My wife will start Medicare Part A effective Oct 23. We contributed to our HSA during Oct-Dec 2023, but shouldn't have. 2023 tax return already filed. How to remedy?

[glesieutre]

Do I ask for a refund of the excess HSA contribution (and interest) and file an amended return for 2023? 

Or, do I take some kind of distribution in 2024 and correct this on my 2024 return? 

Thanks for any help!

[glesieutre]

I see a very similar question was asked and answered earlier this week: 

"Excess HSA Contribution Problems Due to Medicare Enrollment-6 Month Rule"

[Mike9241]

assuming you had family coverage all of 2023 and all the funds went into the same HSA account, any excess would have had to been withdrawn by 4/15/2024 unless the return was properly extended then you have until 10/15/2024 to withdraw excess and earnings thereon. Tell the administrator toy want to withdraw excess contributions and earnings nit that you wan a distribution. there is no such thing as a joint HSA it's either in your name or hers. however, each spouse can have their own account.  the following assumes one of you had a HDHP with family overage

for 2023 the max to your account (no spousal account) is as follows 

7750 times 9 divided by 12

3850 times 3 divided by 12

+1000 if your over 55

=7775

you can leave in any excess and pay a 6% penalty. then reduce the 2024 HSA contribution by the excess and only contribute based on self only max   

if you to your spouse had her own account  (you didn't)

7750 times 9/12 

3850 time 0 divided by 12

1000 times 9 divide by 12

=6563

any excess would need to withdrawn to avoid 6& penalty year after year until funds exhausted

if you Both have an HSA

the max  is 

7750* 9/12

3850 8 3/12

1000 to only your account if over 55

750 only to her account if over 55

=8525

this can be divided between the accounts any way you want as long as hers doesn't go over 6563

[glesieutre]

Thanks @Mike9241 . 

I have an HDHP with family coverage. The HSA is in my name. I made no contributions to the HSA in 2024, as I mistakenly thought Medicare coverage (for both of us) would begin in January. 

Our joint 2023 return was filed on time and not extended. Sounds like I should take a distribution of the excess funds from 2023 (and pay tax on it) to avoid a perpetual 6% penalty. Do I do that by amending my 2023 return or somehow addressing it on my 2024 return? 

I appreciate your advice. 

[Opus 17]

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@glesieutre wrote:

Thanks @Mike9241 . 

I have an HDHP with family coverage. The HSA is in my name. I made no contributions to the HSA in 2024, as I mistakenly thought Medicare coverage (for both of us) would begin in January. 

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Let's start over.  I think there are facts missing.

In short, if you are the owner of the HSA account, then your ability to contribute is determined by your insurance, not your wife's.  If you each own separate HSAs, your ability to contribute is determined by each spouse's specific coverage situation.  There is no such thing as a joint or "our" HSA.

1. You say that you were covered by a family HDHP.  I assume this is a qualifying HDHP for HSA contributions (not all HDHPs qualify.)  

2. Who is the owner of the HSA?  Remember that an HSA is an individual account, there are no joint HSAs so it can't be "our" HSA.  Any person covered by an HDHP can contribute to an HSA even if they are not the owner of the insurance policy.  You and your wife could have separate HSAs, or only one of you has one, but you can't have a joint HSA.

3. What was the HSA owner's medical coverage in 2023?  What months were they covered by an HDHP, and what months (in any) were they also covered by "other insurance", because it is the other coverage that makes them ineligible to contribute.

[glesieutre]

@Opus 17 

1. Correct, a qualifying HDHP for HSA contributions.

2. I own the HSA. My wife is not employed and does not have a separate HSA. 

3. In 2023, we were both covered under my employer's HDHP for the full year. Medicare coverage will soon apply retroactively for both of us: for her, starting October 2023; for me, starting November 2023. I made HSA contributions in October, November, December -- thinking that Medicare coverage would start in January 2024. (That's what my employer told me would happen, incorrectly.) 

Thanks. 

[Mike9241]

when there's an excess there are two important dates

4/15/2024 was the latest date you could take out any excess without penalty if your return was not extended. In addition, any earnings on the excess would have needed to be withdrawn and would be taxable in 2024 - you'll get a 1099-SA if the funds are withdrawn. 

if you did not extend the return, you owe a 6% penalty on the excess or FMV of account if less (Turbotax will calculate this with the proper entries). the excess can no longer be withdrawn to avoid the penalty. in 2024, undercontribute to avoid another year of penalties for excess contributions. this penalty will recur every year until the excess is corrected

if you did extend then you have until 10/15/2024 to withdraw the excess and earnings, if any, without penalty. The income, if any, would be taxable in 2024. Here you have the option of leaving the excess in and pay the 6% penalty, then like above undercontribute for 2024 to avoid the recurring excess contribution penalty.

[glesieutre]

@Mike9241 

I won't be making additional HSA contributions in 2024 or later, so I don't see how I can under contribute. 

Is there some way to avoid paying a 6% penalty in perpetuity? 

Can I just correct the excess by taking a distribution of the 2023 excess in 2024, and paying the penalty and tax (on related earnings as well) then? 

Thanks. 

