I had an excess HSA contribution in 2018. I am eligible to contribute to the HSA for 2019. Can I use the 2018 excess for 2019 instead of withdrawing it?

[markcohen]

I over contributed to my HSA in 2018 by $2875.  This happened because I retired mid year and elected not to use COBRA to cover my wife.  I am eligible to contribute $4450 to my HSA for 2019 and I haven't contributed anything yet.  Is it possible to use the $2875 toward my $4450 instead of withdrawing it to correct the over contribution and separately contributing for 2019?

[Opus 17]

You're not on Medicare?  You have a qualifying HDHP as private insurance or COBRA?

[markcohen]

I am not on Medicare.  I am still covered via COBRA on an HDHP plan and will be through August 2019.

[BMcCalpin]

Yes, if you have an excess contribution in 2018 that you will not withdraw in early 2019, then you carry over that excess to 2019. This excess is applied as a "personal" contribution in 2019. This means that you need to make sure that you reduce your 2019 contributions so that the carry over plus your actual 2019 contributions are less than your annual HSA contribution limit.

You will be charged a 6% excise tax on the carryover amount next year.

[markcohen]

Some clarification questions on your answer.... First assuming that I don't over contribute for 2019, do I still owe a 6% excise tax on anything?  If so, is it better to withdraw the excess 2018 funds now to avoid the excise tax and then make the 2019 contribution as a totally separate transaction?  Finally if I do decide to use the 2018 towards my 2019 contribution allowance, how do I tell TurboTax this?  I don't see an option for this on TurboTax.  I am on the screen that determined that I have an excess and it is asking me to choose from 3 options... withdraw all the funds to avoid the tax.  Withdraw some of the funds.  Don't withdraw funds and pay the excise tax.  

[Opus 17]

If you don't withdraw the money before April 15, you pay regular income tax PLUS a 6% penalty for 2018.  Then in 2019, if you under-contribute, so that the 2018 excess is considered to be part of your 2019 limit, you pay no further penalties.  If you contributed the regular limit in 2019, and still had this $2875 excess hanging around, you continue to pay the 6% penalty again and again.  This situation would be covered on your 2019 tax return, you don't report your future plans on a past return.

If you withdraw the excess, it is still subject to regular income tax but not the 6% penalty.  You need to make the withdrawal before April 15, and it will be a special procedure with the bank, not a normal withdrawal.  Tell them you need to make a return of excess contributions.  They will return the excess plus any interest it has earned, and you pay tax on the returned contribution and the interest.

[BMcCalpin]

I think Opus17 covered all your questions. Generally, taxpayers carry over excess contributions because they no longer have enough money in the HSA to withdraw the entire excess (having spent it on medical bills). There is no upside to carrying the excess over, since, as Opus17 points out, you are going to have the excess added to Other Income no matter what, and if you carry excess over, you get dinged an additional 6% on top of that.

[markcohen]

Thanks to all who answered my questions.  It was very helpful.  It seems a bit silly but the answer is straightforward.  I do have the funds to take a distribution to correct the excess contribution for 2018 so I will do so to avoid the excise tax.  Then I'll turn around and make the 2019 contribution and that'll put me back on track.  Thanks again.

[BMcCalpin]

@markcohen Great!