Contributed and used both FSA (spouse) and HSA (mine) in 2020. How to fix?

[k3offline]

We used FSA completely and HSA (has employer match) partially in 2020.

How do I fix this while filing taxes? Where do I report these?

[SamS1]

The FSA is pre-tax dollars used for medical expenses.  Expenses are normally submitted for reimbursement through your third party FSA plan administrator.  There is no tax impacts for submitting or receiving payments as spouse's salary has been lowered by the amount elected for the FSA.  

The amounts paid through taxpayer's HSA are reported to you on 1099-SA with deposits reported through your W-2 with code W in box 12.  These amount are also deposited to your HSA account with pre-tax dollars.  Unless you doubled dip and paid the same healthcare expense from both plans, there is no additional reporting needed. You should have received the 1099-SA for any distributions made in 2020.   After you have logged in and are in your return:

• Go to Search at the top of the screen.
• Enter Form 1099-SA in the search box. 
• You will see a Jump To function that will take you to the 1099-SA input screens. 
• Then add the 1099-SA in screens that follow.

There you will enter your HSA information.  Again, no entries in TurboTax for the FSA.

[k3offline]

Thanks. I never double dipped (never expensed same expense on both FSA and HSA).

My understand so far was that we are not allowed to have both FSA and HSA. And if I do, my complete HSA would be considered as excess contribution would need to be withdrawn (which is taxable) to avoid any penalty.

Guess my understanding was wrong. Based on your response, there is no tax implication for having both FSA and HSA without double dipping.

I did receive 1099-SA. will add.

Thanks.

[SamS1]

@k3offline I need to clarify my FSA and HSA response.  In order to have both an HSA and FSA  coverage in a family unit, the FSA needs to be a specific purpose FSA.  In other words the FSA can only be used for eligible vision or eligible dental expenses exclusively 

For your HSA account, you can only be covered by a HDHP.  Your spouse's FSA would be considered additional medical coverage other than the HDHP, as their FSA would be able to pay all family medical expenses.  

That being said, assuming spouse's FSA coverage includes all family medical expenses,  your 2020 HSA contributions would need withdrawn by the filing deadline of your return or pay a 6% excise tax on your 2020 excess contributions.

The excise tax applies to each tax year the excess contribution remains in the account. You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
• 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 excise tax is reported on Form 5329.

Click here for more information from Publication 969 that discusses HSA, FSA, HRA

[Edited 3/15/21 3:40 PDT]

[k3offline]

Thanks. In my case, I contributed $7100 in 2020. Out of which 1550 was already distributed for medical expenses. So I was allowed to only withdraw the remaining 5550.

should I use 7100 or 5550 as taxable income? I’m guessing it should be 7100. Correct?

where do I enter these in TurboTax? Is there any section for HSA excess contribution? 

[BillM223]

"should I use 7100 or 5550 as taxable income? I’m guessing it should be 7100. Correct?"

No, let TurboTax be your guide. 

You will need to do the HSA interview, that group of screens related to HSAs. To get there, do a Search (upper right) for hsa and click on the jump-to link (Mac users must find HSA in the Topics List).

On the first screen check off who had an HSA (the HSA belongs to the individual so each of you could have had one).

Proceed through the HSA interview. On the screen where it asks "Did [name] have HDHP coverage at any time during the year?", answer NO. This is because the existence of the FSA conflicted with the HDHP coverage so it's as if you didn't have any.

Shortly thereafter, TurboTax will tell you that you have a $7,100 excess contribution, and how much will you withdraw by May 17th (assuming that they do what they did last year when the due date was extended).

TurboTax will automatically add the $7,100 to line 8 on Schedule 1 (1040) so please do not enter this amount yourself any place on the return.

Are you saying that you have already withdrawn the $5,550? Did you tell the HSA custodian that this was for "excess contributions"? This is important so that the HSA custodian will do their paperwork correctly.

OK, tell TurboTax that you will withdraw $5,550 by the due date of the return.

Then the HSA should send you a check for the $5,550 plus any earnings associated with it. At the end of 2021 or in early 2022, you will get a 1099-SA with a distribution code of 2 and the amount of earnings in box 2, which you will enter into your 2021 tax return. 

As for the rest of the $7,100 ($1,550?), this will carryover as an excess contribution to 2021. Form 5329 will be added to you and you will be penalized 6% of the $1,550.

For 2021, you will have to decide what you are going to do (well, have already started).

If either one of you is covered by a general-purpose health FSA, then you cannot contribute to an HSA. This is because if one spouse has the FSA, the other spouse cannot opt out of it (unlike regular health insurance where you could choose to add in your spouse or kids).

I do not know when sign-up dates are for the FSA, but if you can terminate the FSA at some point during the year, you may be able to enjoy HDHP coverage without the conflicting coverage which would permit you to contribute to the HSA.

If you do resume HDHP coverage in the future with no conflict, then you will be able to "use up" that carryover by applying it to the annual contribution limit. That is, you would reduce your regular contributions by $1,550 so that your regular contributions plus the carryover would come in under the $7,100 (or whatever the limit is for that year).

OK?

[k3offline]

Thanks. I followed the steps you provided. The turbotax says that I should withdraw the full $7100. But my HSA provider says that I cannot withdraw more than 5550 (since 1550 was already distributed to me in 2020).

They also mentioned that they get several calls from their customers (who also use Turbotax) with similar question.

