HSA Partial Year

[wsparrowhood]

My wife had a HDHP with a self funded HSA at the beginning of 2021.  In January we funded it for the full allowed amount ($4,600).  By May we had used the full amount of $4,600 on legitimate medical expenses.  In August we moved to another state and did not enroll my wife in a HDHP (at the time I did not understand that the allowed HSA deduction was calculated on a monthly basis). 

When I finished the TT interview for this item, TT said I had a $3,450 HSA deduction (9/12*4,600), calculated the medical deduction for Schedule A based on medical expenses minus 4,600 and no penalty.  Is this correct?  Or do I show that I made a withdrawal of $1,150 (4,600 - 3,450) before taxes are due (so that it matches the allowed deduction) and show a Schedule A deduction of medical expenses minus $3,450?

[HelenC12]

You would show that you withdrew the excess HSA contribution so that it matches the allowed HSA contribution and enter Schedule A deductions of medical expenses minus the allowed HSA contribution.

• If the 2021 HSA contribution exceeds the allowable amount, the excess must be withdrawn by April 18, 2022 to avoid a penalty (October 15 if you filed an extension).

[wsparrowhood]

That's what I thought reading the IRS instructions.  So either TT is not handling it correctly or I did not answer the questions correctly.  Thanks.

[BillM223]

First, did you still have HDHP coverage on September 1, 2021? Your fraction of 9/12 suggests hat you marked your spouse as covered by a Self-only plan on September 1st. That may be true, but I wanted to be sure since you moved in August. NOTE: coverage for the month is determined by the coverage on the first day of the month.

Assuming that 9 months is correct, you made a contribution of $4,600 to the HSA. As you note, you annual HSA contribution limit is $3,450, so you have an excess contribution of $1,150. If you have the money in the HSA, the best thing to do would be to withdraw the $1,150 before the due date of the return (including extensions). If you contact the HSA custodian, be sure they understand that this is a withdrawal of excess contributions (the may have an online form on their website).

If you do not have enough money in the HSA (and of course, without HDHP coverage, you are not able to add any more until you do have HDHP coverage), then the excess will carry over to 2022. You will dinged 6% penalty. However, the penalty is 6% of the lesser of the carry over or the value of the HSA at the end of the year. Thus, if your HSA value is zero, the penalty will be zero.

A curiosity of TurboTax is that TurboTax expects you to enter all qualified medical expenses in Schedule A, even those reimbursed by insurance or your HSA. Then, at the end of the Schedule A interview, you will be asked how much insurance reimbursement you received and there will be a screen telling you that $X was reimbursed by your HSA (you may be asked to confirm that). Any of the medical expenses not covered by the HSA will indeed count towards the Medical and Dental deduction on Schedule A.

Now, that you understand this, what is it that you think is not working in TurboTax?

[wsparrowhood]

A follow-up question.  At the end of the year the HSA balance was $0.  My wife again has a HDHP for 2022 and I've already deposited $4,650 into the account for this year.  Since the HSA balance was $0 at the end of the year and thus no penalty - should I just leave things the way they are or since I have 2022 dollars in the HSA now should I take the excess contribution of $1,150  out before  taxes are due?  

I still need to get back to you whether I think there is an issue with TT or I just screwed up my answers.

[BillM223]

You either withdraw the excess for 2021 now (but your HSA will lose the amount of the excess for 2022 and since you are at the limit for 2022, you can't contribute more), or carry over the excess to 2022, pay no penalty, and create a new excess in 2022 because between the carry over and the max you have already contributed, you will create a new excess in 2022. Your choice.

If you don't have to have the full amount of the HSA for 2022, the first option is cleaner.

[wsparrowhood]

I'm going to take the withdrawal for the 2021 excess now just to be done with it and I understand I will only have the $3,450 to spend on medical for 2022. How will this be handled on my 2022 taxes where I will have made a 2022 contribution of $4,650, only had medical expenses of $3,450 but the account balance will be $0? With regard to TT, on the step-by-step questions it asks whether I made any excess contribution withdrawals before April 18, 2022 and I entered $1,150. I would assume this would then show up on line 14B of form 8889 but it doesn't and it also does not allow me to manually enter it there. Thanks for all the help. I've been using TT for over 20 years and this is one of the most confusing issues I've had to deal with

[BillM223]

"How will this be handled on my 2022 taxes where I will have made a 2022"

The withdrawal of the 2021 excess (before April 18, 2022) will not appear on your 2022 return - it will appear only on your 2021 return (the one you are doing now).

"contribution of $4,650, only had medical expenses of $3,450 but the account balance will be $0?"

Don't worry about it - the contributions and the distributions are totally asynchronous. That is, this is not an account where it has to balance every year. If you have contributed more this year than you have spent, then what remains carries forward; if you have spent more than you contributed (because you had a balance in the HSA), then your HSA balance is reduced. But the IRS expects the numbers to vary from year to year.

