Problems with 1099-SA and excess contribution to HSA

[deb46]

I'm having problems with form 1099-SA for my husband. Husband is 67, was working in Jan and Feb of 2021, and we had family HDHP. We knew that contributions to HSA are not allowed when you have Medicare. Anticipating retirement, husband quit payroll deductions to his HSA in 2020 because we knew his Medicare coverage would be retroactive for 6 months. He made one "catch-up" contribution directly to his HSA account.  Husband retired in March 2021, started Medicare Part B in March 2021, and Medicare Part A was backdated to July 2020.

In January of 2021, husband's employer contributed $1600 to his HSA.  Not wanting to have any contributions to his HSA, he withdrew the $1600 in February 2021 as an excess contribution. A few weeks later, while doing our 2020 tax return, I learned (from TT) that husband had a $500 excess contribution to his HSA, so he withdrew $500 in March 2021. His 2021 W-2 shows $1600 in box 12 with code W.  

Husband recently received a 2021 1099-SA "distributions from an HSA" with a gross distribution of $2120 and earnings of $20. My problems begin as I try to answer the step-by-step questions for HSAs. TT asks "did you use your HSA to pay for anything in 2021?"  I answer "no" so then TT never asks for the info from the 1099-SA.  TT goes on to ask if husband had Medicare in 2021 and then says his maximum contribution limit is $1367. TT goes on to say husband has an excess HSA contribution of $233. 

Question 1: how do I get husband's 1099-SA info into TT? And then see the $2140 as taxable income on our tax return?

Question 2:  Why does TT say husband can contribute $1367 to an HSA in 2021, knowing his age and that Medicare is retroactive for 6 months, so that contributions would be penalized? The $1367 seems incorrect.

Thanks!

[MarilynG1]

In recreating your scenario in TurboTax, say YES to the question 'did you pay for anything' so that you can enter the 1099-SA.

You should have a Code 2 in Box 3 for 'Excess contributions'.

Say YES your HSA contribution was made by your employer and deducted from wages on W-2.

On 'Type of HDHP Coverage' I indicated 'Family Plan' for January and February, and Medicare for other months (since Part B Medicare did not start until March 2021). 

I got max contribution of $1,200.  So the difference between the $1,600 on the W-2 and $1,200 would be taxable income. In your case, the difference between $1,367 and $1,600. 

For 'did you overfund your HSA in 2020?' answer YES and enter the $500 excess contribution. 

TurboTax asks if the excess $2,500 will be withdrawn by 4/18/22.  YES tells me that it's too late to remove prior year excess, but can remove $2,000 contributed for 2021 ($1600 contributed by employer and $400 excess between $1,200 allowed and $1,600 contributed).

For the value on 12/31/21, enter $0.  On the 'Your HSA Summary' page, it shows Taxable Distributions of $0 and Taxable Earnings on Excess Contributions of $40. 

I hope this resolves your issue.  If not, please post again and we'll try to help.

[deb46]

Thanks for the details. Here are my replies:

In recreating your scenario in TurboTax, say YES to the question 'did you pay for anything' so that you can enter the 1099-SA.  Said "Yes" and entered the 1099-SA info.

You should have a Code 2 in Box 3 for 'Excess contributions'. Yep, there is Code 2 in Box 3.

Say YES your HSA contribution was made by your employer and deducted from wages on W-2. I did say "yes" even though only $1600 of the $2100 was made by husband's employer. The remaining $500 contribution was made directly to the HSA by husband (so it was not a payroll deduction). It doesn't seem like I can correctly answer "yes" or "no." Will this cause a problem? 

On 'Type of HDHP Coverage' I indicated 'Family Plan' for January and February, and Medicare for other months (since Part B Medicare did not start until March 2021).  That's what I did for husband's coverage.

I got max contribution of $1,200. So the difference between the $1,600 on the W-2 and $1,200 would be taxable income. In your case, the difference between $1,367 and $1,600. So in my case $233 is taxable income.

For 'did you overfund your HSA in 2020?' answer YES and enter the $500 excess contribution. I'm not understanding why I would answer "yes" to this question. Husband did not overfund his HSA in 2020. He withdrew the excess $500 before we filed our taxes. I checked our 2020 return and there is no form 5329. And the 2021 1099-SA gives the gross distribution as $2120, which is 1600 + 500 + 20 earnings. So it seems that I should answer "no" -- do you agree?

