HSA Excess Contribution

[ketumm]

Issue:  I did not realize that once I signed up for Medicare that I could no longer contribute to an HSA even though I was covered by an employer sponsored HDHP.  this resulted in excess contributions for 2021 of $860 and for 2022 of $4250.  I discovered the issue in July of 2022.  The following are the actions I took:

1.  In July of 2022, at the request of the financial institution where the HSA is held, I filled out a form to retrieve the $860 of excess contributions including earnings for 2021.

2.  I filed an amended return for 2021 using TurboTax where I had to specify the months where I had both HDHP coverage & Medicare coverage.  Per TurboTax instructions I had to select 'None' when asked if I had HDHP coverage for the months specified where I also had Medicare coverage.

3.  TurboTax then calculated that I had an excess HSA contribution for 2021.

4.  TurboTax wanted to know if I planned on recovering the funds before the tax deadline.  I answered 'No' because the tax deadline for 2021 had already passed.  (Note:  I did already extract the fund per note #1 above.)

5.  TurboTax then charged me tax on the retrieved funds along with assessing a 6% penalty.

6.  In July of 2022, at the request of the financial institution where the HSA is held, I also filled out a form to retrieve the $4250 of excess contributions including earnings for 2022. This recovery did meet the requirement to be executed prior to the 2022 tax filing deadline (April 2023).

Now I will discuss the issue I am having.:

I am using TurboTax again to do my 2022 taxes and have come across the following issue:

1.  TurboTax carried over from 2021 to 2022 a 6% percent penalty for the $860 excess contributions in 2021.

2. I thought this would be resolved when I entered the 1099-SA information which shows that the excess contribution have been retrieved for both 2021 and 2022 ($5110).

3.  TurboTax did not charge me a penalty for the 2022 excess contribution of $4250 because I told it that the funds were extracted prior to the 2022 tax filing deadline however, the $860 excess contribution in 2021 is still being assessed the 6% penalty.  

4.  When TurboTax asked me to enter the amount I planned on retrieving before the 2022 tax deadline, it would not allow me to entered the total amount of $5110 because that exceeded the HSA amount of $4250 shown on my W2.  So only the $4250 was not penalized however the $860 from 2021 still is.

5.  TurboTax does not know that the $860 was recovered even though the amount is shown on the 1099-SA.  

6.  It all boils down to the fact that I was unable to recover the 2021 excess contribution prior to the 2021 tax filing deadline however, it has been recovered and my 2021 TureboTax return assess me the income tax on it along with assessing me the penalty.

What should I do?  How can this be resolved?  All the excess HSA contributions for both 2021 and 2022 have been remove from my HSA account and all taxes and penalties have been paid.  How do I get rid of the recurring issue with the $860 excess HSA contribution which occurred in 2021?

Username :  Ketumm

[BillM223]

"When TurboTax asked me to enter the amount I planned on retrieving before the 2022 tax deadline, it would not allow me to entered the total amount of $5110 because that exceeded the HSA amount of $4250 shown on my W2.  "

Actually, you could not withdraw the $860 because you had to do that before the due date of the 2021 return. After that date it is too late, you have to fix this another way.

As for the $860 that keeps carrying over to the next year, let me ask you: do you have any money left in your HSA? I ask this because you can no longer contribute to an HSA (as you know), so eventually, your HSA will run out of money.

The 6% penalty is actually 6% of the lesser of the amount of the excess that is carried over OR the amount in your HSA at the end of the previous year. So when your HSA is empty, your penalty drops to zero (because 6% of zero is zero).

So tell us if you are out of money (or almost out) in the HSA, at which point the whole discussion is finished.

[ketumm]

Thanks for the reply.

Just a couple of notes:

1.  The $860 excess contribution for 2021 was already withdrawn in 2022 even though it was after the filing deadline.  I then amended my 2021 return at which time TurboTax charged me the associated income tax along with the 6% penalty on the $860.  Just wanted to reiterate this, not sure I did the right thing.

2.  The value in my HSA is fairly substantial and cannot be drawn down to $0.00 unless I have a catastrophic medical event this year.

3.  What is my other option for fixing this?  I believe I can take a non-qualified distribution of $860 from my HSA this year but in doing so, I believe I will incur a 20% additional penalty on my 2023 Tax return.  What bothers me is that the $860 was already withdrawn and income tax and penalty were already paid.  I hate to have to withdraw another $860.  Not sure any of this is correct so I am eager to hear what options I have to fix this.

