HSA Excess Contribution

[jbradford65]

Hi,

My wife and I each have an HSA.  We combined to contribute $8,300 (I am over 55).  My HSA has the family coverage.  Because I changed jobs, I have 2 months that I wasn't covered, so I overcontributed by $1,367.  I can't do the Last Month Rule because I don't have an HDHP in 2023.

We have requested a refund from my wife's HSA for the $1,367.  How do I alter my entries in Turbo Tax to correctly show this?

thanks!

[BillM223]

I need to clarify some things first.

First, Family is an attribute of your HDHP health policy, not your HSA.

Second, Did your spouse have an HDHP policy during the two months that you did not have the HDHP policy? (Like, a Self-only policy)?

Third, which two months of the year did you not have HDHP coverage (i.e., January, December, etc.)?

Fourth, TurboTax automatically uses the last-month rule - the way you deal with it is to reduce your contributions to what they should have been if you had not used the last-month rule. If we are talking about 2022, then it is too late to reduce your contributions.

Fifth, is your spouse going to have HDHP coverage going forward even after you cease having any HDHP coverage?

Sixth, did you become 55 during 2022, or were you 55 on January 1st?

[jbradford65]

Hi Bill,

thanks for the response.  

1.  You are right, my HDHP was family

2.  my wife's HDHP was a self only policy.

3.  I was out of coverage for September and October.

4.   The way I read the rule was that you had until your tax filing deadline to reduce contributions if you made an error.  I got this from IRS Publication 969 (2022). 

5.  My spouse will have a self only HDHP plan in 2023.

6.  I was 55 on January 1.

thanks for your help!!  

[BillM223]

"The way I read the rule was that you had until your tax filing deadline to reduce contributions if you made an error. " This is true; I was thinking of tax year 2023, not 2022.

"I was out of coverage for September and October" If this means that you will have Family HDHP coverage again in November and December, then TurboTax will automatically apply the last-month rule anyway. Since we are talking about tax year 2022, you won't notice the problem (well, TurboTax won't, anyway) until you do your 2023 tax return in early 2024. 

In your 2023 return, TurboTax will notice that you did not have HDHP coverage for every month in 2023. It will then ask you what your HDHP coverage was on December 1, 2022 (yes, 2022 in your 2023 tax return). When you answer Family, it will start asking you a series of questions based on the assumption that you used the last-month rule in 2022 (because you don't have a way to tell TurboTax NOT to use it). TurboTax then calculates what your annual HSA contribution limit would have been had you not used the last-month rule. At the end, TurboTax, tells you how much was added to your Other Income.

Please note that it is difficult for a taxpayer to predict what their excess HSA contribution will be - therefore, we strongly discourage them from withdrawing "excess" HSA contributions from their HSA before they do their tax return, because they frequently get it wrong. Instead, wait until TurboTax tells you what the excess (if any) is.

In your case for 2022, because TurboTax will apply the last-month rule, TurboTax will not calculate an excess contribution. Then, in 2023, because your spouse still has Self-only coverage for all 12 months, I don't think that your excess as calculated will be as straight forward as it seem because the sharing of the Family coverage is dynamic; when TurboTax see that your spouse has Self-only coverage for September and October, it won't borrow as much of the Family coverage for her, leaving more for you. 

In any case, please contact your HSA custodian and declare that the excess "withdrawal" was a "mistaken distribution". You will need to sign a form and send them a check for this amount. The HSA custodian does not have to accept this request, so be nice. Then, on the 2023 tax return, you will find out how much the penalty is (if any), and then you can take care of it.

[jbradford65]

Hi Bill, 

Thanks for the reply.

The interesting thing is that on form 8889, turbo tax has already put the $1,367 on Line 18.   It then puts the 10% penalty in line 21 that carries over to the other tax forms.   Somehow it isn't applying the Last Month Rule.  I'm ok with that, I'd rather take care of it now because I'm not eligible for the Last Month Rule.

So I'm back to how do I show an amended contribution amount?

Thanks!

[BillM223]

No, TurboTax did apply the last-month rule, but for tax year 2021. The amount is in line 18 because on your 2022 return, TurboTax asked you a series of questions when it realized that you did not have HDHP coverage for every month in 2022 (as you were doing your return). TurboTax can't calculate the income for the last-month rule for your 2022 tax return until you do your 2023 tax return, because TurboTax won't know until the end of 2023 if you "failed" to maintain HDHP coverage.

