HSA Eligibility in Question due to seconds medical insurance plan.

[LoganH7007]

I have a primary job that included medical insurance and I picked a High Deductible Plan with an HSA. I contributed the maximum amount of $8100. This was from Jan 2020 to Dec 2020.

In June of 2020, I was able to secure a 2nd job to make ends meet. I forgot to decline the insurance within the 30-day enrollment period and I can’t change it at all now, so I have a 2nd medical insurance which is not a high deductible plan and there is no HSA involved.

While doing my taxes for 2020, I read about the HSA and one of things it says is that you can’t have HSA if you are covered by another medical insurance program. So it seems now my eligibility for an HSA is probably terminated?

So, my questions are:

• What are the penalties for having an HSA/High Deductible Plan and also 2nd non-HSA medical insurance program both through my 2 different employers?

• Should I get with the HSA plan administrator and have them return the HSA money to me that was deducted from my primary job paycheck to avoid penalties?

• My HSA administrator has an opened in error form which I can fill out. However, since the funds were distributed to the HSA company through my employer, who will the funds actually go to? The employer or me?

• If the employer, how will those funds get back to me? As added income in my paycheck?

• Can I specify that they send the funds to me and I add it to my income and pay taxes on it before the filing deadline of April 2021?

• Should I do nothing at all?

[dmertz · Accepted solution]

Your HSA contribution limit is pro-rated for the number of months that you were HSA-eligible, those months that you were covered by the HDHP and not the other plan.  Any contributions beyond that pro-rated limit are excess contributions subject to a 6% excess contribution penalty each year that they remain in the account unless you obtain a return of the excess contribution before the due date of your 2020 tax return.  If you nothing and do not obtain a return of contribution before the due date of your 2020 tax return, it gets real expensive to correct the excess to avoid continuing 6% excess contribution penalties because not only will you owe income taxes and penalty on the excess contribution with your 2020 tax return, you'll also own income taxes again plus, if you are under age 65, a 20% penalty when you later take a normal taxable distribution to correct the excess.  Note that only the amount of the excess can be returned before the due date of your 2020 tax return, not any amount beyond that.

Since the contributed funds were originally part of your pay, the return of excess contribution is paid to you, accompanied by any investment gains attributable to the excess contribution.  The excess amount itself is taxable on your 2020 tax return and any investment gains that are distributed are taxable on your 2021 tax return.

If your spouse is the other individual covered under the HDHP plan and your spouse is not cover by any other plan, your spouse could make a contribution of the remainder of the family limit that you are not eligible to have contributed and, if your spouse was age 55 or over, a $1,000 catch-up contribution.

[LoganH7007]

Thank you for your reply...

I have one follow-up question:

I successfully received the excess funds from the HSA administrator, however, in addition to the $ amount specified as the excess funds in TurboTax, the HSA Administrator also included a return of $1.35 in Interest gained on the excess funds.

TurboTax wouldn't allow me to enter the total excess amount that it calculated plus the additional $1.35. It said it was bigger than it calculated.

Where should i add that $1.35 of interest gained on the excess contribution in TurboTax?

Should it be added as just regular income?

Should it be added and stated as Regular Interest 1099-INT?

Should i also have the HSA administrator send me a corrected 1099-SA form to show the return or will they do that automatically?

Thank you so much for your replies on this forum!

[dmertz · Accepted solution]

The amount returned is equal to the amount of the excess, not the amount of the excess plus earnings.  Nothing about the gains goes on your 2020 tax return.

The gains will be reportable on your 2021 tax return by entering the code 2 2021 Form 1099-SA that you will receive near the end of January next year.  There is no 2020 Form 1099-SA that needs correcting as a result of any of this.

[LoganH7007]

Thank you for the great detail!