Regards,

Ketumm 

[ShirlynW]

The interest from the $860 should have been withdrawn also. Contact the HSA administrator, have them  to report to the IRS the $860 was withdrawn after the deadline and should not be report on your 2022 1099-SA. Request a corrected 2022 form 1099 SA.

[ketumm]

The $860 Excess contribution for 2021 was  withdrawn in July 2022 after the tax deadline.  At the same time I withdrew the $4250 excess contribution for 2022 prior to the 2023 tax deadline. I contacted the financial administrator and he stated that both amounts should appear on a 2099 -SA form showing me the total of 5110.  Even if the $860 did not appear on the 1099 –SA form, TurboTax still knows about the 2021 excess contribution. This is because the amount I was eligible to contribute in 2021 was less than what I actually contributed based on the W-2 form . This was directly related to the fact that I had Medicare coverage the last three months of 2021 and was not allowed to contribute to an HSA but was contributing anyway.  Even though TurboTax is aware that the excess contribution of 860 has been withdrawn based on the existing 1099 -SA form, it will not allow it because the withdrawing took place after the 2021 tax deadline.  Therefore TurboTax carried the 6% penalty over to 2022 and it’s showing it on my current tax filing.

TurboTax is suggesting that I make another withdrawal from my HSA in the amount of $860 as a non-qualified distribution. It states I’ll be charged 20% tax on it but that should resolve the issue. I’d rather not do that because I’ve already withdrawn the $860 and paid income tax plus the 6% penalty. but if that’s what needs to be done, I may have no choice.

again, what options do I have to resolve this?

[BillM223]

The HSA administrator should not have allowed you to withdraw the $860 in 2022 as an excess contribution, because at that point, it was already too late to withdraw the excess from tax year 2021 (unless, by some miracle, you filed for an extension for tax year 2021 - did you?).

But HSA custodians are notoriously resistant to fixing their own mistakes, especially after the tax year is finished.

Contact your HSA custodian and ask that the withdrawal of the $860 be recharacterized as a normal distribution, because they should never have accepted your request in the first place since it was after the due date.

They will almost certainly refuse. If so, just document the date and time and what you said and what they replied.

Enter your 1099-SA for the $860 in 2022 as if it were a normal distribution, but one which you did not apply to qualified medical expenses. This will not sync with what your HSA custodian has on their books, but that is why you are going to document their error.

The 1099-SA for the $860 was issued in 2022 after April, right? If so, it belongs on your 2022 return, which you are doing right now. You removed the $860 (good), and when you state that this was not for qualified medical expenses, the $860 will be added to Other Income (good). You will be fined 20% (not good, but necessary), and the carryover of the $860 will be terminated. 

At the end, you will have paid 6% just once, and you will use the existing $860 withdrawal to cut off the carryover, and not have to withdraw a new $860.

This carries some risk, in that your tax return(s) will not longer match the HSA custodian's books. But (1), you can point out that their books are in error, (2) they declined to fix their books, and (3) you ended up doing the right thing anyway, while not avoiding any income tax or penalties other than what you truly owed. 

If you choose this path, make sure to document everything, in case anyone ever asks.

P.S., I am ignoring the earnings on the $860. This is because the earnings are reported only when you withdraw excess contributions. But we are recharacterizing what you did as not a withdrawal of excess earnings. Therefore the earnings would not have been reported to you. Is that sneaky? No, because you are accepting a 20% penalty in lieu of the earnings. The IRS comes out ahead in this case, and you are finished with the whole affair. 

Questions?

[ketumm]

BillM223,

Thanks for all the information, you have been very helpful.

To accomplish what you are recommending, I will have to do the following:

Note: I received only one 1099-SA containing a total Gross Distribution in Box 1 of $5110.  $4250 of this was an excess contribution withdrawal for 2022 and $860 was an excess contribution withdrawal for 2021.  The 1099-SA only shows a total and not a break out of the distribution.