I will continue in TurboTax after getting the above questions resolved. Thanks!

[BillM223]

"TT goes on to ask if husband had Medicare in 2021 and then says his maximum contribution limit is $1367. "

Did you get this when you pressed the Calculate My Maximum Contribution button? (this is one the screen with the list of months where you list Family or Self-only or Medicare or None). If so please ignore that Calculate button - it does not handle the Family HDHP policy well in terms of calculating your annual HSA contribution limit. It doesn't handle the sharing of the Family contribution limit between the spouses; instead it assigns the Family limit to each spouse, never mind that it did it for both.

"Why does TT say husband can contribute $1367 to an HSA in 2021, knowing his age and that Medicare is retroactive for 6 months, so that contributions would be penalized? The $1367 seems incorrect."

TurboTax assumes that you will handle this, that is, you will enter those back dated months as Medicare. I don't believe that historically, Medicare has been terribly consistent on that 6 months backdating, so it's better for you who actually know which months you had what to just tell us. So in this case, you would have indicated Medicare even for Jan and Feb of 2021. So for 2021, your husband's annual HSA contribution limit should be zero.

"On 'Type of HDHP Coverage' I indicated 'Family Plan' for January and February, and Medicare for other months (since Part B Medicare did not start until March 2021).  That's what I did for husband's coverage."

If you have any form of Medicare, A, B, Z, whatever, you must indicate "Medicare" for each month that you have any such coverage, See above.

"For 'did you overfund your HSA in 2020?' answer YES and enter the $500 excess contribution. "

The wording of this question on the TurboTax screen is poor. You should enter "Yes" to that question ONLY if you carried over the 2020 excess to 2021, as you suspected. Since you did not do this (the carryover), just answer "no" and keep going.

Now I am a little confused on what happened - I commend you for always indicating 2020 and 2021, but I don't always read this correctly - so please go back through the HSA interview, answering the Medicare month as I indicated above, and also the "did you overfund" as no, and then tell me what you have.

Also, at the bottom of your response, please type "@" and "BillM223" without the space in between so that I will be notified.

[deb46]

I changed husband's Medicare months to January thru December, and now TT says his maximum contribution limit is $0.

I continued to my HSA, where I had HDHP family plan for Jan thru Sept and self-only for Oct thru Dec. TT says my max contribution is $7300. Should I believe that number (just wondering since you said TT doesn't handle family HDHP well)?

Continuing the HSA interview, said "no" to overfunding in 2020.

Now TT says husband has excess contribution of $1600. This still does not seem correct. Husband's 2021 1099-SA says gross distribution of $2120 is excess (code 2). This breaks down to $1600 from employer and $500 of his own funds (and $20 of earnings). I was expecting TT to say the excess contribution is $2100 or $2120. Does this discrepancy have something to do with the earlier interview question about "excess contribution deducted from your wages?" MarilynG1 advised saying "YES your HSA contribution was made by your employer and deducted from wages on W-2." So I did say "yes". However, only $1600 of the $2100 was made by husband's employer. The remaining $500 contribution was made directly to the HSA by husband (not a payroll deduction). It doesn't seem like I can correctly answer "yes" or "no" to this question What's the best way to answer? Thanks.

@BillM223 

[BillM223]

"I changed husband's Medicare months to January thru December, and now TT says his maximum contribution limit is $0."

Good

"I continued to my HSA, where I had HDHP family plan for Jan thru Sept and self-only for Oct thru Dec. TT says my max contribution is $7300. "

Actually,  that is correct. You had 9 months of Family coverage (5,400) plus 3 months of Self-only coverage (900) plus $1,000 for the age "bonus" (because the age bonus is not pro-rated in this case), for a total of $7,300. The Calculate button doesn't handle spouses sharing the Family coverage. But your husband wasn't sharing it in 2021 because of Medicare, so it's all right.

"I was expecting TT to say the excess contribution is $2100 or $2120. "

There was only $1,600 contributed to your husband's HSA for 2021, all by his employer. Why do you think that $500 was also contributed to his HSA?

