HSA overcontribution 2021

[whodiini]

I did a one time IRA direct rollover from my IRA to HSA in 2021 of $8200 that turned out was ineligible.  So I did an indirect return of the overcontribution back to the IRA in 2021.   I received a 1099-R of the IRA direct rollover into the HSA coded as G - Direct rollover and rollover  contribution and a 1099-SA for the return of the HSA amount coded as 2 - excess contribution which was a check into my account. I then deposited the exact amount back into the original IRA.    How do I enter these into turbotax desktop? 

For the 1099-R,  I chose in turbotax that the money was put into an HSA.  Then under less common income, I included the 1099-SA amount.  Turbotax says that I made an excess HSA contribution of 7867 (8200 - 233) and asks if I will withdraw the 7867 by April 18, 2022.  When I try to enter that I withdrew 8200, turboxtax says it is too large.  I also enter the 8200 as a IRA contribution (return back into the original IRA) and turbotax says I made an excess contribution of $1200 and owe a penalty.  I am very confused. 

Help greatly appreciated!

What am I doing wrong????  I dont see why I made an overcontribution since I already

[Mike9241]

I don't think your situation is clearly covered by the tax law.    if you weren't eligible to make an HSA contribution the distribution from the IRA may be taxable - ie not treated as a rollover.

then the contribution back into the IRA may be tax deductible but subject to the limit for IRA contributions

the problem comes in because TT is saying the excess is $7867 but you took out $8200. it is too much. you have a nonqualifying distribution of $333 (not $233) 

the maximum IRA contribution for 2021 is 7,000. TT doesn't know you're putting back the 8200. and the issue is whether you can actually do this. if not you have an excess contribution of $1200.  TT is probably taking a $7000 tax deduction for the iRA contribution you reported. 

where did the 233 (333?) come from?  

it makes no sense. if you weren't eligible in any month the excess should be 8200

if you were eligible for 1 month that would be $633

[whodiini]

Had to look at the forms to see how turbotax populated them.

Form 8889 HSA shows for my spouse, a maximum allowable contribution of 2400 and an additional 333 is because we were 55 or older and eligible for 4/12th of the year.  ($1000/3=333). Then it says that the excess HSA funding distribution is 8200 - 333 = 7867 even though I took out 8200.  Even though these numbers dont make sense, it doesnt add additional tax.  (Except that my earnings on the 8200 was $0.10 and due to rounding in turbotax, it rounds that up to $1 and I therefore I have $1 taxable HSA distribution.  Oh well, have to pay $.32 more tax on $.10 of earnings!)

In the HSA summary, turbotax reports a taxable IRA rollover contribution of -$333 and tax free employer contribution of -$7867 and an excess employer contribution withdrawn of $8200.  Does this mean that its a wash taxwise?

[whodiini]

I also deleted the IRA contribution of the $8200 in turbotax since that generated the error of overcontribution.  It seems that I accounted for the rollover from the IRA to HSA in the 1099-R section and then accounted for the distribution in the HSA section. But the part about the summary doesnt work anymore.  The negative numbers seems problematic and turbotax reports an error now when I step thru.  It only allows a return of 7867, not the full 8200!

[BillM223]

Yes, you cannot withdraw as an excess contribution more than what was actually in excess. The difference between what you withdrew and the actual excess is considered to be a distribution not for the purposes of paying for qualified medical expenses.

What you have given us is incomplete. The $333 is, as you note, 4 months of the $1,000 bonus, so the owner of the HSA must be 55 plus.

However, you say that you had an excess of $7,867. I can't read this number as anything other than you were not eligible for any months. But if you were not eligible for any months, then you would not have been allowed the $333, either.

So help me understand. How many HSAs are here? and what was your HDHP coverage (if any) and was was your spouse's HDHP coverage. Did either of you make other HSA contributions? 

[whodiini]

OK.  Here are the details.  I was covered 4 months under a family HDHP plan and the rest of the year was not.  So I am eligible for 1/3 = 4/12 of the total eligible amount = $2733.  ($8200 for the year / 3).   Spouse is the same so our total max HSA amount is $2733 for 2021, which I just contributed in 2022 for the tax year 2021.  The overcontribution was done in my spouse's HSA and IRA and returned to her IRA.

