How do you withdraw the excess contributions from your HSA?

[HelenaC]

Contact your H.S.A. administrator. The IRS is lenient on fixing excess HSA contributions. They provide two options of correction: removal or future application. 

Option 1: The first removes the HSA contributions in the tax year and avoids a penalty – no harm, no foul. You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.

1) You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
2) You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

Option 2: Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6% per year penalty. The mechanism that allows this is the deduction, since next year you won’t actually deposit the contribution (it is already there), you will just deduct it on Form 8889. As an example, if you have excess contributions in 2016, you can let them sit there until 2017 and then use them as your contribution for 2017. Rolling an excess contribution to a future year is allowed per the IRS Form 969:

You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the following two amounts:
1) Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
2) The total excess contributions in your HSA at the beginning of the year.

To read the whole article, click on How to Remove Excess Contributions to an HSA | HSA Edge

[samjasamja]

I overpaid in 2017, paid the excise tax when I filed, and so now this year the excess, because it was less than my max minus my contributions, is being deducted. Do I get to forget about this excess now? No more excise tax? Or because I haven't removed it, will it still haunt me?

[AS3]

Need some clarification here. If one is rolling over to the next year say 2020 from my 2019 contributions, where should one document this in TT?

If we need to check the 'withdrawn before due date' box, why is it being treated as income in the year 2019 and being taxed right now?

[AS3]

Need some clarification here. If one is rolling over to the next year say 2020 from my 2019 contributions, where should one document this in TT?

If we need to check the 'withdrawn before due date' box, why is it being treated as income in the year 2019 and being taxed right now?

[#5]

Need some clarification here. If one is rolling over to the next year say 2020 from my 2019 contributions, where should one document this in TT?

If we need to check the 'withdrawn before due date' box, why is it being treated as income in the year 2019 and being taxed right now?

[BillM223]

The way it works is this:

When TurboTax detects that you have excess HSA contributions, if they were made through your employer (code W in box 12 on your W-2), then it is immediately added back to your federal income as Other Income on line 8 of Schedule 1 (1040).

That is because the HSA contributions in box 12 were removed from Wages in boxes 1, 3, and 5 before your W-2 was printed, so any disallowed contributions (the excess) needs to be added back so that you pay tax on it.

Then TurboTax asks you if you will withdraw the entire excess before the due date of the return (July 15th this year but usually April 15th). Any excess that is not withdrawn will be carried over to next year and penalized at a 6% rate.

Then, next year, your HSA contribution limit is reduced by this carryover amount, so if you are smart, you will reduce your HSA contributions - or else you will just generate another excess and be penalized again.

Note that this reduced HSA contribution limit won't be shown on your return or in TurboTax (although TurboTax will know it if you did your return with TurboTax last year) - you just have to remember this yourself.

If you did not use TurboTax in the previous year, when TurboTax asks in the HSA interview "Did you overfund your HSA last year?", answer "yes" and enter the amount that was carried over - not the whole amount of the excess but only what was carried over.

If you withdraw the entire before the due date of the return, then the matter if over and done with - TurboTax has added it to Other Income, and that's all that needs to happen (except for you contacting your HSA custodian and actually requesting a "withdrawal of excess contributions").

Oh, in the year after you request the withdrawal of the excess, you will receive a 1099-SA with the earnings that your excess made while in the HSA in box 2 of the 1099-SA - enter this into your return.

Does this answer your questions?

[tvandinh]

Hi,

I filed the income tax 2019 and found out that my wife is illegible for HSA when she got covered by medicare. This will make my HSA contribution for 2019 over the limit. 

To fix it by using the option to roll over the excess to next year, I tried to file an amend for 2919 to show the HSA contribution excess in turbo tax software. Because the July 15 passes, I have to select not to withdraw the excess and acknowledge for the 6% excise tax. However, at the end I see turbo tax move my excess amount to other income category and the tax increase is much more than 6% excise tax.

What is step that I am missing to tell turbo tax not to move the excess amount to the other income category.

Thanks

-- TD

[AS3]

@BillM223 

I still haven't gotten this question resolved, I am afraid :(

 When you said

" If you withdraw the entire before the due date of the return, then the matter if over and done with - TurboTax has added it to Other Income, and that's all that needs to happen (except for you contacting your HSA custodian and actually requesting a "withdrawal of excess contributions"). "

Does adding this excess contribution to 'Other income' mean I paid tax on it (this excess contribution) in 2019 ?

[noodad]

@AS3 I struggled with this exact same question for a while too. When I followed it all through, I think @BillM223 has given us the right answer.

What it means is that yes, you were taxed (or are about to be) taxed on that income for the year that your you made that HSA contribution via your employer.

I too thought I shouldn't be taxed on it, since I withdrew the excess contributions. The problem is, when you (and I too!) made that HSA contribution via your employer, your employer deducted that from your taxable income for those pay period(s), so each dollar you contributed reduced your taxable income by a dollar on the W-2 for the year. The fact that you withdraw the excess contribution has no effect on that. So, yes, now it is as if you never contributed that money to your HSA in the first place ... but this means now you're no longer entitled to that reduction in taxable income that's still on your W-2.

So, it has to get added back in as taxable income (I would argue that it should be added back in on the "Wages" line on 1040 Line 1, but I guess the IRS directs us to "Other income" instead so we can add that note about excess contribution and Form 8889.

On the bright side, even though you still get taxed on it, by withdrawing the excess contribution you do wind up saving yourself the penalty you would otherwise pay had you not withdrawn it. And you still get to keep that withdrawn contribution, so it all balances out.

[gooseontheloose]

@BillM223You seem super knowledgeable, and my question is related here, so hoping you can help.

I went ahead and edited this reply because I put my question into it's own thread:

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/excess-contribution-to-hsa-years...

[pmHSAblues]

I have been trying to figure out how to get the never ending penalty out of my taxes for a couple of years.  I had thought I had corrected our family contribution this year, but I found out that we are both on individual plans and that didn't apply.

So, the way to clear this is to do a non-qualified withdrawal from the plan.  The administrator should have a form for correcting over-contributions.  The key in all of this is that the administrator should issue a 1099-SA form with the 2 box checked showing the amount plus earned interest (I haven't got mine yet so this is theoretical).

The hard part is that TurboTax gives you ZERO clue or documentation on how this comes back out.  I finally did way more research into IRS docs than I should have had to do after buying TurboTax and figured out where the correction should be entered in the IRS form.  The problem is that everybody including myself expects the "interview" to ask the question about this.

I finally found a new trick with TurboTax.  I went to the form display and selected the line where I thought the correction should go (in this case for 2021 Form 8889 line 14b) and right clicked on the cell and selected "Data Source".  That selection popped up a box that explained that the data came from a smart worksheet.  Then I located that worksheet and right clicked on the worksheet and selected "Data Source".  This popped up a box pointing to form 1099-SA Box 1 (when box C distribution code is 2).  

So that's my theory and how I developed it.  To get the excess contribution out of your return you need to have the 1099-SA form for withdrawal with the proper indication.  This is entered separately in TurboTax in the income section which is why it doesn't appear in any of the dialogs or helps. 

According to my administrator I'm not going to get my form until well after the filing deadline.  At this point I'm just going to file and pay the penalty again and then hopefully submit an amendment.

I hope this answers the original poster's question.  I have seen this question a lot and the answer seems to get danced around in the forums and the application is worse than unhelpful ["O I'll withdraw the excess. Check.  Psych - it's too late].  A mention of the 1099-SA for excess contributions would be really helpful by Turbotax in that particular spot.