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kunhardt-edward
New Member

I recently got a job where I signed up for an HSA not realizing I was ineligible since spouse is on FSA. Both have 2021 contributions. Can this be remedied at tax time?

The reason why I want to see if this can be remedied at tax time, is because both of our jobs are being difficult in reversing the FSA and HSA contributions. I want to know if there are penalties or if TurboTax will simply allow me to pay the taxes on the excess contributions when I file for next year.
3 Replies
Opus 17
Level 15

I recently got a job where I signed up for an HSA not realizing I was ineligible since spouse is on FSA. Both have 2021 contributions. Can this be remedied at tax time?

Don;t even try to stop the FSA, at this point, it generally won't be allowed anyway and you would technically be "covered" anyway.

 

You probably can't stop the HSA deductions either, without a qualifying "life event."

 

What you will do is contact the HSA bank and withdraw any excess contributions before April 15.  The excess contributions will be added back to your taxable income, because you aren't entitled to a tax deduction, but you won't be subject to a penalty.  This is not a normal withdrawal, it will probably require a special form with the HSA bank. 

 

If you are having ongoing payroll deductions, there won't be any point in withdrawing the excess contributions until after the last deposit (presumably around December 31, 2021).  And you still can withdraw money for medical expenses.  It won't affect your tax return either way, because the contributions will still be added back to your taxable income.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
kunhardt-edward
New Member

I recently got a job where I signed up for an HSA not realizing I was ineligible since spouse is on FSA. Both have 2021 contributions. Can this be remedied at tax time?

Thanks so much for the answer! One other clarifying point I forgot to bring up....What if my employer also contributed to my HSA? Would it be treated the same way? The HSA bank will send me the check for that amount and I'll just treat it as additional income? (As an aside: Seems kinda strange if that's the case, because it would be like a loophole for me to increase my salary at that point).

Opus 17
Level 15

I recently got a job where I signed up for an HSA not realizing I was ineligible since spouse is on FSA. Both have 2021 contributions. Can this be remedied at tax time?


@kunhardt-edward wrote:

Thanks so much for the answer! One other clarifying point I forgot to bring up....What if my employer also contributed to my HSA? Would it be treated the same way? The HSA bank will send me the check for that amount and I'll just treat it as additional income? (As an aside: Seems kinda strange if that's the case, because it would be like a loophole for me to increase my salary at that point).


Once the money is in the HSA, it's all "yours".  Technically, all HSA contributions made by payroll deduction are "employer" contributions, including your voluntary contributions and cash-match or incentives.  Per the tax code, what happens is you agree to a salary reduction, and the employer contributes that money to the account instead.

 

You must also withdraw the earnings on the excess contribution, if there are any. Since these earnings will be paid to you in 2022, they would be reported as taxable income on your 2022 tax return. The HSA bank knows this is part of the procedure and will do it automatically.  If you are invested in a regular savings account, it might only be a few pennies. If you invested part of your money in the stock market, it could be more.

 

Yes, this can result in you obtaining extra money from your employer that you would not have obtained if you didn't enroll in the HSA.  How your employer feels about it is up to them, the tax code doesn't care.   

 

(Incidentally, there is a second "loophole".  Your HSA contributions are deducted from your payroll before calculating any taxes, including federal income, state income, social security and medicare tax.  You will pay federal and state income tax on the unallowed or excess contributions, but you don't pay SS or medicare tax.  So it's still about a 7% tax break.  But, this reduces your social security wage base, which may result in a benefits reduction in retirement.  It's just how things are set up.)

 

If you can afford to contribute the maximum to an HSA and let the unspent amount accumulate, it's a great way to put money away for retirement, either medical needs or ordinary spending.  In fact, you should probably maximize your HSA contributions before you think about making IRA or 401(k) contributions.  Presumably you can do this starting January 2022, as long as you don't also re-enroll in the FSA.  

 

Also be aware that you can have a "limited purpose" FSA and still contribute to an HSA.  A limited purpose FSA only covers medical expenses not traditionally covered by insurance, like dental care and eyeglasses/contact lenses.  You may want to see if your wife can enroll in a limited purpose FSA next year if you expect to have such expenses. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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