In any case, your description doesn't make sense unless you did not have HDHP coverage for every month in 2021, and since as we know, you did not have HDHP coverage for every month in 2022, then TurboTax would have done the last-rule penalty processing in tax year 2022. 

Please tell me if this is not consistent with the facts, but I am thinking that line 18 is for the last-month rule processing for tax year 2021, not this year (2022).

[jbradford65]

Hey Bill,

I think what I don't understand is why I would pay a penalty on 2021 contributions when I did have family HDHP coverage for every month in 2021?

[BillM223]

You said, "The interesting thing is that on form 8889, turbo tax has already put the $1,367 on Line 18.   It then puts the 10% penalty in line 21 that carries over to the other tax forms. "

Line 18 is under the heading of "Part III Income and Additional Tax for Failure to Maintain HDHP Coverage". Failure to Maintain HDHP Coverage in 2022 is only an issue when you used the last-month rule in 2021. In other words, line 18 is always trailing a year.

You also said, "I did have family HDHP coverage for every month in 2021?". Could you do me a favor and look at your 2021 return? Is there a form 5329 on it? Are there entries under Part VII?

Are filing married joint? Did your spouse have HDHP coverage for every month in 2021? This $1,367 - was it on the 8889-T or 8889-S?

[jbradford65]

Hey Bill,

There is no Form 5329 for 2021.

We are married filing joint.  My spouse did have HDHP single for every month.

The form only says 8889, but it is OMB No. 1545-0074.  Attachment Sequence No. 52   Rev. 2/24/23 TTW

[BillM223]

OK, something does not make sense here. You should not have anything on line 18 of the 8889 unless you used the last-month rule in 2021.

Could you do me a favor? Can you send me a copy of your return with all the personally identifiable information redacted? You can do this by sending me a "token" which is an index into our database with your redacted tax information. The process by which this token is generated automatically redacts all personally identifiable information so you do not have to do it. 

TurboTax Online:  

Click Tax Tools in the menu to the left.

Click Tools, and then

Click Share my file with Agent.

A pop-up message will appear. Click OK to send the sanitized diagnostic copy to us.

Provide the token number that is generated onto this thread.

TurboTax Desktop:

Select Online menu if the customer is using Windows. Select “Help” if using a Mac.

Select Send Tax File to Agent.

A pop-up message will appear, and the customer will select, Send. If using Mac "Send Tax File to TurboTax Agent" 

Note: Desktop will save a file to your computer unless you uncheck the box.

Another message will appear. Provide the token number that is generated onto this thread.

At the bottom of your reply (with the token) add "@" "BillM223" (without the space in between) so I will be notified.

This will let us see what is happening on your return. Thanks.

***

Sorry, the question about form 8889-T and 8889-S was assuming that you could see your forms list (if you were using the CD/download software). As you saw , the actual form name is 8889, where one has your name on it and the other has your spouse's name. But don't worry about that now because when you send me the token, I will be able to see it (them).

[jbradford65]

I sure can.  Thanks for the help, Bill.

I'll send it when I get home tonight.

[jbradford65]

Hi Bill, @BillM223 

Here is  the Token Number 1097947  These are the 2022 draft taxes.

Here is the Token number for the 2021 taxes in case that is helpful.  1097965

Thanks again for your help!!

[BillM223]

Thank you for the token. 

I see that while as you said, you did not have Family HDHP coverage in September or October of 2022, you also entered that you did not have Family HDHP coverage in September or October of 2021.

That is, when you answered the question, "What type of High Deductible Health Plan did [name] have on December 1, 2021?", you answered Family or Self (whichever, it doesn't matter, but I guess you answered Family). When TurboTax compared this to your current entries for 2022 for HDHP coverage, TurboTax thought (1) you had Family coverage in 2021, and (2) you had Family coverage for 10 of 12 months in 2022 (because you had just entered it in the HSA interview).

This triggered the last-month rule processing for 2021-2022. One of the things that TurboTax asks you during the last-month rule interview is for which months in 2021 did you have what type of HDHP coverage (since it obviously couldn't look back to your 2021 return). You evidently didn't realize that TurboTax was asking about 2021 this time because you gave the same months for 2021 as you did for 2022 - Family all year except for September and October.

Please go back to the HSA interview and recheck your entries after "What type of High Deductible Health Plan did [name] have on December 1, 2021?" Note that this is for "taxpayer", not the spouse.

[jbradford65]

Thanks Bill,  that took care of the problem.  Appreciate the help!