Now the problem is in turbotax - when I enter the 8200 that was initially contributed and later withdrawn from my spouse's account, it doesnt recognize that all 8200 is ineligible.  It only recognizes that 7867 is ineligible and only allows me to enter that amount as that withdrawn, not 8200.  in the form 8889-S it lists 4 months of eligibility for my spouse with a max allowable of 2400, which transfers as 0 to line 6 in form 8889-S.  Because she is over 55, it adds an additional 333.  (1000/4). So the max allowable is 333 in line 8 of 8889-S.  This makes no sense to me, it should be 0 I would think.  So when it calculates excess contributions, it doesnt list 8200, it lists 8200-333=7867 and then it doesnt allow me to enter 8200 as withdrawn.  These are shown in the smart worksheets.  The actual form 8889-S looks OK because it lists that I distributed 8200 that I rolled over and did not incur any tax,

[whodiini]

I see the issue and my misunderstanding.  The maximum amount one can contribute to an HSA is $7200 between 2 people if filing jointly, married.  There is an additional $1000 FOR EACH PERSON OVER 55.  So the max if both are over 55 is $9200.  I thought that it was $1000 for both!

So when I did the original one time rollover of $8200 from my spouse's IRA to her HSA, it was wrong on 2 counts.  $9200 is the max, and in addition, I did not understand that the requirement was that we had to stay in the HDCP for 12 months following the transfer.  So when I tried to reverse the rollover to the spouse HSA, I withdrew the entire $8200.  Turbotax does not understand why I withdrew the entire $8200 because it doesnt understand this 12 month rule.  It doesnt think that the entire $8200 is ineligible, it thinks $333 is eligible for a HSA contribution.  $333 is eligible for a HSA contribution for my spouse, but NOT as a IRA to HSA rollover because the rules for a IRA to HSA rollover are different than for a HSA contribution.  Therein lies the issue.  Turbotax cannot handle this, so I need to do this manually,  GRRRR.

[whodiini]

So I now realize that if I manually override the interview in turbotax, I no longer can efile. That makes turbotax useless to me.  So now I am trying to address this in 2 steps:  1) determining line by line in form 8889 what the correct entries are and 2) figuring out how to answer the interview questions to populate the lines in 8889 correctly.  Step 2 is where I am stuck. 

So this is what I think 8889-S entries should be: 

Line 1:Family

Line 2: 0

Line 3: 2400 (7200/4 months)

Line 4: 0

Line 5: 2400

Line 6: 0 (2400 carried to spouse)

Line 7: 333 (over 55, 1000/4)

Line 8: 333

Line 9: 0

Line 10: 8200 (Qualified HSA funding distribution)

Line 11: 8200

Line 12:  0

Line 13: 0

Line 14a: 8200

Line 14b: 8200

Line 15: 0

Line 16: 0

Line 17: 0  (no additional tax)

Line 18:  blank

Line 19:  0 (even though I took a Qualified funding distribution, I returned it, so it should be zero, I think?)

line 20:blank

Line 21:  blank (no additional tax)

To get the interview questions to populate this as above and be able to efile, it seems I have to answer them incorrectly.  Turbotax doesnt seem to transfer an answer to later in the interview:

Under wages and income, HSA section:

1) I choose HSA for spouse

2) I enter the 1099-SA received, 8200 gross distribution, 0 earnings, distribution code 2 excess contributions

3) excess contribution not deducted from wages

4) HSA not inherited

5) HSA contributions: 0 for all entries

6)  No employer contributions

7) no medicare

😎 Covered by HDHP at least one month, different plans at different times

9) HDHP family plan jan, feb, mar, apr, none for remainder of year

10)  WHO MADE excess contribution of $7867?  Spouse (note that it says 7867, not 8200).    This is problem 1 in the interview

11)  Did not overfund in 2020

12)  LOOKS LIKE excess contribution of 7867.  Chose we will withdraw full excess contribution (no option to pick a number 8200, can only pick 7867)

13) Done with HSA summary

14) Qualified HSA funding distribution - now it asks if I will meet the conditions, which I do not.  That was why I returned the money.  This question seems like turbotax doesnt understand the prior section questions that I refunded the money and asks again.  If I choose no, I do not meet the conditions, then turbotax populates line 19 with 8200 and puts an additional tax on line 21.  I have to put yes, I will meet the conditions to avoid the tax, even though I dont meet it and return the $.  Is this what I need to do, answer the question wrongly so it can populate form 8889-S correctly? 

[BillM223]

#1

"So when I did the original one time rollover of $8200 from my spouse's IRA to her HSA, it was wrong on 2 counts.  $9200 is the max"

Actually, while the total for the family with two partners over 55 is 9,200, in fact the $1,000 bonus belongs to each HSA owner. So of that 9,200, at least 1,000 has to go in each HSA. and the 7,200 Family limit is shared anyway you like it. So, it's not really right to say that the limit is 9,200, because you can't put that amount in any single HSA.

Make sense?

