HSA Excess Contributions - can I apply those to more than one future year? Or is it limited to just the next year and I have to remove the rest to avoid Excise Tax?

[ukachaka1]

isn't the 6% Excise Tax much lower than counting it toward my income tax?

[HelenC12]

Yes, the IRS allows you to roll forward excess contributions and not remove them, but apply them to future periods. You can’t apply more than you have in excess and you can’t apply more than that year’s HSA contribution limit. The downside to this plan is that you must pay the 6% excise tax on the excess contribution for each year it remains in your account as excess (i.e. not applied).

We can't see your income tax return to know the income tax ramifications of leaving the excess HSA contributions in your account and paying the 6% excise tax. Everyone's tax situation is different.

You can do test return to calculate the income tax versus the excise tax.

• See How to make a test copy of your return?

[ukachaka1]

but I can only apply one future year at a time it sounds like?   Or can apply all of the excess to future yearS ?   Sounds like no, as you mention the excess left will still be taxed at 6%.

[BillM223]

If you had excess contributions of $2,000 from tax year 2019, then you can carry this over to tax year 2020, with the 6% penalty.

This carryover has the effect of reducing your 2020 HSA contribution limit by $2,000. This will likely cause another excess contribution. Let's say that you contributed less than the full HSA contribution amount in 2020, say $1,000 less.

This would cause $1,000 of the $2,000 carryover to be used up in 2020 (good), and would generate a $1,000 excess ($2,000-$1,000) for 2020. So the $1,000 excess carried over to 2021 would be penalized at 6% (better).

In 2021, you would again reduce your HSA contributions so that what you and your employer contribute is at least $1,000 less than what would be the normal limit for your situation. This will use up the carry over, and you will be free of it.

Does this answer you question?

[laquan]

Hi,

I overfunded my 2020 HSA contribution but withdrew the excess plus earnings in February 2021.  While working on my 2020 taxes, I realized that I had overfunded my 2019 HSA contributions by $66 and did not withdraw it, and so I paid the 6% penalty on my 2019 tax return.  The $66 carried forward to my 2020 return in TurboTax.

My HSA account was transferred from a prior brokerage firm to the current brokerage firm on 3/12/20, and so the current brokerage firm is unable to compute the earnings on the excess $66 contribution made on 11/1/19.  I asked the rep whether the $66 excess from 2019 can be carried forward to 2020 and whether I can complete a second return of excess contribution for 2020 for $66 plus earnings.  She said no, and that I would need to calculate the earnings myself from 11/1/19 forward, and then withdraw that amount as a normal distribution because it is too late to request a return of excess for 2019.

This does not sound right to me based on my understanding of being able to use prior year excess contributions towards the current year's contributions.  The stickler though is that I overfunded for 2020 as well, and so my question is whether I can do a second return of excess plus earnings for 2020 prior to the tax filing deadline so that I can use the $66 excess contribution from 2019 as a 2020 contribution.

My other question is whether the earnings on the excess should be reported on my 2020 or my 2021 tax return, given that the distribution was made in 2021 (prior to the tax filing deadline).  The instructions in Form 8889 state that "you can withdraw some or all of your excess contributions for 2020 and they will be treated as if they had not been contributed if you also withdraw any income earned on the withdrawn contributions and include the earnings in "Other income" on your tax return for the year you withdraw the contributions and earnings."  In contrast, the instructions for Form 1099-SA Box 2 (Earnings on excess cont.) state that "you must include the earnings in your income in the year you received the distribution even if you used it to pay qualified medical expenses."

Lastly, on Form 8889 Part II for HSA Distributions, line 14a asks for total distributions, which I interpret to include excess contributions plus earnings.  Then line 14b asks for distributions including excess contributions plus earnings.  Since 14a and 14b end up being the same number (I had no other distributions other than to remove the excess plus earnings), the taxable HSA distributions in line 16 ends up being 0.  This doesn't seem right, as I believe I need to include the earnings as taxable income.  I don't know whether TT will put everything in the forms correctly presuming I input everything correctly; I just wanted to review the forms first so that I understand mechanically what should be happening.

Thanks in advance.

[BillM223]

1. Don't worry about the earnings on that $66. The cheap way to have this excess that is carried over go away is to not contribute the maximum amount this year (2021). The excess amount carried over acts to reduce your annual HSA contribution limit for any year it is carried over to. So just decrease your contributions this year by $66 so that the carryover can be used up. TurboTax will handle this automatically.

2. As you have probably figured out, it is too late with try to withdrew that $66 and its earnings from 2019 - that needed to be done by July 15, 2020 (usually April 15th, but that was a strange year).

When the rep said withdraw it as a normal distribution, what she meant is that you would withdraw the $66 and its earnings (which you say have no way of knowing what they are at this point) and then not spend it on qualified medical expenses. When you tell TurboTax that, then not only will you pay ordinary income rates on it, but you will pay an additional 20% penalty. It's cheaper to just apply it to a future year.

