BANK RETURNED HSA DEPOSIT TO EMPLOYER. WHAT DO WE DO NOW?

[dmacaroon]

My husband has two HSA's which he was careful not to over fund, but on the last day of the year, his employer put a surprise $500 into his account which made him go over the limit and thus the fun began. The bank received it 12/31/2021 but it hard posted on 1/4/2022 so the 5498 has the $500 plus his last payroll contribution of the year ($40) listed as 2022 for 2021.

The bank wouldn't let him do an excess funding withdrawal because he didn't exceed the limit at their bank ( but between their bank and the other bank, he did). He spoke to a bank rep who gave him some bad advice and he ended up filing some paperwork they recommended, which ended up with them sending the $540 back to his employer. Not allowed to do that per the IRS. They  screwed up the new 5498 by taking that $540 out of the 2021 for 2021 amount (so it no longer matches the W2 box 12 amount) and still has $540 as 2022 for 2021.

What happens with the $540 sent back to the employer? Do we pay taxes on it as a non- medical withdrawal even though the money went to his employer? Pay the penalty for that as well as an overfunding penalty? How do we work this out on the 8889 form? The bank is not helping. They aren't going to correct the form. His HR department is not responding because they never do. We don't even know what they're going to do with the $540 they got back. Time is running out.

[BillM223 · Accepted solution]

The best you can do is the right thing for your tax return, and let the chips fall where they may with your HSA custodian and your husband's employer.

So was the code W amount in box 12 of his W-2 correct? Or did it include the $500 plus $40?

If you enter just the code W amount, do you get the HSA excess contribution error message?

The $500 was withdrawn by the employer. Never minding that the employer may have done that wrong (although there is a circumstances in which the employer can do it), is it part of the code W amount?

As for what happens to the $540 sent back to the employer, no, you should (1) not report it as income (it's not in Wages on his W-2, is it?), and (2) you should not report the distribution, either. So no penalty on the distribution that you didn't even ask for. If the HSA custodian sends you a 1099-SA with a distribution code of "1" for the $540, just cross it out and stick it in your tax file (not tax return). 

Don't worry about the 5498-SA - it can only be understood during a multi-year audit. Don't worry about the 8889 - if line 2 is blank (your direct HSA contributions, which I don't think you had any of) and line 9 is the code W amount - then that part of the 8889 is OK. 

And if I right so far, you won't see an excess HSA contribution message, so there is no penalty here, either.

So, let me know - can you just enter what the code W amount is in the W-2, and get no error message?

If so, be sure to write down everything that has happened (especially the bad advice from the employer and the HSA custodian), and be satisfied that you did the best you could.

[dmacaroon]

Thank you for answering a complicated question.

 From Jan 1 to Dec 24, 2021 he put $2640 into his HSA. The W2 says $2680 because they included his last $40 payroll deduction on Dec 31 in with 2021 for 2021 even though the employer's $500 on Dec 31 ended up as 2022 for 2021. The bank is including that same $40 as 2022 for 2021 on the 5498, so it's counted twice. The $500 was definitely not in the W2 amount. No error message when putting in $2680. I tried explaining to a supervisor at the bank that the $540 was never in the 2021 for 2021 amount on their 5498 but she said they are right. After a heated discussion she said she would send it to research.

My husband made a call to see about an excess contribution removal 6 weeks ago - they said no. He said he asked if the $540 hard posted on 2022 could be applied to 2022 instead of 2022 for 2021 and he says the rep said yes and walked him through some paperwork which he downloaded and sent to them. Either the bank rep gave him bad advice or he misunderstood what was happening. In any case, he filled out forms that allowed for a distribution of $540 and the "mistake" box is checked. The form doesn't say where the money was going.

No deposits other than payroll. Can that $500 be included as already-taxed income on his W2 and if so, how would we know?

