Solved: Mistaken HSA Contributions without HDHP
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Mistaken HSA Contributions without HDHP

We had a HDHP plan in 2019, but in 2020 switched to a different type of health insurance.  I have two questions:

 

1. In 2020, I made HSA contributions *for tax year 2019*.  Are these contributions still valid and eligible for the HSA tax benefits even though we don't have a HDHP plan in 2020?  I think they are, but want to confirm.

 

2. I forgot about the HDHP requirement for HSA contributions and made some HSA contributions in 2020 *for tax year 2020*.  Some of those funds have been used for medical expenses; some have not.  I now realize I shouldn't have made those contributions.  I don't think this affects 2019 tax filing, but looking ahead to 2020 taxes, what is the best course of action to take given that these mistaken HSA contributions have already been made?

1 Best answer

Accepted Solutions
Level 15

Mistaken HSA Contributions without HDHP

Your contribution limit for 2019 is not affected by an insurance change in 2020 unless you relied on the last month rule.

 

The last month rule says that, if you were eligible for an HSA on 12/1/2019, you can contribute the full amount for 2019 even if you were not eligible earlier in 2019, but only if you also maintain your eligibility for all of 2020. If you used the last month rule, and lost your eligibility, your 2019 contributions become retroactively disallowed and you will pay a penalty on your 2020 tax return.  If you were eligible for all of 2019, your insurance change in 2020 does not change that.

 

For your 2020 contributions, you need to request a "return of excess contributions" from the HSA bank.  This is a special form, not a normal withdrawal.  The excess amount is not eligible for a tax deduction so it will be included in your 2020 taxable income.  If you don't have enough left in the account to remove the entire amount, remove as much as you can.  You will pay income tax on the entire amount as part of your wages (the deduction is not allowed) but the penalty is, I think, 6% of the excess contribution or 6% of the remaining balance whichever is less, so remove as much as you can if you can't remove the entire 2020 contribution.  Any earnings on the 2020 contribution must also be withdrawn and that will be taxable interest on your 2020 tax return (you will get a 1099-INT). 

*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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3 Replies
Level 15

Mistaken HSA Contributions without HDHP

Your contribution limit for 2019 is not affected by an insurance change in 2020 unless you relied on the last month rule.

 

The last month rule says that, if you were eligible for an HSA on 12/1/2019, you can contribute the full amount for 2019 even if you were not eligible earlier in 2019, but only if you also maintain your eligibility for all of 2020. If you used the last month rule, and lost your eligibility, your 2019 contributions become retroactively disallowed and you will pay a penalty on your 2020 tax return.  If you were eligible for all of 2019, your insurance change in 2020 does not change that.

 

For your 2020 contributions, you need to request a "return of excess contributions" from the HSA bank.  This is a special form, not a normal withdrawal.  The excess amount is not eligible for a tax deduction so it will be included in your 2020 taxable income.  If you don't have enough left in the account to remove the entire amount, remove as much as you can.  You will pay income tax on the entire amount as part of your wages (the deduction is not allowed) but the penalty is, I think, 6% of the excess contribution or 6% of the remaining balance whichever is less, so remove as much as you can if you can't remove the entire 2020 contribution.  Any earnings on the 2020 contribution must also be withdrawn and that will be taxable interest on your 2020 tax return (you will get a 1099-INT). 

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

View solution in original post

Level 14

Mistaken HSA Contributions without HDHP

The 2019 contribution is fine. 

For the 2020 contribution you  will need to specifically inform your HSA trustee of a correction and that you wish to remove an excess contribution to your HSA. This triggers them to classify the transaction separately, as opposed to a normal withdrawal for qualified medical expenses. They will proceed to file an additional Form 1099-SA showing the excess contribution being distributed from the HSA with a distribution code of “2”. Be sure to remove and identify any earnings on the excess contribution as well. This form will be provided to you to indicate 1) a distribution from the account that 2) was for excess contributions.

Anonymous
Not applicable

Mistaken HSA Contributions without HDHP

1. In 2020, I made HSA contributions *for tax year 2019*. Are these contributions still valid and eligible for the HSA tax benefits even though we don't have a HDHP plan in 2020? I think they are, but want to confirm. yes you can contribute post 12/31/2019 for 2019 even if you don't have a HDHP in 2020

 

2. I forgot about the HDHP requirement for HSA contributions and made some HSA contributions in 2020 *for tax year 2020*. Some of those funds have been used for medical expenses; some have not. I now realize I shouldn't have made those contributions. I don't think this affects 2019 tax filing, but looking ahead to 2020 taxes, what is the best course of action to take given that these mistaken HSA contributions have already been made?

IRC Code sec 223(f)

(3)Excess contributions returned before due date of return
(A)In general

If any excess contribution is contributed for a taxable year to any health savings account of an individual, paragraph (2) shall not apply to distributions (ie no inclusion in gross income for removal) from the health savings accounts of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if—
(i)such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year, and
(ii)such distribution is accompanied by the amount of net income attributable to such excess contribution.
Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received.

 

so except for having to remove any remaining excess contributions (by 2020 return due date - I wouldn't wait - people sometimes forget and then the tax law is not so forgiving) and include in gross income for 2020 any income earned on the excess contributions, you should have no other tax consequences  

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