#2

"So when I tried to reverse the rollover to the spouse HSA, I withdrew the entire $8200"

Unfortunately, you can't reverse the rollover this way. What would have been appropriate is to declare that the IRA to HSA contribution was "mistaken" and asked the HSA custodian to return the entire contribution (the 8,200). In fact, some HSA custodians have a form on their website to allow you to apply for this online.

But note that a withdrawal because of a mistaken contribution is not the same on the custodian's paperwork as a general distribution or a withdrawal of excess contributions. As you are now realizing, the HSA is not a simple savings account, but has many rules about what you can put in and what you can take out.

"Turbotax does not understand why I withdrew the entire $8200 because it doesnt understand this 12 month rule."

On the contrary, TurboTax absolutely understands this "12 month rule". That's why TurboTax displayed the following screen after you saw the HSA Summary:

What did you enter here? Yes or No?

"It doesnt think that the entire $8200 is ineligible, it thinks $333 is eligible for a HSA contribution. "

Well, of course it does, because $333 WAS eligible for an HSA contribution. Note that distributions and contributions are not tied in the land of the HSA. That is, a contribution of $8,200 cannot be undone by a distribution of $8,200. Rather, the $8,200 has to be withdrawn according to the IRS's rules, whether as a mistaken contribution or an excess contribution. If you ask the HSA custodian for a distribution, the custodian has no idea that this was to undo the IRA to HSA transfer, and so TurboTax has no way of knowing, either.

"$333 is eligible for a HSA contribution for my spouse, but NOT as a IRA to HSA rollover because the rules for a IRA to HSA rollover are different than for a HSA contribution."

I don't know what this means. The rules for an IRA to HSA "rollover" (actually a one-time "Qualified HSA funding distribution") are the same in terms of determining the excess, which I think is your issue. They do differ in that the IRA to HSA "rollover" is allowed only if you plan to be under HDHP coverage for the next 12 months. Hence the warning screen above.

"Turbotax cannot handle this"

TurboTax follows the US Tax Code and the rules as outlined in various IRS Notices about HSAs. The situation is that you were not aware of these rules. 

"10)  WHO MADE excess contribution of $7867?  Spouse (note that it says 7867, not 8200).    This is problem 1 in the interview"

This is not a problem, this is correct. TurboTax applied the part of the IRS to HSA "rollover" (actually Qualified HSA funding distribution) that could sneak in under the annual HSA contribution limit for your spouse, which was $333. Why was it not more? As best I can tell, the $2,400 that your spouse might have had from the Family coverage for those four months went to you, so your spouse had only the 1/3rd of the 1,000 bonus your spouse got for being 55+.

"12)  LOOKS LIKE excess contribution of 7867.  Chose we will withdraw full excess contribution (no option to pick a number 8200, can only pick 7867)"

This is also correct. Your spouse made a contribution (through the Qualified HSA funding distribution) of 8,200. Your spouse's annual HSA contribution limit came out to be $333, because the Family coverage limit was applied to you. So 7,867 is the correct number for the excess contribution, and under the IRS's rules, that is the only amount you can withdraw as an excess contribution.

"This question seems like turbotax doesnt understand the prior section questions that I refunded the money and asks again."

As I noted above, distributions and contributions are not tied together, so TurboTax had no way to know that you were trying to undo the Qualified HSA funding distribution. At this point, you should have contacted the HSA custodian and asked their advice about backing out the Qualified HSA funding distribution or contacted a tax professional. 

No, do not answer any questions wrongly, because, if nothing else, that will void the TurboTax Accurate Calculation Guarantee. And you are correct that overriding numbers in Forms mode will likely prevent you from e-filing. But that's just as well, as you want to file your return as accurately as you can.

You believe that TurboTax can't handle the situation, but in reality TurboTax is adhering to the tax law. At this point, I might suggest that you find a tax professional who fully understands all the ins and outs of HSAs and ask that person to reshape your input as best as possible to minimize the penalties. Note that this tax professional could include TurboTax Live.

[whodiini]

I did ask for the overcontribution to be returned as an excess contribution.  My 1099SA distribution has it coded as excess contribution. 

So far I have asked 2 CPAs and turbotax live.  I got 3 different answers!

1) Turbotax live:  Said to answer the qualified funding distribution (your picture) as no, I do not meet these conditions.  Result is I have to pay 10% tax on the $8200 even though the IRS instructions for 8889 say "

However, you can withdraw some or all of your excess contributions for 2021 and they will be treated as if they had not been contributed"

2)  CPA 1:  I do not have to pay 10% additional tax.  Report line 19 Qualified funding distribution as $0 since it was reversed.  Turbotax does not allow me to zero line 19 unless I I answer the question above as "Yes, I meet these conditions"

3) CPA 2:  Dont enter the 1099R nor the the 1099SA on your tax return since they cancel each other.  If I delete these 2 forms in turboxtax, then there is no issue.  I am very uncomfortable excluding these forms since one thing the IRS checks is undeclared income and that would increase my audit risk.

