you did not indicate any HDHP coverage in 2018, then all of your 2019 contribution would be in excess and subject to the 6% penalty. If your coverage did not allow a high limit, then any contributions in excess of that limit would be subject to the 6% penalty.

If I read your question correctly, you did not appear to have HDHP coverage in 2018, so you are not allowed to contribute for that year.

[kva]

Thank you TurboTaxBillMc. I was mistakenly under the impression that you could essentially back-fund the HSA within the limits of the prior year, even if you were starting fresh this year. I see now that this is obviously wrong, so I'm working to change the tax year applied for that transaction with my HSA bank, so I don't have to pay the 6% penalty. Appreciate your timely response!

[BMcCalpin]

Your impression would have been correct, if you had had the HDHP coverage last year. If the HSA bank won't recharacterize the contribution to 2019, then you can do the following: (1) tell TurboTax that you will withdraw the entire excess (in your case, everything you contributed) before the return due date (April 15, 2019), (2) call the HSA bank and request a "withdrawal of excess contributions" (use that exact phrase so they'll do the paperwork right), and (3) when the check shows up (the withdrawn amount is mailed to you), contribute it to the HSA in 2019 and take the deduction in 2020 on the 2019 return. The only problem would be if what you contributed for 2018 plus what you have already contributed for 2019 is more than the annual HSA limit for 2019, well, you'll have to be careful not to exceed the limit. One year of excess contributions is enough. 😉