3. "This does not sound right to me based on my understanding of being able to use prior year excess contributions towards the current year's contributions. " - actually, as I explained in #1, this is exactly right.

4. "The stickler though is that I overfunded for 2020 as well, and so my question is whether I can do a second return of excess plus earnings for 2020 prior to the tax filing deadline so that I can use the $66 excess contribution from 2019 as a 2020 contribution."

You can withdrew only the excess for 2020 by May 15, 2021 (June 15 if you are in Texas, Louisiana, or Oklahoma). TurboTax will stop you from withdrawing the entire excess for 2020, because it won't let you withdraw that $66 from 2019.

So, be smart and REDUCE your contributions now for 2021, so that you can fit the $66 into the limit.

5. "My other question is whether the earnings on the excess should be reported on my 2020 or my 2021 tax return, "

Because your earning span the 2020 and 2021 tax years, the IRS lets you report them all in 2021. NOTE, when you call the HSA custodian and ask to withdraw "excess contributions" (use this exact phrase), the 1099-SA that you get will have the distribution code of 2 and the earnings in box 2. You should get this 1099-SA towards the end of 2021 or, more likely, in early 2022, to enter on the 2021 tax return.

6. "Lastly, on Form 8889 Part II for HSA Distributions, line 14a asks for total distributions, which I interpret to include excess contributions plus earnings.  Then line 14b asks for distributions including excess contributions plus earnings.  Since 14a and 14b end up being the same number (I had no other distributions other than to remove the excess plus earnings), the taxable HSA distributions in line 16 ends up being 0."

Your timing is off. Line 14a is for distributions you received in 2020, which would have been excess contributions from 2019. If I recall what you said correctly, you just got a return of excess contributions in early 2021 for excess contributions in 2020 - only the excess returned to you in 2020 goes on line 14a.

I hope I answered all your questions...

[laquan]

Thank you BillM223 for your helpful response.  I decided to carry forward the 2019 $66 excess contribution to my 2020 contributions and submit a second return of excess contributions request to the HSA brokerage firm for the $66 plus earnings, as I am not eligible to contribute to an HSA in 2021 and wanted to clear out the $66 balance.

I am still unclear as to what numbers should be reported in Form 8889 Part II HSA Distributions lines 14a and 14b.  Line 14a says to "Enter the total distributions you received in 2020 from all HSAs."  Line 14b says to "include any excess contributions (and the earnings on those excess contributions) included on line 14a that were withdrawn by the due date, including extensions, of your return."  If I understand your prior response correctly, line 14a will be blank in my 2020 return since the return of excess contributions plus earnings were distributed in February and March 2021.  It seems like 14b should be blank as well since there were no excess contributions and earnings included on line 14a.  If this is correct, then in my 2021 return, wouldn't I enter the sum of the return of excess contributions plus earnings into both lines 14a and 14b, resulting in $0 taxable distributions?  This can't be right, as I am supposed to pay tax on the earnings.  I can make it work by reporting only the excess contribution on line 14b, but that doesn't seem to be what the instructions indicate to do.

I presume that the 2021 Form 1099-SA I will receive in 2022 will show the sum of the two excess 2020 contributions plus their earnings in Box 1 for Gross distribution.  Could you please confirm?  Frankly, I'm confused as to whether I am supposed to report this distribution of the return of excess 2020 contributions anywhere in either the 2020 or 2021 tax return given that they were distributed prior to the 2020 tax return filing date and subtracted out from the 2020 contributions to be reported in the 2020 tax return.  It seems like the excess contributions should not be considered taxable income in either 2020 or 2021 since I did not receive deductions in my 2020 tax return for those excess contributions?

[BillM223]

"I decided to carry forward the 2019 $66 excess contribution to my 2020 contributions and submit a second return of excess contributions request to the HSA brokerage firm for the $66 plus earnings, as I am not eligible to contribute to an HSA in 2021 and wanted to clear out the $66 balance."

You won't be able to do that, because as I said above, "TurboTax will stop you from withdrawing the entire excess for 2020, because it won't let you withdraw that $66 from 2019." That is, once you have passed the due date of the return, you cannot withdraw the excess for that year. Yes, this means that the 2019 excess will remain the 2019 excess even as it carries forward.

If you won't have HDHP coverage in 2021, the only way to clear out the balance is to take a distribution for the $66 and whatever you estimate the earnings to be, and when the 1099-SA comes, indicate that none of it was for qualified medical expenses.

That will cause the $66-plus to be added to line 9 (Other Income) on line 8 of Schedule 1 (1040) as well as a 20% penalty calculated in Part II on the 8889.

You should make all entries through the step-by-step interview and not worry  about how you get a value on a certain line. I commend you for looking at the output to check it, but you should let TurboTax do its thing.

"I presume that the 2021 Form 1099-SA I will receive in 2022 will show the sum of the two excess 2020 contributions plus their earnings in Box 1 for Gross distribution. "

No, as I noted in the first paragraph, you won't be able to withdraw the $$66 as an excess contribution. However, if you do take a distribution of the $66 and its earnings, then you should get a 1099-SA with a distribution code of 1 (because the HSA custodian thinks that this is a normal distribution).

