HSA excess contribution

[1Fin]

My Husband had an excess contribution in 2018.  He did not draw it out in 2019.  Can he draw it out now and pay the taxes and penalties and be done with the excess contribution or does he have to pay the tax every year until the HSA has no balance.  He is 67.

If he can draw it out now how do you do that in Turbotax?  The program says it is impossible to draw it out now.

[JamesG1]

At the screen Did you overfund your HSA in 2018?, are you able to eliminate the overfunding when you enter the amount for 2018 IRS form 5329 line 48? 

I suspect that your spouse may be covered by Medicare and not be eligible.

[1Fin]

No,  The amount from 5329 is entered.  the next screen asks if the excess will be withdrawn before the Tax filing date, but then the program says it is too late to withdraw it now, it should have been withdrawn in 2018 and does not give the option to withdraw it now.

[BillM223 · Accepted solution]

"it should have been withdrawn in 2018 and does not give the option to withdraw it now."

That is correct; the IRS rules are that the excess has to be withdrawn by the due date of the return, which you understand that you missed.

There are two choices: 

1. Pay the 6% a year until your HSA balance goes to zero because of qualified medical payments you have made (in your case, I don't know if this will be one year or many years - it depends on your spending).

2. Ask for the withdrawal from the HSA custodian, and when you get the 1099-SA next year, report that this was not for qualified medical expenses. This will cause the distribution to be added to Other Income and a 20% penalty, but the carryover of the excess will be cut off.

2.a A variation on #2 is if you received a 1099-SA this year for other qualified expenses. If the 1099-SA distribution amount is less than the carryover, then you can tell TurboTax this year in the 1099-SA interview that X amount (where X is the amount of the carryover) is not for qualified medical expenses. This will cause the extra income and penalty this year, but it will cut off the excess this year, too. Then you won't have to do a separate distribution (#2).

It's your choice.

[sasmith]

In the case where you missed the deadline for removing the excess contribution and you elect to take a non-qualified distribution off the excess the following year (taxed at 20)% - do you also have to file an amended return for the year the excess contribution was made?

I am wondering because the (excess) contribution would lower MAGI for that tax year which might yield a tax savings over the 20% tax on the excess contribution withdrawal the following year.  However, if an amended return is required, then that would eliminate that advantage.

[BillM223]

"do you also have to file an amended return for the year the excess contribution was made?"

No, no amended return is needed. That is because the moment that TurboTax determined that there was an excess contribution, the amount of the excess was added to Other Income on line 8 on Schedule 1 (1040), whether the excess was withdrawn or not. ***Note, this applies to HSA contributions made through your employer (code W in box 12 on your W-2). If the excess contribution was a direct contribution, then TurboTax lowers the amount deducted on line 12 of Schedule 1 (1040) instead.