HSA Excess

[hikemike]

I overfunded my HSA for 2020 by $800. I have contacted the HSA provider for a form in order remove the excess before April 15th.  I also have to include the earnings on this excess on the form.  The earnings on the $800 excess is $118. I understand how to input the $800 excess into Turbotax but how to I input the $118 of earning on the excess.

Thanks.

[BillM223]

In the HSA interview, TurboTax should have told you that you had excess contributions of $800. At that point TurboTax did two things:

1. It added $800 dollars to line 8 of Schedule 1 (assuming that these contributions were reported on your W-2 in box 12 with a code of W).

2. It asked you if you were going to withdraw the excess before April 15, 2021.

Normally, at the end of 2021 the HSA custodian would send you a 1099-SA for the distribution with a distribution code of '2' with the distribution in box 1 (which will be ignored) and the earnings on the excess amount while the excess was in the HSA in box 2. This box 2 amount will be added to line 8 on Schedule 1.

That is, if you withdrew the excess after January 1, 2021, then the earnings are reported on your 2021 return, not your 2020 return.

Have you already received the 1099-SA with the distribution code of '2'? Or did you just call the HSA custodian and get the $118? Don't worry about the $118 until you get the 1099-SA with the distribution code of '2', which, as I said, will be later this year or early next year.

[hikemike]

Thanks for the Reply

A little more detail:  This excess is because I have been retired for 5 years and went on Medicare in May 2020. Until May 2020, I was still on my former employers Medical insurance. My former employer contributed $1200 in January 2020 as usual. However, I miscalculated and personally contributed $2300 lump sum in February 2020. So the total HSA contribution for 2020 was $3500 ($1200 + $2300).  My HSA contribution should have only been $1500 for a total of $2700. Thus the $800 excess. 

So Turboxtax did tell me that I had an $800 Excess for 2020. However, that did not appear on a W-2 since I am retired and get a 1099-R.  TurboTax did ask me if I plan to withdraw the Excess before April 15, 2021. I answered Yes. Therefore, I contacted my HSA Provider and they sent me a form that has a box for the Excess $ and an additional box for the Earning on the Excess $. They told me to get a tax expert to calculate the Excess Earning $ and include it on the form. They will remove the $800 + $118 from the HSA account. I actually calculated the $118 using the Treasury Reg 1.408.1. (This reference was on the form the HSA provider sent me.)

So I'm a bit confused: I send in HSA Excess Removal form and request $800 + $118 be removed from the account, but I don't file $118 as income on my 2020 return. Instead wait until I get a 1099-SA and file the $118 on my 2021 return. Is this correct? 

Thanks so much for your help.

[BillM223]

"However, that did not appear on a W-2 "

That's OK, I didn't realize that you were retired. I mentioned the W-2, because I wanted to make sure that the contributions in excess came from your employer (whether made by your employer or by you through payroll deduction).

All right, if your personal contribution was the cause of the excess, then instead of the excess being added to line 8 on Schedule 1 (1040), the amount of deduction that you would have had on line 12 of Schedule 1 (1040) is reduced by this $800 amount.

"They told me to get a tax expert to calculate the Excess Earning $ and include it on the form."

I commend you for calculating the earnings in the excess, but it's the HSA custodian's job to do this, not yours.

"I send in HSA Excess Removal form and request $800 + $118 be removed from the account, but I don't file $118 as income on my 2020 return. Instead wait until I get a 1099-SA and file the $118 on my 2021 return. Is this correct? "

No, do not request that the $118 be removed, only the $800 that TurboTax told you about. After all, the HSA custodian may come up with a different number than you.

The $118 will remain in your HSA, where you will be able to use it in the future. And this is why you will report it as income, because it is income to you.

And, yes, wait until you receive the 1099-SA with the distribution code of '2'; only then will you report the earnings as income (i.e., for tax year 2021).

You see why you don't report the earnings in 2020, right? Some of the earnings were from tax year 2020 (i.e. before January 1, 2020) and the rest was earned in tax year 2021 (after December 31, 2020), so the IRS just makes it all taxable in 2021.

[dmertz]

The $800 and the $188 of attributable earnings will both be removed.  Because the $800 was from a personal contribution, not made through your employer, this $800 will not be included on your Schedule 1 HSA deduction.  The $188, that is required to be distributed will be taxable on your 2021 tax return when next year you enter the code 2 2021 Form 1099-R into 2021 TurboTax.

[hikemike]

Thanks for all your help. After talking again to my HSA provider, Turbotax Community, reading tax regs, here is what it seems that I must do:

1) Have the Excess and the Earnings on the Excess removed before April 15, 2021. I must report both on the form that I send them before April 15. $800 + $118. This will prevent me from paying any penalty for the excess and excess earning.

2) Turbotax accurately captures the $800 excess and I will pay taxes on this in 2020. 

3) Report the Earnings on the Excess $118 as Other Income on my 2021 tax filing.

Thanks.

[BillM223]

@dmertz is correct (as is his habit) that you do withdraw the earnings in 2021 and report them on your 2021 tax return.

"Normally" (as normal as anything is in the tax code), the taxpayer does not calculate the earnings, but when the taxpayer requests that the excess contributions be withdrawn, the HSA custodian calculates the earnings for you (it is easier for them), and handles the 1099-SA for 2021.

I have a slight concern that the HSA custodian will come up with a different number than $118 which becomes the amount to withdraw; however, since you were willing to read the Treasury regs, I can hope that you arrived at the right number. Perhaps the HSA custodian will just process your excess contribution request and calculate the earnings and work with whatever they come up with.

Your understanding is correct, and I am glad that you will be able to put this behind you and not drag the excess into future years.