HSA Excess Contributions due to Medicare

[TGS-MAS]

I unexpectedly left my employer in 2023.  I applied for Medicare in April of CY 2023 but had continued making HSA employee contributions (pre-tax) thru the first 4 months of 2023 and all of 2022.    My Medicare was "backed-up" 6 month and actually started in November 2022  (I was already 65 years old).  I have withdrawn the excess contributions for both the two months in 2022 and the four months in 2023.  I received a 1099-SA for the total amount (that is, all six months) for tax year 2023.  I did not file a form 5329 for tax year 2022 (since I did not know at the time that I would be leaving my job in 2023).  Do I include only the excess contribution for 2023 on my 2023 taxes (which is what Turbo Tax is suggesting) and then I assume I need to send in a 1040X amended return for tax year 2022 to cover the two months of 2022?  (or do I include the entire 1099SA amount on Schedule 1 as other income)?

[Mike9241]

 include only the excess contribution for 2023 on my 2023 taxes and then amend the 2022 return for the two months of 2022. income withdrawn is taxable in 2023. 

[TGS-MAS]

Thank you for the reply......so if the income is taxable in 2023, when I use Turbo  Tax, it sends me a message indicating that the amount of excess contributions is greater than the amount contributed by my former employer in 2023. (The 1099SA comprehends both 2022 and 2023 excess contributions). How do I input the information so that it is captured correctly on the tax forms?  

[BillM223]

"it sends me a message indicating that the amount of excess contributions is greater than the amount contributed by my former employer in 2023."

Does this mean that TurboTax tells you that your excess is equal to that of 2022 and 2023? I thought you said that TurboTax did not report an excess for 2022 (no 5329). Please explain.

In your situation, I would agree with Mike. 

1. Amend your 2022 and when TurboTax tells you have an excess, be very agreeable and say that you will withdraw the entire excess (since you already have).

2. Leave your 1099-SA on your 2023 tax return. This 1099-SA has a distribution code of 2 and something in box 2 for earnings, right?

3. Note that TurboTax (and the IRS) do not calculate the excess the way that you might - TurboTax does it on an annual basis, not month-by-month. This means that withdrawing amounts just for the months that you were ineligible might not result in the same numbers. If you are happy with the excess numbers, then never mind.

[TGS-MAS]

Thank you for the reply......to further clarify....."Schedule 1 line f" from TurboTax after going thru the step-by-step only shows the contribution for calendar year 2023 plus the earnings for 2022 and 2023.  The 1099 SA shows the withdraw of excess funds and earnings for both the two months of 2022 and the 2023 contributions (equals the gross distribution...box 1).  Yes, the 1099 SA form has box 3 notes as a "2" along with an amount for earnings (which is for both years).  When you say "leave your 1099 SA on your 2023 tax return" the total (2022 + 2023 contributions and earnings or the gross distribution) amount does not show up on the 2023 Schedule 1.  Recall, all of the contribution dollars are "pre-tax".  Hoping you can further clarify what I should see on Schedule 1 for 2023 tax year.  

[BillM223]

"Schedule 1 line f" from TurboTax after going thru the step-by-step only shows the contribution for calendar year 2023 plus the earnings for 2022 and 2023. The 1099 SA shows the withdraw of excess funds and earnings for both the two months of 2022 and the 2023 contributions (equals the gross distribution...box 1)."

Yes, this is correct. 

To clarify, it's line 8f on Schedule 1(1040).

Note: when the distribution code is 2, TurboTax ignores what was in box 1, because TurboTax knows that that amount was added to income the previous year. Only the earnings should be added to the 2023 return.

"When you say "leave your 1099 SA on your 2023 tax return" the total (2022 + 2023 contributions and earnings or the gross distribution) amount does not show up on the 2023 Schedule 1.  "

The excess contributions for 2022 - if there are any - will appear as Other Income on your amended 2022 return. I say, "if there are any" because it's possible based on a number of factors, that you might not have excess contributions for 2022. But if there are any for 2022, they will appear on your 2022 amended return. The 2022 excess should NOT show up on your 2023 return.

[TGS-MAS]

Thank you again for the reply......just so I understand:  Although my 1099-SA for tax year 2023 shows the total amounts for CYs 2022 and 2023, then Schedule 1 (line 8f) for the 2023 tax year should only show the portion of the 1099SA that were excess contributions in CY 2023 which corresponds to the value in box 12W of my W2 along with the earnings for both 2022 and 2023 excess contributions.  My amended 1040X for 2022 CY will show only the excess contributions for November and December 2022 (since Medicare started in November) and these two months will have a 6% additional tax.   Is this the correct understanding (my concern is that the IRS will see the 1099-SA for tax year 2023 and will look for the entire amount in the 2023 tax year)?  

