HSA contributions

[Troyrez]

In 2019 I was covered by my employer with a HDHP and HSA.  I changed my healthcare plan to my wife's going into 2020.  However, my employer made 2 contributions into my HSA in 2020 from a Fitbit program I was enrolled in through 2019 and the other they say on accident (just keep it it's free money they said).  Because a contribution was made into my HSA in 2020 turbo tax says I must have a HDHP in 2020, but I did not, how do I handle this ?  

[MinhT1]

As you do not have a HDHP in 2020, you cannot contribute to a HSA. And the amount contributed by your employer in 2020 are overcontributions. These contributions are reported on your form W-2 in box 12 with code W.

Please read this Community answer on how to deal with your over-contribution to the HSA on your tax return.

[Troyrez]

Thank you, 

The over contribution is on my W2 line 12 code W as you mentioned and is recognized that way in Turbo Tax, however it still tells me I cannot have an HSA without a HDHP and will not allow me to file.   The over contributed funds to the HSA have been mostly used in 2020 to cover previous medical payments so a withdrawal is not necessary.

[BillM223]

"just keep it it's free money they said" - no, it's not that simple. See below.

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"however it still tells me I cannot have an HSA without a HDHP and will not allow me to file." - You did not tell us what or where TurboTax is telling you this, but I am guessing that this is in the Review, and TurboTax is telling you that line 1 on form 8889 needs either Self-only or Family checked.

TurboTax has a design difficulty in the Review, in that it assumes that any taxpayer with a form 8889 must have HDHP coverage, which is why you are being asked to fill in this field on Line 1 for Self-only or Family. 

The design does not anticipate your situation in which you have a form 8889 because of your HSA contributions but no longer have any HDHP coverage.

The workaround in this case is to just check Self on line 1 of the 8889 so that you can clear the Review. You have already indicated that you had no HDHP coverage on Line 3 on the 8889, so all the numbers on the form will be correct - you are just doing this to bypass the Review.

You might make a note of what you did and why, not because the IRS will inquire, but because you may wonder next year why you did this...

***

"The over contributed funds to the HSA have been mostly used in 2020 to cover previous medical payments so a withdrawal is not necessary."

This is not how excess contributions are handled. When you made excess contributions to an HSA, and these contributions were through your employer (i.e., on your W-2), and you are unable to withdraw them before the due date of the return, then the excess contributions are carried over to the next tax year, to see if they can be applied the next year.

In addition to being carried over to next year, you will be assessed a 6% penalty in form 5329 (see Part VII). 

This penalty will be assessed each year until you are (1) under HDHP coverage again so can use the excess against that year's contribution limit, or (2) you take a distribution and not say that it was for qualified medical expenses. I am guessing that you can't do #2 because you don't have enough money in the HSA to cover the excess. Besides, #2 will get you penalized 20% (but at least the carryover would be gone).

In any case, once you reduce the balance in your HSA to zero, the penalty will go away, so if you don't expect to have HDHP coverage any time soon, pay out everything you can on qualified medical expenses to get the balance down to zero.