I maxed HSA family contr. in March.Wife new job received employer contrib into her HSA.I did reversal from mine equal to that.Is 6% excise tax calculated on my acct gain?

[jamesluntz]

My gain since March is ~10%. I did the reversal within a week of her receiving her employer contributions into a low-interest account (no gain). Do I have to also remove 10% gain? If I should and don't, do I pay 6% fee against that 10% portion every year until removed?

[dmertz]

You should have requested an explicit return of excess contribution and your HSA custodian should have been obligated to calculate and distribute the gain-adjusted amount.  The gain is subject to income tax but not to any penalty.  The excess itself is also subject to tax if it was contributed through your employer such that your employer will exclude it from box 1 of your W-2; if it was a personal contribution it simply won't be deductible. 

It sounds like you are saying that the attributable gains have not been distributed.  Why didn't that happen?  Did you mistakenly request a regular distribution instead of an explicit return of excess contribution?  That would be problematic.  If so, has it been less than 60 days since you obtained the regular distribution?

Given that your HSA had gained about 10%, resulting in the adjusted amount required to be distributed to be about 110% of the excess contribution and the gains in your wife's HSA were less, it might have been better to treat the contribution made to your wife's HSA as the one that was excess and request that that one be returned instead.

[Anonymous]

the withdrawal of excess contributions is supposed to include earnings thereon.  they have to be withdrawn by the due date including extensions.   any amount not withdrawn is subject to a 6% penalty.     the problem is that you have taken a distribution and we don't know exactly how that was handled.  if you requested a normal distribution of $X, then the trustee might report it as such and if it didn't cover qualified medical expenses, it is subject to penalties.     your going to have to discuss the situation with the custodian/trustee  so to minimize any penalties.      

[jamesluntz]

Thanks for the points here. Sorry, my initial "question" had to fit in 170 characters, so I was a bit too concise. 

The part about paying income tax on the gain but not penalty makes sense; thanks for that.

Regarding the other points, I may need to clarify. In chronological order:

3/31/19: I made a large lump sum payroll contribution to my Family HSA limit which maxed it out for the year (inclusive of employer contribution). I have two children covered under my insurance.

10/31/19: My wife received an employer contribution of $1668 to her new HSA for her individual health care plan.

11/12/19: I received a return of excess contributions from my HSA custodian. My employer has indicated they will correct my W2.

So, technically, my wife is the one that "over contributed". But obviously we're not going to ask her employer to take their contribution back so I must take it out of my HSA. However, I would argue that any gain should be calculated based on the date the excess contribution was made 10/31/19. Obviously, neither employer would have been able to know of this issue due to the fact that we must adhere to the family contribution limit between two different plans with two different employers. I guess my question is... am I good? My thinking is after the dust settles, what the IRS sees is that we did not over-contribute on the year and I cannot imagine they would realize that we were temporarily over the limit for 12 days in early November. Neither employer will report any over-contributions. At this point, I'm the only one that could have known this happened.

[dmertz]

The excess contribution is present in whichever account you designate as the one containing the excess.  By requesting a return of excess contribution from your HSA, you've designated that the excess contribution was made to your HSA, not your in wife's HSA, so the gain must be determined by the investment performance only in your HSA.

In this case, the gain is determined by the investment performance in your HSA between the time of your 3/31/19 contribution and the date of the return-of-excess-contribution distribution (also taking into account in the calculation any intervening regular distributions).  Investment performance in your wife's HSA is irrelevant to a return of excess contribution from your HSA.

How is it that the HSA custodian did not properly calculate the attributable gain and include it in the distribution?  It's generally their responsibility to do so.  Without that being included in the distribution, the distribution does not meet the legal requirement for the distribution to be a return of excess contribution.  A code 2 Form 1099-SA for a return of excess contribution must show in box 2 the proper amount of gains.

If your employer does not exclude from box 1 the amount of the the returned excess, you don't include the returned excess in income again, you only include the attributable gains.

