I read similar situations in last year’s community questions, but still have my doubts, so here’s our nitty-gritty:
I retired in January 2021. This was the first year my wife and I were insured in a HDHP. My employer contributed $300 into a HSA for me, and we made contributions into a HSA for her. We both had HDHP coverage through COBRA, me until May 2021 when I went on Medicare, and her through all of 2021 and until August 2022 when she went on Medicare. No other contributions were made into my HSA, but we personally funded her HSA to the max allowable for 2021 and then also for 2022. (uh oh!)
I discovered that our HSA administrator was charging me some service fee for having a dinky account, so I filed for medically covered distributions and zeroed out my HSA. She has received no medical related distributions from her HSA.
In doing our income taxes for 2022, I discovered that the 5 Medicare months for her in 2022 allowed no contribution, therefore we had an excess contribution of $1,937. The 6% additional tax was $116, so I just figured that was a tax on my ignorance and left her HSA account alone.
Then in doing our income taxes for 2023, I discovered that the excess contribution that remained in her HSA during 2022 became a new excess contribution for 2023 and we again would suffer the 6% additional tax. Furthermore, this would occur every year until the account became eventually depleted. To clean this up, we requested a distribution of the $1,937 excess contribution before the 2023 filing deadline of 4/15/2024 and received same from the HSA administrator, plus $4 earnings on that excess contribution. I assumed this excess contribution distribution (and $4 earnings) would be classified as additional income for 2024, along with a 20% penalty for me being double ignorant.
We received a 1099-SA for 2024 showing the $1,937 distribution in Box 1, the $4 earnings in Box 2, and Distribution Code 2 (excess contributions) in Box 3. All seemed right. However, when completing my draft TurboTax return (desktop TurboTax Premier), I see no 20% penalty, no place where the $1,937 is added to taxable income, and another 6% additional tax of $116. Answering the Step-by-Step interview questions, it does not seem to care that we eventually withdrew this carryover excess contribution.
I switched into Forms, but cannot manually force it to calculate the 20% penalty. The forms do indeed account for the $4 earnings in additional taxable income.
I get that the carryover excess contributions from 2022 become a new excess contribution in 2023. But why does the 20% penalty not calculate? Is the carryover considered a new excess contribution for 2023 and since it was distributed out before 4/15/2024 there is no 20% penalty? If so, why are we being assessed a 6% additional tax? Or is that the final 6% tax penalty and we’re not being assessed the 20% late carryover withdrawal penalty because we are over age 65 (as found on an IRS.gov FAQ page)?
I would be happy to, as Expert Bill said last year, “declare victory and move on”. But what I really don’t want to do is see any of this HSA nonsense again this time next year. Thanks in advance for your advice, or words of consolation, or prayers.
