HSA Excess Contributions

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I had an HSA Excess Contribution of $1600 by my employer in 2020. I paid the 6% tax in my 2020 tax return, but missed the requirement to make a non-qualified withdrawal before April 2021. I am paying the 6% additional tax again this year. Since it is too late to make the non-qualified withdrawal without more penalties and I am no longer in a High Deductible health plan, I'm trying to understand my best option. The Turbotax Help says that one option is to take qualified withdrawals for medical expenses until my total HSA balance is zero. It would likely take a couple of years to incur enough expenses to do that. But if I'm able to do that, will I still have to pay the 20% penalty plus the 6% additional tax in the year the balance goes to zero, plus add the excess contribution to my income for 2020? Or is it best to make the non-qualified withdrawal now, pay the 20% penalty and be done with carrying over the excess?

Thank you for your help.

DaveF1006Answer

Alumni - Intuit

Yes, the contributions will stay in your HSA account until you use them. Even though you are not enrolled in High Deductible Health Plan, you can still receive tax free distributions in future years from your HSA as long as you have basis in your account.

In the year your balance goes to zero, you will not pay the 20% penalty if the distribution was for medical expenses and you will not be charged the 6% penalty because there is no excess contribution to penalize.

As far as making the decision now to take a non-qualified withdrawal now, you need to attempt to weigh the costs rather to leave the distributions in and pay 6% excise tax but receive a tax-free distribution later OR take a non-qualified taxable distribution now but not worry about future 6% excess contribution penalty each year. This is something you need to determine on your own.

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DaveF1006Answer

Alumni - Intuit

Yes, the contributions will stay in your HSA account until you use them. Even though you are not enrolled in High Deductible Health Plan, you can still receive tax free distributions in future years from your HSA as long as you have basis in your account.

In the year your balance goes to zero, you will not pay the 20% penalty if the distribution was for medical expenses and you will not be charged the 6% penalty because there is no excess contribution to penalize.

As far as making the decision now to take a non-qualified withdrawal now, you need to attempt to weigh the costs rather to leave the distributions in and pay 6% excise tax but receive a tax-free distribution later OR take a non-qualified taxable distribution now but not worry about future 6% excess contribution penalty each year. This is something you need to determine on your own.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"