[BillM223]

"Although my 1099-SA for tax year 2023 shows the total amounts for CYs 2022 and 2023" - if you are referring to a 1099-SA for the withdrawal of excess contributions, then since I believe you requested the withdrawal of excess contributions for both years, then yes.

However, it is not normal to withdrawal excess contributions for more than one year at a time except in a certain circumstance, so don't get used to this. However, the earnings often span more than one year (see below).

"then Schedule 1 (line 8f) for the 2023 tax year should only show the portion of the 1099SA that were excess contributions in CY 2023" - yes, if the excess contributions were from "employer contributions" (code W in box 12 on your W-2). TurboTax did this in the process of making your return - this number does NOT come from a 1099-SA.

"which corresponds to the value in box 12W of my W2 along with the earnings for both 2022 and 2023 excess contributions. " The code W amount is your "employer" contributions. The excess reported on line 8f happens to be the same for you, but often isn't for most people. As I noted above, the earnings can commonly span more than one year, because the period of excess starts towards the end of one year, but it's resolved until the beginning of the next year.

"My amended 1040X for 2022 CY will show only the excess contributions for November and December 2022 (since Medicare started in November) and these two months will have a 6% additional tax." - This is generally true. Note that the 6% penalty is 6% of the smaller of the carryover excess (to 2023) or the value of your HSA at the end of the year (12-31-2022, in this case). So, depending on your HSA value, the amount of your penalty may  vary.

"Is this the correct understanding (my concern is that the IRS will see the 1099-SA for tax year 2023 and will look for the entire amount in the 2023 tax year)?  " - As a previous generation would say, "It's close enough for government work." However, please note that a 1099-SA that you receive in 2023 will be entered on your 2023 tax return in early 2024, because the earnings span two years

[TGS-MAS]

Thank you for the further insight......although I was confused by your last comment:  "However, please note that a 1099-SA that you receive in 2023 will be entered on your 2023 tax return in early 2024, because the earnings span two years".  Just to be clear, the 1099-SA I received is for tax year 2023 as stated on the form.  When you say "entered on your 2023 tax return in early 2024".....I thought your prior comments meant that I should only have the portion of the 1099 amount on the 2023 tax return and the remaining amount on the 2022 amended return?   The term "entered is confusing me.....please clarify.....Thanks in advance.

[BillM223]

The usual sequence is this:

1. During a tax year (say, 2023), you made excess contributions to your HSA.

2. While you are doing your 2023 tax return in early 2024, TurboTax tells you about the excess.

3. If the excess was from "employer" contributions (i.e., the code W amount). then the excess is immediately and automatically added back to your Other Income (line 8f, Sch 1 (1040)). (Please don't do this yourself).

4. If the excess is from personal or direct contributions, then the amount of line 13 of Schedule 1 (1040) is automatically reduced by the amount of the excess. (Please don't do this yourself).

5. You call the HSA custodian before April 15th or visit their website and ask for the "withdrawal of excess contributions" - you must use this phrase or the custodian's paperwork will be wrong.

6. The custodian should calculate how much the excess amount made in earnings while it was in the HSA. Note that this period spans from when you made contributions in 2023 to when you asked for the excess to be withdrawn. This period necessarily covers parts of two calendar years (2023 and 2024).

7. The HSA custodian should send you a check for the excess and the earnings.

8. The HSA custodian should send you a 1099-SA, documenting the excess and the earnings. This 1099-SA will have a distribution code of '2', to differentiate it from the 1099-SA for medical expenses (distribution code of '1').

9. Since some of the earnings are normally from 2024, the IRS has you file this 1099-SA as part of your 2024 return -- done in early 2025. Yes, this means that earnings from 2023 tax year are not taxed until your 2024 tax year.

OK, can you make this sync with your return and all that is going on?

[TGS-MAS]

Thanks again for the response.....in my case I contacted the custodian in 2023 and had the funds withdrawn in November of 2023 (these funds were all pre-tax dollars).  So, in regard to item 9 "Since some of the earnings are normally from 2024, the IRS has you file this 1099-SA as part of your 2024 return -- done in early 2025. Yes, this means that earnings from 2023 tax year are not taxed until your 2024 tax year.".....I do not think there is any impact to the 2024 return.  I need to amend the 2022 return for the contributions in the two months of 2022.   The 2023 contribution (plus the earnings) for four months would be on my 2023 tax returns.  Correct or am I missing the obvious?

[BillM223]

If you already have the 1099-SA, then go ahead and enter it in your 2023 return.

"I need to amend the 2022 return for the contributions in the two months of 2022." - Is this going to change/increase the excess for 2022? If not, you should stop adjustments.

If it increases an excess carryover, then did you in the amened return tell TurboTax that you would withdraw the excess by the original return due date (which would have been 4-15-2023).

I am trying to simplify this because HSAs can always be more complicated in real life the the rules allow...