So his annual HSA contribution limit is zero, as you see, it makes sense that all of the HSA contributions are in excess - and so they are: $1,600.

NOTE: 1099-SA distributions have nothing to do with the annual HSA contribution limit. The excess is ONLY the amount of the contributions in excess of the annual contribution limit.

"MarilynG1 advised saying "YES your HSA contribution was made by your employer and deducted from wages on W-2.""

Yes, this is correct, because all $1,600 was reported on the W-2 in box 12 with a code W. There is no $500 contribution. Again, why do you think there is?

[deb46]

"There was only $1,600 contributed to your husband's HSA for 2021, all by his employer. Why do you think that $500 was also contributed to his HSA?"

There was no $500 contribution in 2021--it was in 2020. Husband contributed $1000 directly to his HSA in 2020 (not via payroll deduction).  While doing our 2020 tax return in March 2021, I learned (from TT) that husband had a $500 excess contribution to his HSA, so he withdrew $500 in March 2021. 

"Yes, this is correct, because all $1,600 was reported on the W-2 in box 12 with a code W. There is no $500 contribution. Again, why do you think there is?"

So the $500 was contributed in 2020 and withdrawn in 2021. I just want to know that we're paying the taxes on that excess $500. Maybe that was resolved in 2021 since he withdrew the excess $500 before we filed our return? 

"NOTE: 1099-SA distributions have nothing to do with the annual HSA contribution limit. The excess is ONLY the amount of the contributions in excess of the annual contribution limit."

I think what's confusing me is that $2120 is reported on the 1099-SA with distribution code 2 ==> excess contribution. That code 2 on the 1099-SA seems to say (to me at least) that the entire $2120 is an excess contribution.

@BillM223 

[BillM223]

That $500 was not a contribution to the HSA for 2021. 

"I just want to know that we're paying the taxes on that excess $500. Maybe that was resolved in 2021 since he withdrew the excess $500 before we filed our return? "

You don't need to pay any taxes on that $500, because it was a personal contribution, not through his employer. When there is an "employer" contribution (that is, an amount with code W in box 12 on your W-2), this the code W amount is removed from Wages in boxes 1,3, and 5, making the HSA employer contributions not taxed. So when the excess is from the employer contributions, the excess is added back to line 8 as Other Income, because it had mistakenly been removed from income before the W-2 was printed.

However, a personal or direct contribution doesn't do this since it does not go through the W-2. Instead, the direct HSA contribution appears on line 13 of Schedule 1 (1040). So if some of that direct HSA contribution is excess, TurboTax just subtracts that from the amount it was going to put on line 13.

In either case, TurboTax took care of it in 2020, and you don't need to worry about it on your 2021 tax return.

"I think what's confusing me is that $2120 is reported on the 1099-SA with distribution code 2 ==> excess contribution. That code 2 on the 1099-SA seems to say (to me at least) that the entire $2120 is an excess contribution."

You told the HSA custodian that you made two withdrawals of excess contributions: 1,600 and 500. So the 1099-SA represents the sum of the two withdrawals plus the earnings. The $2,120 wasn't actually the excess, you just told the HSA custodian that is was and they took your word for it, because they don't have any way to know better.

OK, you asked for two distributions in the same calendar year, so the HSA custodian lumped them together and put them on one 1099-SA (as they were supposed to). It doesn't matter the the 500 was excess for 2020 and the 1600 was excess for 2021.

[deb46]

Thanks very much for clarifying those details on husband's HSA. 

I'm now working on my own HSA contribution for 2021. I believe I can still contribute for 2021, up until IRS tax filing deadline--is that correct?

If so, I will contribute the $7300 that TT calculated and you assured me is correct. However, going thru the TT interview, it asks me to enter "any contributions you personally made". Since it's using past tense ("made"), I'm just double checking that I enter the $7300 here, even though I didn't make that contribution during 2021. Thanks.

@BillM223 

[RobertB4444]

You can contribute to the HSA up until the due date of your tax return.  No matter when you made the contributions, whether it was in 2021 or in 2022 up to the date that the return was due, enter the amount as though you had already made the contribution.

Then, when contacting your bank, ask them to classify the contributions as 2021 contributions.

[Edited 2/22/22 RobertB4444]