Opened HSA by Mistake

Forum|Forum|5 years ago
March 5, 2021
15 replies
91 views

In late 2019, I opened an HSA account and made a contribution. (This was not through an employer.) My financial institution then issued a 5498-SA. In early 2020 (prior to filing my 2019 taxes), I realized I was ineligible for an HSA so I withdrew the money plus the small amount of interest. I never used this money as a deduction on my tax return since I realized I'd opened the account by mistake before filing. Recently, my financial institution issued a 1099-SA, showing I'd taken a distribution in 2020. Again, I'd paid taxes on the contribution money, never having claimed it for an HSA. The only benefit I've received is the $25 interest which I know I'd need to pay tax on. How can I resolve this so I don't incur any penalty from the IRS?

Opus 17

Level 15

Did you do a regular withdrawal or did you ask for a "return of mistaken contributions?" What code is in box 3? Code 1 is a normal distribution, code 2 is excess.

Steelydan989Author

Level 4

Box 3 Distribution code is 1.

I'd planned to complete a Return of Mistaken Distribution form and return the money to the account. After that, I'd hoped to do a Return of Excess Contribution to get the money back out and close the account but my financial institution told me Return of EC could only be done if the contribution had been made within the most recent tax year.

Opus 17

Level 15

Oh dear.

To withdraw mistaken contributions, you must make a special request to the HSA bank. It may require a special form, it is not a regular withdrawal. If you did request a withdrawal of mistaken contributions, the HSA bank must issue a corrected 1099-SA. If you requested a normal withdrawal, then you made a major mistake with significant tax implications. Because this is a regular withdrawal, it is taxable unless you have offsetting medical expenses. Any part that is not covered by offsetting medical expenses is an improper withdrawal and is added to your taxable income plus a 20% penalty.

Then, you need to go back and file an amended 2019 return, to change your answer to the fact that you did not remove the excess contributions before the deadline. It will still be added to your taxable income but you will also be assessed a 6% penalty. For 2020, there would be a continuation of the 6% penalty, but since you spent down the account and closed it, the penalty is 6% of the remaining balance which is zero.