[jamesluntz]

Thanks again for helping with this. I am grateful... and still confused 😉

<The excess contribution is present in whichever account you designate as the one containing the excess.  By requesting a return of excess contribution from your HSA, you've designated that the excess contribution was made to your HSA, not your in wife's HSA, so the gain must be determined by the investment performance only in your HSA.>

Perhaps this is the way the rules are read/interpreted and if so I'll accept it. But does it make sense why this seems silly? I had no choice but to do the reversal on my account. My wife received an automatic contribution from her employer - one that I imagine we couldn't have stopped if we wanted to (nor would we. obviously, I'd rather pay the fees and/or taxes on gains over returning free money). 

<In this case, the gain is determined by the investment performance in your HSA between the time of your 3/31/19 contribution and the date of the return-of-excess-contribution distribution (also taking into account in the calculation any intervening regular distributions).  Investment performance in your wife's HSA is irrelevant to a return of excess contribution from your HSA.>

I don't follow why it is irrelevant - maybe you just mean per the letter of the law based on first comment above. If my wife hadn't accepted a new job with an employer that contributed money to her HSA, then we wouldn't have gone over our combined annual limit. 

I also don't follow the part about intermediate distributions. It sounds like you're saying if I paid for HSA-qualifying expenses between 3/31 and date of reversal (I did), I may not have had to make the reversal at all. But if this were true, it seems like it would be akin to saying... if the annual contirbution limit is $7,100 and I knew I had $3k of upcoming expenses in the following year, I could contribute$10,100 to the account which I cannot believe would be true.

My custodian is PayFlex. On the Request for Return of Excess Contributions form I filled our, after I indicated the amount of excess contribution I wanted returned, there is a note, "The excess contribution plus any interest will be removed from the core account." However, the only returned the exact number I provided (which did not include estimated gain)

[dmertz · Accepted solution]

When the excess contribution is the result of the combined contributions of the spouses but neither contribution, without regard to the other spouse's contribution, is in and of itself an excess contribution, the excess contribution is a shared excess contribution.  It is not explicitly attributable to one spouse or the other until an action is taken by the spouses to attribute the excess to one spouse, the other spouse, or in some combination between the two spouses.  Because only excess contributions are permitted to be distributed from an HSA as a return of excess contribution, obtaining a return of excess contribution from a particular spouse's HSA  explicitly attributes that amount of the excess as being in that spouse's HSA.

With regard to the irrelevance of the investment performance in your wife's HSA, I'm referring only to the legally required calculation (https://www.law.cornell.edu/cfr/text/26/1.408-11), substitute "HSA" for "IRA" since the law requires the same calculation for HSAs as is required for IRAs) of the earnings that must be distributed from your HSA to accompany the return of excess contribution from your HSA.  Obviously it would have been better to have less earnings required to be distributed by basing the earnings calculation on the investment performance in your wife's HSA, but that would have required that the excess contribution be distributed from your wife's HSA.

Regarding intermediate distributions, no, I am definitely not saying that a nontaxable distribution used to pay medical expenses is considered to be a distribution of earnings.  I'm saying that any regular distributions during the calculation period must be added back to the closing account balance in the calculation of attributable earnings.  to determine attributable earnings.  See the definition of Adjusted Closing Balance  in CFR section 1.408-11(b)(2) referenced above.

It appears that it was PayFlex's mistake not to calculate and distribute the earnings as they said they would on the form.  By distributing exactly the amount that you indicated was the amount of the excess contribution, PayFlex is effectively saying that there was exactly $0 gain or loss during the calculation period, which you say is not true.  You'll need to contact PayFlex to inform them of their error and have them make the correction.  Since there were gains, they probably need to treat the first return of excess contribution as return of only roughly 91% of the excess, with about 9% of the excess still remaining.  For example, if the excess contribution was $1,668, there was a 10% gain in your HSA and the gross distribution of a return of excess contribution was $1,668, that would mean that $1,516 of excess was returned accompanied by $152 of earnings, with $152 of excess contribution still remaining to be resolved.

[jamesluntz]

Thank you so much. After about three times now, I think this has finally permeated through my skull. Since my question was also poorly asked, I wasn't sure how to mark the best answer, so I went with the last response  thinking any future readers may be more inclined to go through the full thread in order to follow the logic.