[Opus 17]

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@glesieutre wrote:

@Opus 17 

1. Correct, a qualifying HDHP for HSA contributions.

2. I own the HSA. My wife is not employed and does not have a separate HSA. 

3. In 2023, we were both covered under my employer's HDHP for the full year. Medicare coverage will soon apply retroactively for both of us: for her, starting October 2023; for me, starting November 2023. I made HSA contributions in October, November, December -- thinking that Medicare coverage would start in January 2024. (That's what my employer told me would happen, incorrectly.) 

Thanks. 

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If you enroll in Medicare more than 6 months after your 65th birthday, your enrollment is backdated 6 months from when you apply.  If Medicare says November 1, then you are ineligible to make HSA contributions for those months.  Your contribution limit for 2023 would be $7750 + $1000 catch up ÷ 12 = $729 per month x 10 months = $7291.

Your wife's enrollment does not affect your contribution limits.  

If you contributed less than $7291, you don't have an excess, even if some of the contributions were made after November 1.  What counts is the total for the year, not the exact date of the contributions.

Since it is after the due data and you did not have an extension, the option to perform the special withdrawal of excess contribution is not available to you.   If you contributed more than $7291, you must first file an amended 2023 return to report the excess and pay the 6% penalty.

Then you have two options for the excess.

You can make a regular withdrawal and not use it for medical expenses (in other words, if you had a $1460 excess and your qualifying medical expenses were $2000, you would withdraw $3460).  The withdrawal will be subject to income tax and a 20% penalty.  Because this withdrawal is performed in 2024, it will be reported on a 2024 1099-SA and reported on your 2024 tax return. (You do not need to remove the earnings on the excess, that only applies to the special procedure that you can perform before the deadline—which is passed.  You simply make a withdrawal that is not used for medical expenses so that you pay the tax and 20% penalty.)

Or, don't withdraw the excess, and pay as you say, a perpetual 6% penalty.  But the penalty stops when the account balance is zero. And because of the 20% plus regular income tax (12% to 22%), it would probably be the case that if you expect to spend the account down to zero within 5 years, you would pay less overall by paying 6% per year.  If you plan to hold the account longer than 5 years, you will be better off withdrawing the excess all at once at paying the 20%. 

[glesieutre]

@Opus 17 Thanks, this is very helpful. This discussions spurred me to look at the instructions for Form 5329. For line 47, they say: 

"If you timely filed your return without withdrawing the excess contributions, you can still make the withdrawal no later than 6 months after the due date of your tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” entered at the top. Report any related earnings for 2023 on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return." 

In addition to regular income tax for 2023, I suppose I still have to pay the 6% excise tax (because I already filed timely without extension). But it sounds like I otherwise wipe the slate clean going forward and avoid the additional 20% tax for a non-qualified distribution. 

Is that correct? 

If that's not correct, can any future medically-qualified distributions from the HSA be counted first against the excess contributions? (So that the 6% excise tax goes away, even though the HSA still has remaining funds.) 

[Opus 17]

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@glesieutre wrote:

@Opus 17 Thanks, this is very helpful. This discussions spurred me to look at the instructions for Form 5329. For line 47, they say: 

In addition to regular income tax for 2023, I suppose I still have to pay the 6% excise tax (because I already filed timely without extension). But it sounds like I otherwise wipe the slate clean going forward and avoid the additional 20% tax for a non-qualified distribution. 

Is that correct? 

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I think the wording could be more clear.  Where it says "If you timely filed your return without withdrawing the excess contributions, you can still make the withdrawal no later than 6 months after the due date of your tax return, excluding extensions."

What that means is that you can make the correction up to 6 months after your deadline, whatever that was.  If your deadline was April 15 and you filed on time, you have until October 15 to make the correction.  If you did get the extension to October 15 and you filed on time, you would have until April 15 of the next year to make the correct.  The actual code section is here.  https://www.law.cornell.edu/cfr/text/26/301.9100-2

(This is actually something I have misunderstood for a long time, apparently, so I apologize for not including this option in my earlier answers.)

Therefore,

You have until October 15 to contact the HSA bank and remove any contributions over $7291.  You must also remove any earnings attributable to the excess contribution (the HSA bank should know how to do this).  A "return of excess contribution" is not a regular withdrawal and will probably have a special form or procedure.  Don't make a regular withdrawal by accident.

Prepare an amended return.   Change your answers in the HSA interview to reflect that you stopped your HSA in November 2023.  Turbotax will tell you that you have an excess contribution and will ask if you will remove it before the deadline.  Say yes.  Turbotax will automatically add back the excess contribution to your taxable income (since it is no longer tax-deductible).  Add the attributed earnings as "other taxable income."  Your tax return will show the net amount of contributions on form 8889 as if you had never over-contributed, and you will not have a form 5329, and will not pay a penalty.  Print your amended return and mail it to the IRS.  Write "Filed pursuant to..." on the top of the first page, and include a brief explanation of the reason for the amendment on form 1040-X. 

Then going forward, you have no excess issues to deal with. 

If that's not correct, can any future medically-qualified distributions from the HSA be counted first against the excess contributions? (So that the 6% excise tax goes away, even though the HSA still has remaining funds.) 

If you leave the uncorrected excess in the account, it is treated as the last out, not the first out, unless you withdraw it not for medical expenses and pay the 20%/