HSA

[HappWorks]

TurboTax is saying I overpaid on HSA, stating I must remove  $1456 by tax time this year to avoid 6% overpayment penalty.

I contributed for 8 months and retired in month 9. My employer has less than 20 employees so they stopped both their and my contributions beginning in Sept. I continued to work thru 12/31/21, and paid for Medicare during the last 4 months of work. How could an overpayment happen?

Turbo additionally stating I must remove  $1456 by tax time this year to avoid 6% overpayment penalty on the HSA contributions in 2021. But there is only $1117.00 in the account. What is the best way to handle this in Turbo?

[RaifH · Accepted solution]

You are not eligible to contribute to an HSA during any month you were covered by Medicare. For the first eight months, your contribution amount is determined by whether you had self-only or family coverage, and whether or not you are over the age of 55. If the Code W amount in Box 12 exceeded your allowable contribution, then you will have to remove the excess or be penalized on it. The penalty is 6% of the lesser of the amount of over-contribution or the amount in your HSA. If you completely empty the $1,117 in your account, you still have an over-contribution of $339 but you will not be penalized because your HSA account will be $0. When you do this, notify your plan administrator that the withdrawal is for excess contributions. To enter this in TurboTax:

1. Enter your W-2 with the Code W in Box 12.
2. This should have opened an area on your tax return for HSAs. If you do not see it, go to Federal > Wages & Income > Less Common Income > 1099-SA, HSA, MSA and click Start/Revisit.
3. Make sure you have HSA selected.
4. If you made any withdrawals from your HSA, you should receive a 1099-SA and answer Yes to Did you use your HSA to pay for anything in 2021? Otherwise, select No.
5. Assuming you did not inherit this HSA, select No.
6. Under Let's enter your HSA contributions your employer amount should already be in there from the W-2. If you made any additional contributions, enter them here. 
7. Answer Did your employer tell you about any other contributions? 
8. Answer Yes to Did you have Medicare at any time in 2021?
9. Enter the type of coverage for each month. For any month you had Medicare, enter none. Then click on Calculate Max Contribution Limit and Continue. 
10. After asking about prior year over-funding, the system will alert you if you over-funded this year and can make the withdrawal by April 18, 2022 in order to avoid the penalty. If you withdraw a lesser amount, enter that instead under I'll withdraw some of the excess contribution by April 18, 2022. 
11. Enter your HSA value as of December 31, 2021. 

[HappWorks]

Very helpful - I followed your steps and understand. Thank you!