2019 HSA excess contribution refund

[Serge]

My wife's employer opened an HSA  in October 2019 (new job). I realized this in December preparing fo the taxes. We already have a family HSA which we contributed to personally thus this was not desired. She stopped all contribtutions to her HSA in December 2019.

In Feb 2020 we asked the custodian of my wife HSA to close her unused HSA account and do a excess contribution refund. Here is where it get strange:

The W2 shows a contribution of $140 but the account indicates an employee contribution of $330. We received $310 back and paid $20 fee to close. I am not sure what the difference is between the $330 and the $140. Interests were 1c.

The questions are:

1. Since the $140 are in the W2 but we requested a excess refund and got it back in February 2020, should we indicate she contributed the $140 in the W2 in the 2019 declaration or just omit the $140 deduction from the W2?

2. If we enter the $140 from the W2, should we declare the $310 excess contribution refund in the 2019 or 2020?  If 2019, how in turbotax?

3. In regard to the difference between the $310 and the $140 in the W2, how should that difference be treated? Is there a split between 2019 and 2020 to declare the refund?

4. Are we supposed to get any form before April about the excess contribution refund?

[Opus 17 · Accepted solution]

I would start by trying to reconcile the difference between the W-2 and the bank's records with the employer and the bank.  The bank should have records of deposits that were credited; the employer should have records of the deposits.  Does the difference represent deposits made by the employer in 2020?  They would not show up on the 2019 W-2 but they will show up on the 2020 W-2.

Assuming that is the reason for the difference, you leave the W-2 alone.  Report that you closed the account and withdrew the $140.  Next year, if you don't change the situation, her W-2 will show $190 in contributions and you will again indicate you withdrew them all.  You will get a 5498-SA statement of contributions in May, but it won't list the return, that will be listed on her 2020 5498-SA. 

This is not an answer to your question, but there is something else you should know.  "We" do not already have a family HSA.  An HSA is an individual account owned by one person, like an IRA.  You might own an HSA, your wife does not (for now).  Second, if you are enrolled in an HSA-eligible family HDHP, then your spouse is considered also to be enrolled in an HDHP, even if she is not.  As long as neither of you has disqualifying insurance, then both of you can make tax-deductible contributions to an HSA.  The contribution limit on a family HSA is $7000 for 2019 and $7100 for 2020.  This can be split between you in any way you want, as long as neither of you goes over the limit and as along as your combined total is not also over the limit.

So it is completely legal for you and your wife to contribute to separate HSAs, and the only reason to close your wife's account is if your account is fully funded.  And if this money from your wife's employer is free from the employer (an employee benefit or cash match) why would you turn down free money?  (For example, if her employer offers $500 of free HSA money each year, you should take the free money and reduce the contributions to your own account to $6500 or less.)

Unless you are fully funding your account, I would go to her employer, apologize for the confusion, and ask to reopen the account and make contributions, especially if they include free employer matching money.  Adjust your own contributions down if needed.   If you are not fully funded for 2019 and want the additional tax deduction, you can contribute out of pocket money to either HSA up until April 15 and count it as a 2019 deposit, as long as you inform the bank ahead of time that this is a 2019 deposit.  

Unless there is some other reason you don't want your spouse to have assets in their name.

[BillM223]

First, the HSA belongs to the individual, not to the employer. This means that there is no reason each of the spouses can't have an HSA, if you each have qualifying HDHP coverage.

The big issue is that even if you have two HSAs, there is only one annual HSA contribution limit if either spouse has Family HDHP coverage, so you have to make sure that the aggregate of HSA contributions for all HSAs don't exceed the Family contribution limit.

"The W2 shows a contribution of $140 " - this is the amount that was contributed through the employer in 2019, whether by the employer or by your spouse through payroll deduction.

"but the account indicates an employee contribution of $330." Did you mean "employee" or "employer"? Did your spouse make any direct contributions to the HSA? Or is it possible that this $330 reflects additional contributions made through the employer in 2020?

"Interests were 1c." Interests? Do you mean the earnings?

"1. Since the $140 are in the W2 but we requested a excess refund and got it back in February 2020, should we indicate she contributed the $140 in the W2 in the 2019 declaration or just omit the $140 deduction from the W2?" What did you actually tell the HSA custodian, that you wanted the withdrawal of excess contributions? Or did you tell the custodian to close the account and to send you all the money? There is a big difference here. If indeed her employer contributed $140 in 2019, then leave her W-2 alone - it is correct.

"2. If we enter the $140 from the W2, should we declare the $310 excess contribution refund in the 2019 or 2020?  If 2019, how in turbotax?" You don't tell TurboTax that you withdrew a contribution - instead you should wait until TurboTax tells you. But it's too late now. That is, you can't withdrew excess contributions unless you in fact had some excess contributions

The problem is that HSAs are not general purpose savings accounts that you can add money to and take money out of willy-nilly. 