So, I believe I will have to do the following:

1.  On the existing 1099-SA entry in TurboTax, I will modify the gross distribution in box 1 from $5110 to $4250 (2022 Excess Distribution) and leave the Distribution code as is (Code 2: indicating excess distribution withdrawal).  TurboTax is OK with this because this withdrawal took place before the filing deadline.  This will not match the financial institutions documentation so I will document the reasons for this and keep it with my tax file.

2.  Enter a 2nd 1099-SA in TurboTax (even though I do not have one) showing a gross distribution of $860 and a distribution code of 1 indicating it is a normal distribution.  Inform TurboTax that the $860 distribution was not used for qualified medical expenses at which time it will tax me 20%.  Again, I will thoroughly document the reason for this and keep with my tax file.

Note:  If I was audited, I can show that the gross distributions add up to the amount on the 1099-SA that I received and that I only was changing the distribution codes to reflect what really took place.  And since I was trying to correct a taxing issue to be more favorable to the IRS, I should not have any concerns.

What do you think?

The other option I can think of is:

1.  File my taxes as they are without making the corrections and pay the 6% on the $860 that TurboTax is carrying over.

2. Make a non-qualified withdrawal of $860 from my HSA sometime in 2023.

3. Then, for my 2023 taxes, I would get a 1099-SA showing a gross distribution of $860 coded as a '1' showing it is a normal distribution.

4.  When filing my taxes in 2023, tell TurboTax that the $860 withdrawal was not for medical expenses and be charged the 20% tax on my 2023 taxes.

In doing this I would not have to make any modifications and my entries in TurboTax will match the financial instruction's documentation.

What do you think about this?

Should I fix it now and make the modifications or fix it next year where all entries in TurboTax match info on the 1099-SA forms?

[BillM223]

The choice is yours. If you do it the first way, you minimize your tax but increase your chance of being hassle in an audit because the paperwork doesn't match. If you do it the second way, all the paperwork matches, but you will pay a little more.

Your descriptions are good, so go with either way that suits you. After, if I am counting on my fingers right, the difference is 6% of $860, so not so much.

[ketumm]

BillM223,

Again, thanks for all your input.

I contacted the financial institution and they are sending me corrected 1099-SAs.  One for the $860 showing a normal distribution and a 2nd one for the $4250 showing an excess contribution distribution.  This will get me what I want and therefore all the documentation should match.

Thanks for your help in getting me pointed in the right direction.

Regards,

Ketumm

[ketumm]

BillM223,

As you indicated in a previous correspondence, the financial institution refuses to fix their error even though they initially said they would.  They are stating that I withdrew the $860 prior to the IRS Extension deadline of 10/15/2022 for the 2021 tax year.  This is true however, I did not file for an extension, I had already filed my taxes.  My taxes were filed in 3/2022, processed by the IRS, and all taxes were paid/refunded per the filing.  I do not believe you can file for an extension after you already filled your taxes, not sure though.

Any comments?

I think what I am going to be forces to do is file my taxes per the 1099-SA that I received so that all documentation matches in order to reduce the chance of an audit.  Then in 2023 I will make an $860 withdrawal from my HSA.  As stated earlier, at that point I will get a 1099-SA showing a qualified distribution for medical expenses.  I will let TurboTax know that these funds were not used for medical expenses at which time it will assess me the appropriate taxes.  Oh, by the way, TurboTax is not assessing me the 20% tax on this distribution because, per the instructions for the 8889 form, you do not have to pay the 20% tax if you are over 65.  I was over 65 when I received the $860 excess contribution distribution in July of 2022, and hence, I will be still over 65 when I make the $860 distribution in 2023.  This way all documentation matches.

What do you think?  Do you agree that I am exempt from the 20% taxes because I am over 65?  Do you think this is the right course of action to minimize an audit because all documentation matches?

Regards, Ketumm.

[AbrahamT]

No, you cannot file an extension after you already filed your taxes

and yes, you are exempt from the 20% penalty after the age of 65, See HERE under subsection Health savings account.

Input the 5,110 as they recorded it, you will be charged the 6% on the excess contribution carryover from 2021 so you keep yourself safe in not triggering an audit. And then take the 860 distribution in 2023 as a nonqualified distribution without incurring the 20% penalty.

The HSA administrator should not have allowed you to withdraw the $860 in 2022 as an excess 2021 contribution, because at that point, it was already too late to withdraw the excess from tax year 2021 because the funds were withdrawn after the 2021 tax deadline which was in July of 2022.