I am leaning to option #2 above.  It will void the Turbotax guarantee but it will allow me to efile.  Overriding it will also void the turbotax guarantee and also prevent efling! 

[BillM223 · Accepted solution]

Ask your HSA custodian if they will recharacterize your qualified HSA funding distribution as a mistaken contribution. Then the 1099-SA will be on their books as the return of the contribution. They may also issue a corrected 5498-SA showing the effects of all this (if they have already sent you the 5498-SA, they may not have).

That way, if you decide to not enter either the 1099-R or the 1099-SA, the HSA custodian's records will back up what you did and why. Any audit of a tax return on form 8889 is going to involve gathering your records, your employer's record, the HSA custodian's records, and (in this case) the IRA administrator's records.

If you can get the HSA custodian to update their records, this will go a long way to explain why what happened, happened.

But, as you suspect, leaving out forms that you received that the IRS also received, does increase the chance of getting a letter from the IRS, which gives you a chance to explain. So it's good to have as many ducks in the row as possible if the letter comes.

[whodiini]

I called the HSA custodian.  There is no code in 1099-SA that has mistaken contribution as a choice. So they cannot modify the 1099-SA to a non-existent code. I then asked how they would treat a mistaken contribution differently than an excess contribution.  They said they do not have another process. 

So I am trying to understand what you are suggesting "ask if they will recharaacterize your qualified HSA funding distribution as a mistaken contribution".  from distribution code "2" to ?  

• 1 (Normal distributions):

• 2 (Excess contributions): This code refers to excess HSA contributions that were distributed back to you (the accountholder).

• 3 (Disability):

• 4 (Death distribution):

• 5 (Prohibited transaction): This code refers to a prohibited transaction made using HSA funds (see questions 34 – 37 on IRS Notice 2008-59 for a list of prohibited HSA transactions).

• 6 (Death distribution after year of death to a non-spouse beneficiary):

If you mean code 5, according to the IRS, this was meant for employer contributions, not qualified distributions.  Can you clarify what you meant?

[BillM223]

This situation does not neatly fit any of the procedures above. There are a numbers of situations that the IRS has not clarified. For example, the IRS originally said that employers could withdrew mistaken contributions under certain circumstances. Later after a lot of feedback, the IRS greatly expanded that list. The IRS has not gotten to documenting for the public how to handle a mistaken contribution by the taxpayer, but clearly the HSA custodians have. Here are four HSA custodians*** who have such forms on their websites that allow the HSA account owner to request the withdrawal of a mistaken contribution (this is not the same as the employer process, which the IRS has covered).

To be honest, I do not know how these institutions code the 1099-SA or if they even issue one at all. But clearly, there is a process. Because I have never worked at an HSA custodian and because the IRS has not specified it any place where I can see it, I can't say what it is.

The fact that these forms are similar suggests to me that these HSA custodians are members of a trade association that provides sample standardized forms to its members. Presumably, this same trade association provides descriptions of the whole process.

***

HSA Bank

motivhealth

HealthEquity

Omnify

***

But to answer your question as best I can, given that your HSA custodian is not aware of the process that other HSA custodians seem to be, you might do Option #3 above, understanding there is an increased risk of an IRS letter. Also, save everything here in your tax files so you can explain why you did what you did, if it ever comes to that.

[whodiini]

I think the answer to my question lies in the content of one of the forms you attached (thank you):

"I understand that by completing this form, the contribution(s) will be reversed from my account if the account has a sufficient balance, and that the contribution(s) will not be included on tax reports if the error occurred this year."  

"If the error occurred last year, I understand that I may receive corrected tax forms and that I should consult with a tax advisor."

They simply do not send a form 1099SA or send a corrected form where they zero out the distribution (my interpretation).  If they remove the 1099SA amount, then it is as if the distribution never happened. 

I will call them again. Thank you!

[whodiini]

I did a search and my HSA does not have a contribution correction form, only a distribution correction form and return of excess contribution form.  The difference between return of excess and contribution correction seems to be the 1099-SA.  In other words, the return of excess generates an (incorrect) 1099-SA and a contribution correction does not generate a 1099-SA.  So it would seem (agreeing with you) that option 3, deleting the 1099-SA from turbotax would be consistent with "as if it had never been done". But as we say, it increases the audit risk.  Maybe a statement included with the tax return would help.  This is complex, but it is beginning to make sense how to handle it.