Of course, at this point, I am not sure how many 1099-SAs you may get. For example, if you ALSO had normal medical expenses, then the 1099-SA with distribution code of '1' will likely have all the distributions added together in Box 1. Then you will have to tell TurboTax how much of the distribution was not for qualified medical expenses (the $66 and its earnings) - this happens in the screens after you enter the 1099-SA.

[laquan]

Ugh.  I'm not sure if we are misunderstanding what each other is saying, but I entered the info into TurboTax without issue.  So it seemed like I did everything correctly regarding reporting the removal of excess, but your reply is making me unsure.  I will explain one more time with specific details in the hopes of making sure we both understand each other correctly:

1)  On 4/15/20, I directly contributed the maximum $3,550 to my HSA account (not through W-2 contributions as I am retired).

2)  On 11/26/20 I switched to a non-HDHP health plan.  Therefore, because I was ineligible for December 2020, my 2020 contributions were overfunded by $296 (1/12th of $3,550).

3)  On 2/1/21 I submitted a return of excess 2020 contribution request for $296 to the HSA brokerage firm, using 4/15/20 as the contribution date for the calculation of earnings on the excess contribution.  On 2/17/21 a distribution of $384 ($296 excess + $88 earnings) was transferred to my checking account.  My 2020 HSA contributions now totaled $3,254 ($3,550 - $296).

4)  When preparing my 2020 taxes I realized I had an excess 2019 HSA contribution of $66 that had not been subsequently removed.  I decided to carry it forward to my 2020 contributions, which meant that I would then need to reduce my actual 2020 contributions by an additional $66.

5)  On 3/22/21 submitted a return of excess 2020 contribution request for $66 to the HSA brokerage firm, using 4/15/20 as the contribution date for the calculation of earnings on the excess contribution.  On 3/25/21 a distribution of $85 ($66 excess + $19 earnings) was transferred to my checking account.  My 2020 contributions (excluding the 2019 carryforward) now totaled $3,188 ($3,550 - $296 - $66).

6)  TurboTax calculated that $3,254 was the maximum 2020 HSA contribution that could be made ($3,550 original - $296 for December ineligibility).  I entered $3,188 as the total HSA contributions for 2020 ($3,550 original - $296 excess removed - $66 excess removed).  TurboTax carried forward the $66 excess from 2019, and so I was able to take a $3,254 deduction for contributions on Form 8889 and 1040 Schedule 1.  And Form 5329 showed 0 excess contributions for 2020.

7)  Thus, I thought I had properly removed my excess contributions and was only left wondering whether to report the earnings on the excess contributions removed in my 2020 or 2021 tax return, and what figures to enter into TurboTax.

Whether or not I did it correctly, it has already been processed by the HSA brokerage firm as a return of excess 2020 contribution, and so there is no opportunity to withdraw the $66 excess contribution from 2019 + earnings as a normal distribution as you suggested.  I should receive either 2 separate or 1 combined 1099-SA in early 2022.  I believe the form(s) will show "2 - Excess contributions" as the distribution code in Box 3.  So I think I will leave my 2020 return as is because it seems correct to me, and I will deal with reporting the earnings on the excess when I prepare my 2021 tax return.

Could you please confirm that the $296 and $66 distribution amounts that represent the return of excess contributions would NOT be taxable in my 2021 return?  I did not take any deduction for the $296 contribution in my 2020 return, and I already included the $66 as taxable income in my 2019 return.  I understand that I will need to pay income tax plus penalty on the earnings distributed.

Thank you.

[BillM223]

"Whether or not I did it correctly, it has already been processed by the HSA brokerage firm as a return of excess 2020 contribution, and so there is no opportunity to withdraw the $66 excess contribution from 2019 + earnings as a normal distribution as you suggested."

Basically, you should not have asked the HSA custodian to withdraw that $66 as excess earnings for 2020. They would have no way to know if it was an excess for 2020 or a prior year, so they would take your word for it.

However, this is getting out in the weeds. It will not matter that the HSA custodian took your word for it; if there were ever a detailed audit of your 2019 and 2020 returns, this should be changed for both years by the IRS auditor.

Honestly, though, I have not heard of HSAs being part of an audit - they should be, but I have never heard of it. So as I said, this is way out in the weeds, so you should note what you did and stick it in your tax file and just be ready to explain in case anyone ever asks.

I can't rightly answer your other questions about what year things are taxable in, because the way you have done things has already deviated from the way it should have been done.

So, it's your choice, but since this represents not a large amount of money, I would consider just leaving the return the way it is, declaring victory, and promising to do better the next time.

Just watch your tax return, though, and make sure that TurboTax is not creating a 5329 (Part VII) to penalize a carryover - if so, you will have to do a distribution of that amount, or report that part of the current 1099-SA distribution was not for qualified medical expenses - this is the only way to get TurboTax to not keep doing this now.