Our contribution to our family HSA account totalled $6176, which is below the 2020 HSA limit. Why does TurboTax state that we need to withdraw or pay a penalty?

[taraburnham1]

We have two HSA accounts, Mike contributed $1134, Tara contributed $5042 in her's. We are married and filing jointly. The system says we exceeded contributions by $4187, but we are well below the allowed limits. Please advise. 😕

[BillM223]

First, is either of you 55+?

Second, what type of HDHP coverage did you have you each month? Did it change over the year?

Third, how did you make the contributions? Were they through your employers or made directly to the HSA custodian?

Did either of you carry over an excess HSA contribution from the previous year?

[taraburnham1]

First, is either of you 55+?

- No, both are 36

Second, what type of HDHP coverage did you have you each month? Did it change over the year?

Wife had family plan that carries the kids, entire year, did not change
Husband has single plan, did not change

Third, how did you make the contributions? Were they through your employers or made directly to the HSA custodian?

Through the employer

Did either of you carry over an excess HSA contribution from the previous year?

I don't remember exact amounts, but I do believe we both carried over some level of balance in the HSA from 2019.

[BillM223]

"Did either of you carry over an excess HSA contribution from the previous year?

I don't remember exact amounts, but I do believe we both carried over some level of balance in the HSA from 2019."

No, I am not talking the balance in the HSA(s), but whether or not you made excess contributions in 2019 and failed to withdraw the by July 15, 2020.

OK, based on what you have said so far, you should not have excess contributions in 2020, which means that we are missing something.

I asked about how the contributions were done, but I did not complete the thought.

You had $1,134 and $5,042 as the code W amounts in box 12 on your W-2s, right?

Did either of you make contributions by means of payroll deduction (I assume yes)?

On the screens "Let's enter [name]'s HSA contributions", did you enter the amount of payroll deductions on the second line, thinking that this was your personal contribution?

If so, that is the problem. The code W amount is the sum of whatever your employer contributed plus whatever you contributed by means of payroll deduction (yes, the terminology is confusing, but we have to go with the IRS's terms). So your payroll deduction is already part of line 1 and should not go on line 2.

If this is the problem, then go back through the interview for both HSAs and remove these amounts. Then come back to me and tell me what is on the form 8889 on line 2 (s/b zero), line 9 (s/b your code W amount), line 13 (s/b zero), and 14- end (should all be blank).

NOTE, there is an 8889 for each of you, so allow for that.

Let us know.

[taraburnham1]

I just double checked, there are no duplicate amounts added, only the payroll additions.

However we did give you an incorrect value in our first question. We were looking at the distribution amount not the W-2 contribution amount.

The contribution amounts are

Wife - $7,000

Husband - $1162

[NCperson]

to confirm, the Code W amounts on the W-2 is $7000 and $1162 and you DID NOT enter any amounts elsewhere.  Part of the problem is the family limit was $7100.  She doesn't get $7100 and then you get a separate $3550.  That doesn't explain the entire problem, but it is a start.

The language the IRS uses is confusing (and TT has to follow it)

When it talks about the 'employer contribution' that is the money that is Code W on the W-2, even though it was your income that was withheld. 

When it asks if you made any contributions (employee contributions) this is where you sent a check directly to the HSA administrator and it did NOT go through your paycheck.  Many replicate what is on their W-2 Code W with this entry as the wording is very confusing.

does that help any? You are certainly over by $8162 - $7100 or $1062 but there must be something else. 

[taraburnham1]

And we could agree to the $1100 over, but the website is insisting on $4,000 over and being withdrawn from the HSA or being taxed at 6%

[BillM223]

OK, you are saying that your spouse had Family coverage all year and you had Self-only coverage all year. Well, to be accurate, the IRS considers that you both had Family coverage all year and that you share the $7,100 annual contribution limit. 

As NCperson noted, that does not explain the size of the excess.

As I asked above, did you have any excess contributions in 2019? That is, did you have a form 5329 with entries in Part VII on your 2019 return?

Additionally, when TurboTax asked you if you "overfunded" your HSA in 2019, did you answer yes? And what amount did you enter?

[taraburnham1]

Now that I figured out where to find that information...

Apparently yes we did overfund by $3125 in 2019 and paid $84 in 6% tax on that amount. 

When clicking yes it autofills the $3125, and then next screen tells us we have an excess contribution of $4,187.

You say it considers us family.

Right now we have checked that Tara has family and Michael has self insurance. should we check the box that both have family plans?

[BillM223 · Accepted solution]

No, no need to check Family for Michael, because as soon as TurboTax sees Family for Tara, whatever Michael checked will be ignored.

And the $4,187 is now explained by the $3,125 carryover. 

OK, you may have already noticed that while TurboTax wants to know is you will withdraw the excess amount by the due date of the return, in fact, if you try, TurboTax will tell you that $3,125 cannot be withdrawn. This is because the last time that you can withdraw for a given year is the due date of the return, so this $3,125 needed to have been withdrawn by July 15, 2020 (the updated due date).

Now, there are only two ways to deal with this, assuming that you want to stop the carryover.

First thing is to withdraw (if you can), the excess that you can: $1,062. You can withdraw it from either HSA.

Next, the remaining $3,125 carries over to 2021 (yes, 6% again).

The two ways to end it are:

1. Lower your contributions for 2021 so that the $3,125 can be used up in 2021 as if it were a personal contribution; that is, make sure that you do not contribute more than $4,075 (which is the 2021 limit of $7,200 minus $3,125). This is easily the cheapest way to do this, although it means your HSA will be underfunded for this year.
2. Take a distribution of $3,125 and don't spend it on medical expenses. When you tell TurboTax this (while entering the 1099-SA), then not only will TurboTax put the $3,125 on Line 8 of Sch 1 (1040) to be taxed, but you will also have to pay a 20% penalty. This is the direct, but expensive option.

In either case, you will be done with the carryover...

Make sense?