I did some research and read that an employer can withdrawal money from an HSA for 7 reasons. A mistake is one of them and his employer did say the money wasn't supposed to hit the bank until 2022. He also did not ask for the money or expect it. Question is..who is considered to have made the withdrawal? Him or his employer? He filled out the papers requesting it to be removed- did he even have the right to do that if the money didn't come from him? His employer hasn't responded to his questions about where the returned money went. The bank suprevisor said we will get a check for $40 from someone (them or employer?) that we pay taxes on. But that's the same $40 the W2 has included in Box 12!

Bottom line is I just want this over and taxes filed on time. TurboTax will let us file if we disregard the $500. I'm not sure what to do about the  Dec 31 $40 deposit from my husband which  is counted for 2021 on the W2 and 2022 for 2021 on the 5498. Filing a 8889 that doesn't match the 5498 worries me. I'm afraid ignoring the $500 will cause trouble in the future. We do have otherwise simple taxes, average income and low audit risk.

Thank you for taking time to answer.

[BillM223 · Accepted solution]

"In any case, he filled out forms that allowed for a distribution of $540 and the "mistake" box is checked. The form doesn't say where the money was going."

Was this a form for a "Mistaken Distribution"? Has the HSA custodian asked for the return of the $540?

Otherwise, perhaps it was a form for a "mistaken contribution". If so, the HSA custodian should have sent the money to your husband.  Please check your transactions in the HSA account...was the $540 ever sent anywhere? If it was sent to his employer, then fine - you won't report it or pay tax on it.

"Can that $500 be included as already-taxed income on his W2 and if so, how would we know" - unfair question on my part, since you can't tell just by looking at the W-2 (the code W amount is removed from Wages in boxes 1, 3, and 5, so everything looks the same no matter how much is removed).

"The bank suprevisor said we will get a check for $40 from someone (them or employer?) that we pay taxes on. But that's the same $40 the W2 has included in Box 12!" So the HSA custodian (is that who you mean by "bank supervisor"?) is acknowledging that $40 is an excess contribution and they are returning that to you. That's OK, because your husband had that withheld from his payroll (which removed it from tax), and it you get it back because it was an excess, then you should (1) get a check for $40, and (2) pay tax on that.

"Question is..who is considered to have made the withdrawal? Him or his employer?" I don't know, which is why I have asked you to go look at your transaction history to see if the employer has taken the money back.

"Filing a 8889 that doesn't match the 5498 worries me" - Now that you remind me that you have 2 HSAs, this is even a better reason not to be concerned about the 5498-SA. The 5498-SA is a multi-year look at an HSA, so it's not unusual for the 8889 to not exactly sync with the 5498-SA. Even better when you have two HSA's, because this means that you have two 5498-SA forms (you do, don't you? Did he make contributions to both HSAs in 2021?).

As for the $40, was it deposited twice into the HSA? Or is it just that it was reported as deposited twice: once as part of the code W on a W-2 and once on the 5498-SA. If the latter, then ignore it. Keep good records of what you are doing and why in case anyone ever asks. This is a confused situation not of your making. As I noted above, we just want your return to be as accurate as possible. If you run through TurboTax and get TurboTax to say that you have a $40 excess, then this is good - just say that you will withdraw the $40 by April 18th (I guess this is true since the HSA custodian told you they are sending you the check, right?), the $40 will be added to Other Income on line 8 on Schedule 1 (1040), and you will pay tax on that (but no penalty). If this is where you end up, that sounds as close as you can get to accurate, and you can still file, too.

BUT, please please please, keep records of everything and of all your attempts to rectify others' mistakes.

[dmacaroon]

I forgot to mention the $5400 one-time rollover from an IRA to the HSA at the other bank. This brought the total to $8080, which is why the $540 put him over the limit.

[BillM223]

I don't think this IRA to HSA rollover affects anything we've said, except to remind you that you have to stay under HDHP coverage for the 12 months following this rollover or be penalized for "failure to maintain HDHP coverage" (one of those little gotchas). Hopefully, this is not an issue for you.

@dmacaroon