"3. In regard to the difference between the $310 and the $140 in the W2, how should that difference be treated? Is there a split between 2019 and 2020 to declare the refund?" This depends. Did TurboTax actually tell you that you had excess contributions? If not, then the $330 was a distribution not for qualified medical expenses, and you will owe income tax on it as well as a 20% penalty.

"4. Are we supposed to get any form before April about the excess contribution refund?" You may get a form 1099-SA. This may report the distribution. However, how it reports it depends on whether or not the HSA custodian thought it was a withdrawal of excess contributions or not.

Please answer the questions in bold above, and let's see if we can straighten this out.

[Serge]

These are greeat replies. Let me answer the questions because they put some doubts in my mind:

Did you mean "employee" or "employer"? Did your spouse make any direct contributions to the HSA? Or is it possible that this $330 reflects additional contributions made through the employer in 2020?

The W2 $140 is consistent with what my wife's contribution taken out of the gross pay were after calculation. Thus the difference of $190 may be a employer payment in 2020? They never mentioned any matching when this started. I'll check but it seems likely so. Their HR people are not good at answering questions.

What did you actually tell the HSA custodian, that you wanted the withdrawal of excess contributions? Or did you tell the custodian to close the account and to send you all the money?

Yes that is what we said and form we filed. In doing so we asked to send all the money but we kept the account opened for now. Balance is the 1c earnings.

Did TurboTax actually tell you that you had excess contributions? 

No. From your answer it appears this may be considered a simple distribution. We did however had  out of pocket prescription costs in 2019. Can that offset the distribution?

Finally this sounds to me that I may want to just let us declare her $140 contribution in 2019 and deal with the whole return for 2020. My personal contribution for my 2019 HSA (that includes family) did not reach the $7000 so I am afraid now this may not be viewed as excess return and thus be laible for the 20% penalty.  However she had this HSA only for a month and we never used it.

[BillM223]

"We did however had  out of pocket prescription costs in 2019. Can that offset the distribution?"

Yes. Just be sure to document the out-of-pocket payments and the distribution and stick it in your tax file so that you can associate them with the distribution, in case the IRS ever asks.

"However she had this HSA only for a month and we never used it."

Unfortunately, the requirement for reporting the HSA's activities on form 8889 is if there are either contributions or distributions, so the fact that she did not use it doesn't matter.

"My personal contribution for my 2019 HSA (that includes family) did not reach the $7000"

Yes, I think that her contributions were added to your contributions and still stayed under the $7,000, which explains why TurboTax did not report excess contributions.

In the future, please do not take out excess contributions unless TurboTax tells you to. And don't ever take out the earnings on excess contributions - you will be sent a 1099-SA with a distribution code of 2; entering this into TurboTax will take care of that.

"Yes that is what we said and form we filed."

Ha! It serves me right for asking a two-part question - now I don't know if you asked for a withdrawal of excess contributions or just closed the account (see above).

I am going to assume that you filed the request to withdraw excess contributions. If we did nothing, then your paperwork and the HSA custodians paperwork won't match. 

So let's do this: contact your HSA custodian and tell them that you had a "mistaken distribution" - the $330. They don't have to honor this so be nice and grovel if you have to. Explain that the problem was that you thought the amount would be an excess contribution but when you did your return, it turns out it wasn't.

They will maybe ask you to sign another form (perhaps online) as well as send them a check for $330 (you'll have to eat that $20 fee for closing).

If they will do the mistaken distribution process, then your paperwork is now clean. They will send you a corrected 1099-SA (although the fact that it will have a zero in box 1 may confuse TurboTax some - well, that a tax year 2020 problem). You no longer have to explain why you took this money out. There will no longer be any income tax or 20% penalty.

Oh, and the HSA custodian will have to reopen her account and put the money in it (you see, they may not want to do this). If they won't do this, then get ready to document what you spent the $330 on - remember that you can apply it to any qualified medical expenses incurred AFTER the creation of your first HSA.

Are we now clear on what to do?

[Serge]

"Ha! It serves me right for asking a two-part question - now I don't know if you asked for a withdrawal of excess contributions or just closed the account (see above).

I am going to assume that you filed the request to withdraw excess contributions. If we did nothing, then your paperwork and the HSA custodians paperwork won't match."

We did file for a withdrawal of excess contributions but have not filed to close the account. 

[BillM223]

"In Feb 2020 we asked the custodian of my wife HSA to close her unused HSA account and do a excess contribution refund. " So you did part 2 but not part 1.

Good, there is no need to close her HSA.

Most married couples tend to use on HSA belonging to one spouse or the other, but once one of you turns 55, then there is an advantage to having two, because if the owner of an HSA is 55, then he/she can contribute an extra $1,000 to his/her own HSA, without regard to the Family limit. For two people over 55, this turns the $7,000 annual HSA contribution limit for Family coverage to $9,000.

But if that is too far away for you and the HSA fees are eating you up, just spend the last of the money in her HSA, reduce the balance to zero, and let it die a natural death (i.e., close it) - you can always reopen one later if you still have HDHP coverage.