"I would assume this would then show up on line 14B of form 8889 but it doesn't and it also does not allow me to manually enter it there. "

Yes, the excess withdrawn should appear on 14b. But NOTE, if you are filing married joint, there will be two 8889s, an 8889-T (for the taxpayer) and an 8889-S (for the spouse). Make sure you are looking at the right one.

In any case, please do NOT force any entries on the form - that will keep you from e-filing. Instead, please look for two 8889s and see what you've got.

[wsparrowhood]

8889-T (me) is blank - I'm on Medicare

8889 -S is blank on 14B

[BillM223]

Ah, a small correction - you won't see much about this excess withdrawal on your 2022 return...except the 1099-SA that you will receive in early 2023 return, so that you can report the earnings on the excess and pay tax on them in 2022. This 1099-SA will have a distribution code of "2" to tell TurboTax how to handle it.

This means that the excess withdrawn should not appear on line 14b on your 2021 return, because line 14a is "Total distributions you received in 2021 from all HSAs" and line 14b is "Distributions included on line 14a that you rolled over to another HSA. Also include any excess contributions (and the earnings on those excess contributions) included on line 14a that were withdrawn by the due date of your return."

The excess withdrawal did not happen in tax year 2021, so the amounts should not appear on your 2021 tax return. Instead, you will see the amounts populate your 2022 return, when you enter that 1099-SA that you are going to receive in early 2023.

[wsparrowhood]

OK, I', totally confused. If I "Also include any excess contributions (and the earnings on those excess contributions) included on line 14a that were withdrawn by the due date of your return." why doesn't  14b include a withdrawal that I make this year before April 18, 2022?

[BillM223]

It does not include it because "line 14a is "Total distributions you received in 2021 from all HSAs"." You didn't get this distribution (for the excess) in 2021, you got it in 2022.

So "Also include any excess contributions (and the earnings on those excess contributions) included on line 14a that were withdrawn by the due date of your return."" But since the excess contributions that you were referring to were not in line 14a, then they won't be in 14b.

The distribution of excess contributions that they are referring to are from your 2020 return, which would have been distributed in 2021.

See the instructions for lines 14a and 14b on page 6 in the 8889 Instructions.

[wsparrowhood]

That doesn't make any sense to me and seems inconsistent with the way the IRS handles similar situations.  For example, I do part time consulting and still contribute to my IRA.  The IRS allows me to make contributions to my 2021 IRA through April 18, 2022.  Why wouldn't a withdrawal of excess contributions made before April 18, 2022 then show as as credit (line 14b) to my 2021 distribution on line 14a?

Also, I just redid Form 8889 in TT and if line 14b is blank then TT says I have a penalty of $230 for 2021.

[BillM223]

1. What is the amount on line 14a? If it is not zero, what went into it, one or more 1099-SAs? If so, what was each one (normal distribution, excess contribution, etc).

2. As a follow-up, how many 1099-SAs did you enter, and what was the distribution code for each one?

3. How did you make the contribution to your spouse's HSA - one single direct contribution?

4. When TurboTax told you that you had an excess contribution, what did you answer: (1) we will withdraw the entire amount by April 18th, (2) we will withdraw some of it by April 18th, (3) we will not withdraw any of it by April 18th?

[wsparrowhood]

1. Line 14a is $4,600. It is from one 1099-SA that showed it as a normal distribution.
2. See #1 – it was only one 1099-SA with a code of normal distribution.
3. There were two contributions – one for $3,000 on 1/15/21 and one for $1,600 on 1/31/21.
4a. TT did not explicitly say that I had an excess contribution – after I answered the questions it said that I had I had a taxable amount of $1,150. When it asked about my contribution, I said it was $4,600 and I made an excess contribution withdrawal of $1,150 before the deadline of April 18. When it asked about the HSA distribution was used, I said I said $3,450 was spent on medical expenses (although the full $4,600 was spent on medical) assuming the remaining $1,150 represented the excess contribution. I believe this is what generated the taxable amount.
4b. I then went back into TT and changed the response to the distribution question to say that the full $4,600 was spent on medical expenses, which it was, and the taxable HSA distribution became zero. However, when I did this, TT generated the following info for Form 8889:
Line 2: 3,450
Line 3: 3,450
Line 13: 3,450
Line 14a: 4,600
Line 14b: Blank
Line 14c: 4,600
Line 15: 4,600
Line 16: 0
However, if I am following the IRS instructions for Form 8889 correctly, Line 14b should be 1,150, Line 14c should be 3,450, Line 15 should be 3,450 and Line 16 should be 0.
Maybe this goes back to what you said before – “Don't worry about it - the contributions and the distributions are totally asynchronous. That is, this is not an account where it has to balance every year.” 4b above is showing the reduced deduction correctly and the full distribution was spent on medical expenses. Also, there are no earnings associated with this HSA so earning on the excess contribution is not an issue.