I too feel that Turbotax is showing incorrect information.

How can I withdraw $7100 when I have only $5550 left (7100-1550) in my HSA?

I feel that I should be withdrawing only $5550 from HSA. But report 7100 as excess contribution and pay taxes on them.

Please clarify.

Thanks

K

[BillM223]

TurboTax said that you had an excess contribution of $7,100, right? On the same screen, did it not ask you HOW MUCH of the excess you would be able to withdraw by the due date of the return?

There should be three choices: 

1. The entire excess

2. part of the excess (if you check this, it will ask you how much you can withdraw)

3. none of the excess.

This screen appears near the end of the HSA interview (after you have indicated what kind of HDHP coverage you had). It will appear to look something like this:

Do you see where to enter the 5,550? Where the 0 is under the 7,100.

[Opus 17]

@k3offline 

There are two consequences for contributing an excess amount. First, the excess is added back to your taxable income, and second, there is an additional 6% penalty.

$7100 is your excess contribution.  That amount will be added to your taxable income because it was not allowed to be contributed to the HSA tax free.

Then, there is a 6% penalty based on the amount of excess contribution that remains in your account at the end of the year, or your account balance at the end of the year, whichever is lower.  In your case, if you withdraw the remaining $5500 as a return of excess contribution before the tax filing deadline, then your balance will be zero and you will not be charged the additional 6% penalty.

[k3offline]

Thanks. The balance for 2020 (after excess removal and distributions) is zero. 

I do see the screen you mentioned. If I enter 5550 in the box, will Turbotax calculate 6% penalty on the 1550? 

Shouldn’t TurboTax see that I already have a distribution of 1550 ( from my 1099-SA that I entered) and ask me to withdraw 5550?  

[Opus 17]

---

@k3offline wrote:

Thanks. The balance for 2020 (after excess removal and distributions) is zero. 

I do see the screen you mentioned. If I enter 5550 in the box, will Turbotax calculate 6% penalty on the 1550? 

Shouldn’t TurboTax see that I already have a distribution of 1550 ( from my 1099-SA that I entered) and ask me to withdraw 5550?  

---

I haven't set up this specific test, but there should be some way that Turbotax captures the ending balance of the account, since it is used on form 8889 to determine if a penalty is required.  I would just run the entire program and see what happens.  It may be that when you enter that you will only remove $5500, that will trigger a separate penalty interview, where you will be asked to enter the ending balance after removing the excess.  (Turbotax's interviews often follow the tax forms and the HSA excess is calculated on form 8889, but the penalty is calculated on form 5329, so there might be two different interview sub-sections. )

[ESLJ]

This has been the only helpful thread I've been able to find anywhere on how to fix this issue.    Thank you!

In addition to withdrawing the current year's HSA contributions before the tax filing due date, how would one go about fixing excess HSA contributions in a prior year?   I see my HSA provider has a field for "tax year" on their excess distribution form.  I can pull out excess from past years now and have it all taxed (and penalized) as "other income" in 2021 or do I have to go back and amend a prior return?       

[Opus 17]

@ESLJ 

The only way to withdraw excess from older years is to withdraw it from the account NOT for medical reasons, and pay income tax plus a 20% penalty. Supposing you had $2000 of medical expenses and $3000 of excess contributions.  You would withdraw $5000, report the expenses, and pay tax and penalty on the excess withdrawal.  

This rarely makes sense, since the penalty for leaving the money in the account is 6% per year while the tax plus penalty could be 44%.  Maybe if you are young and the excess is small and you want to clear the mistake so it doesn’t hang over your head.  

The other way to clear the penalty is to spend the account down to zero for medical expenses, since the penalty is 6% of the excess or 6% of the account balance, whichever is less.  

If you stopped making contributions and spent the account for medical expenses, that would clear the excess then you could start making new contributions in the future.  I don’t know which would be best for your situation.  It would depend on your age, how much you have saved so far, and your expected future medical needs.  

[allosaur83]

@BillM223 Thank you for this answer! It's the best answer to this problem I could find online anywhere.

One clarification: if my wife already had a balance in her HSA going into the year (before we had overlapping FSA and HSA) and she took disbursements for medical expenses, does that change what we should do?

She had a balance of (say) $8000 going into the year, contributed $7000 to it, and took dispersments of $4000 for medical expenses. She isn't allowed to contribute to the HSA, so she needs to withdraw the $7000 she contributed and pay taxes on it. But what about the $4000 in disbursements? Do we need to pay taxes or penalties on that, too, even though she already had a balance from prior year contributions? Or do we need to pay the HSA back for those expenses or something? 

[HopeS]

No the distributions from an HSA that are used to pay qualified medical expenses aren't taxed.

HSA distributions used for anything other than qualified medical expenses are not only taxable, they're subject to an additional 20% penalty if you're not disabled or are under the age of 65. You should receive Form 1099-SA showing the distributions.

After you enter your 1099-SA, we'll ask Did you spend all the money you took out on medical expenses? If you answer Yes, the entire distribution in box 1 of your 1099-SA is nontaxable.

However, if you answer No, the portion that wasn't used for qualified medical expenses becomes taxable income. This income appears on Form 8889, line 16, and Schedule 1, line 8. The 20% additional penalty, if applicable, will show up on line 17b of your 8889 and Schedule 2, line 8.

Please see additional information in the link below:

Excess HSA Contribution

@allosaur83