HSA excess contribution withdrawal tax treatment

[jsobie1]

I retired on January 31, 2023 assuming the Medicare 6-month setback would be from my first day of retirement. I contributed to my HSA from January through May 2022. Unfortunately, the government back-dated my Medicare Part A six months from my application date.  This puts my Part A start date at April 1, 2022.

That means I was not eligible to contributed in both of these months. This also puts me $25 over my prorated yearly limit. 

I processed an excess contribution withdrawal with my HSA ($600).  This won't show up in the 1099 until 2024.  

Turbotax accounts for the $25 as 2022 income.  I'm looking for a way to add the additional $575.

There's no place to address this withdrawal in the software questions. Seems inconsistent with the need to include this $600 as income in 2022.

[BillM223]

Have you entered your 2022 tax return yet? What was the excess HSA contribution amount reported to you by TurboTax? Was it the $25?

We discourage taxpayers from withdrawing the excess amounts before TurboTax has a chance to tell them what the excess is, because it is difficult for taxpayer to accurately determine the actual excess amount.

Also, the HSA is not a savings account from which you can willy-nilly withdraw dollars. Technically, when you withdrew that $600, it was not a withdrawal of excess contributions. Only the first $25 was a withdrawal of excess contributions. The other $575 was a distribution for purposes other than paying qualified medical expenses. This mean that the $575 should be added to Other Income and penalized 20% on top of that.

This is why TurboTax does not provide an easy way for you to indicate what you think the excess ought to be - because the $600 was not the excess, only the $25 was.

There are two steps to deal with this:

1. Contact your HSA custodian and tell them that the "withdrawal" of the excess was a mistaken distribution - it should have been $25. They don't have to allow this, so be nice. If all goes well, they will ask you to complete a form and to send them a check for the amount (i.e., return the money).

2. Then ask the HSA custodian to withdraw the $25 as the excess HSA contribution.

If these two steps don't work out for you, then ask yourself if you have $575 in unpaid medical bills now or in the very near future to which you can apply the $575 as a reimbursement. The IRS does not specify a time limit on when these bills must appear vis-à-vis the reimbursement, but clearly, the IRS does not intend for you to ask to be reimbursed years before the bill comes.

P.S., If the final action is easier to achieve that steps 1 and 2 (i.e., the unpaid medical bills are already at hand), then just document which bills were paid by the $575 and stick it in your tax files in case anyone ever asks, and skip the first two steps.

[Opus 17]

All that matters is that your total contributions for 2022 don't exceed your pro-rated limit, it doesn't matter when in 2022 you made the contributions.  You could even contribute after Medicare enrollment as long as your total for the year doesn't go over the limit for the year.   So Turbotax only recognizes $25 as excess because that's the amount of excess for the year.  You didn't need to withdraw the other $575. 

Maybe if you contact the bank, you can return it?   Many HSA banks allow for a return of mistaken withdrawal, although they are not required to do so.  

As it stands, you have a $25 return of excess contribution (that is reported on your 2022 tax return) and a $575 withdrawal that happened in 2023 so it will be reported on your 2023 return (next year).  Maybe you will have at least $575 in medical expenses some time in 2023 that you can apply against the withdrawal. 

[jsobie1]

Thank you for your response.

My understanding from reading the IRS documentation is that I was no longer eligible to contribute to the HSA once I was covered by Medicare part A.  

The Medicare part A coverage started on April 1 2022. I expected that my April HSA contribution and my May HSA contribution were not allowed. The total for these two months is the $600. 

I also thought that I could correct this mistake prior to filing my taxes.

BTW these were made by my employer through payroll detection, if that matters.

[Opus 17]

---

@jsobie1 wrote:

Thank you for your response.

My understanding from reading the IRS documentation is that I was no longer eligible to contribute to the HSA once I was covered by Medicare part A.  

The Medicare part A coverage started on April 1 2022. I expected that my April HSA contribution and my May HSA contribution were not allowed. The total for these two months is the $600. 

I also thought that I could correct this mistake prior to filing my taxes.

BTW these were made by my employer through payroll detection, if that matters.

---

As stated, it doesn't matter when during the year the contributions are made.  It only matters that your contributions be less than your maximum eligibility.  If you enrolled in Medicare on April 1, then you have 3 months of eligibility, and your contribution limit for the year is $1162 (if you were covered by a single HDHP) or $2075 (if you were covered by a family HDHP).  

[dmertz]

If you told the HSA custodian that you had an excess contribution of $600 (even though the actual excess contribution was only $25), they will be reporting on Form 1099-SA that you obtained a return of $600 of contribution, which is technically incorrect, although they have no way of knowing that.  Because the tax code permits only truly excess contributions to be returned, what you actually received was a return of the $25 excess contribution, adjusted for investment gain or loss, plus a regular distribution of $575.

Getting the HSA custodian to accept back the $525 (adjusted for investment gain or loss) as a return of mistaken distribution could be a challenge.  Upon in forming them that only $25 was actually the amount of excess contribution eligible to be returned, they should at least correct their coding of the distribution to show a return of excess contribution of $25 (with the amount distributed being adjusted for investment gain or loss) and a regular distribution of the remainder or the original distribution, resulting in you receiving two Forms 1099-SA.  You could then apply the distributed remainder against qualified medical expenses to make that portion nontaxable.

[jsobie1]

Thank you.

My HSA walked me through the paperwork.