HSA excess contribution "distribution type"

Forum|Forum|6 years ago
March 13, 2020
5 replies
53 views

I'm trying to remove an excess HSA contribution that occurred 3 years ago. I left my job & the high-deductible health plan (HDHP) in May that year, but my last paycheck paid in June included contributions to the HSA. I haven't had an HDHP ever since; otherwise, I would've simply reduced my HSA contribution the subsequent year to avoid all the trouble. I should've taken care of the excess contribution during the same tax year it occurred, but long story short, I didn't, and it -- along with the penalty -- has carried over year after year

Of the following choices on the HSA administrator form to request a distribution, which is the correct distribution type?

Excess contribution removal -- I thought it was this, but the HSA administrator said they can't process it as such, since we're now outside the tax year in which the excess contribution occurred. They said they could not advise me on which of the alternative types below is more appropriate, because they can't give "tax advice."
Normal
Mistaken contribution
Prohibited transaction

(There are other choices, but they obviously aren't correct for my situation. e.g. Divorce, Disability, etc.)

Not A Product Question

MarilynG

Level 15

It sounds like you have not received a 1099-SA yet.

You could choose 'Normal Distribution' and indicate that it was used for Medical Expenses (you spent it down as Opus 17 suggests).

Click this link for info on How to Enter a 1099-SA.

[Edited 3/13/2020 | 3:58 PM]

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Opus 17

Level 15

@MarilynG wrote:

You could use ''Mistaken Contribution'.

Indicate in TurboTax that you did not use the distribution 'for medical expenses' so it will be taxable income, since you did not have an HDHP last year.

Click this link for info on How to Enter a 1099-SA.

Removal of a mistaken contribution would apply if the taxpayer made a contribution in 2019 that was not allowed, and wanted to remove it before April 15, 2020.

This problem could only have been fixed before April 15, 2017. The taxpayer is stuck with the penalty now.

dmertz

Level 15

Since you will not be able to apply the excess as part of your HSA contribution for some subsequent year, to avoid continuing yearly excess contribution penalties you must either spend the HSA down to zero or make a regular (normal) HSA distribution of exactly the amount of the excess and treat it as taxable by not applying it to a qualified medical expense. If you are under age 65, this taxable distribution will also be subject to a 20% early-distribution penalty. Doing this in 2020 will eliminate the excess and penalty for 2020 and beyond. Assuming that this excess contribution was made in 2017, there is nothing you can do about the 6% penalties for 2017, 2018 and 2019.

(If you have debt-card privileges on your HSA account, can make this distribution by using the debit card. If your debit card automatically limits use to only payments for medical services, you can use the card to pay for a medical service and then claim on your tax return that the amount used for medical expenses was less by the amount of the excess in your HSA.)

Opus 17

Level 15

There is nothing you can do, you are stuck with the penalty as long as you own the account, or until you spend it down to zero, or you enroll in a new HDHP so you can apply the excess. (remember, once you own an HSA, you can spend it to cover any out of pocket expenses, no matter what kind of insurance you have. You just can't make new contributions unless you have an eligible HDHP.)

The "remove excess contributions" procedure to avoid a penalty only works if completed by April 15 of the year after it happened. None of the other distribution options is appropriate.

Although, one month of excess contributions on a single plan should only be costing you $17 per year, that's annoying but only about the cost of 5 cups of coffee.