HSA Excess Contribution

[kiks_722]

Hello,

In 2022, I was only enrolled in a HDHP for only 5 months which prorated my (self) contribution limit to $1521. As a result, I contributed an excess of $681 to my HSA. By the end of 2022, my HSA distributions totaled $2537.57 which included the excess distribution of $681, current year contributions, plus rollover funds from previous years with a previous HSA custodian. At the end of 2022, the HSA account balance was $22.00.

When I filed in April 2023 for the 2022 tax year, TurboTax informed me... "You may want to withdraw money from your HSA. It looks like you have an excess contribution of $681. This amount is being taxed an extra 6%. But, anything withdrawn between January 1 and April 18, 2023 avoids this additional tax." I selected "No, I'm not going to make this withdrawal." Honestly, I probably didn't understand the question and in my head I was thinking that the HSA money was already spent. 

Question 1 - Filing for the 2023 tax year, TurboTax is stating that I'll be taxed (again) 6% on the $681 excess contribution. Do I need to go back to my 2022 taxes and amend my response to the HSA withdrawal question? I believe the correct response should have been "OK, I'll withdraw the full $681 excess contribution by April 18, 2023." Otherwise, I don't know how to inform the government that the excess contribution has already been distributed. 

Question 2 - Is there any further documentation I need to acquire from the HSA custodian? Because there were no contributions or distributions in 2023 for this HSA, I did not receive a 1099-SA. 

[BillM223]

"my HSA distributions totaled $2537.57 which included the excess distribution of $681," - Are you saying that you actually withdrew the $681 before the due date of the 2022 return (i.e., April 15, 2023)?

When you withdrew that $681, did you tell the HSA custodian that it was for "withdrawal of excess contributions"?

If you withdrew this amount by the due date of April 15, 2023, then, yes, going back and amending 2022 would be a good idea, because that would erase the "long-term excess" (my term) that got taxed at 6% and carried to 2023.

Since the long-term excess is appearing on line 2 on your 2023 8889, erasing it would likely erase any excess for 2023. Then you would be done with it.

So, did you withdraw the $681 before April 15, 2023?

[kiks_722]

Hi @BillM223, thanks for the reply. Your reasoning is sound and what I was suspecting. All good questions, please see my answers in bold below. 

"my HSA distributions totaled $2537.57 which included the excess distribution of $681," - Are you saying that you actually withdrew the $681 before the due date of the 2022 return (i.e., April 15, 2023)? Yes, I did withdraw the $681 before the due date of 2022 return. 

When you withdrew that $681, did you tell the HSA custodian that it was for "withdrawal of excess contributions"? No, I did not inform the HSA custodian that it was for withdrawal of excess contributions. At the time, I did not realize my HSA contribution limit would be prorated due to the fact that I switched insurance plans mid-year. That was not apparent until I filed for the 2022 tax year. 

[BillM223]

OK.

1. It is too late to call the HSA custodian and have them switch this distribution to a withdrawal of excess contributions. In my experience, custodians won't change prior year events. 

2. Because of this, the paperwork won't be right in any case. However, we should be able to make a reasonable approximation for the IRS by doing one of the following:

2.A. amend your 2022 return to show that you, in fact, withdrew that excess in a timely manner. After you do this, though, you will need to reimport your 2022 tax data into your 2023 return (yes, start your 2023 return over again). If you filed an extension, this will not affect it. You would do this to clear the long-term HSA excess carryover for 2023.

2.B. You should have received at some point a 1099-SA for the withdrawal of the $681. Did you already get it? If so, did you enter it on your 2022 return? It would have been normal to wait to enter it on your 2023 return. OK, if you have a 1099-SA for the $681 - even if it is included in a 1099-SA with other qualified medical expenses, you can enter it in your 2023 return, and indicate that $681 was not for qualified medical expenses. This will add the $681 to Other Income and penalize you 20%, but, again, the long-term excess would be eliminated. This is probably close to what the IRS would want you to do, if it ever came to an audit (the IRS seldom complains when you pay tax).

NOTE: If you entered the 1099-SA on the 2022 return, and you are amending the 2022 return anyway, you won't have to do this 2.B step...just document what you did any why and stick it in tax file.