HSA excess contribution still showing after removal of excess contribution

[a908234]

Hi, hoping to get some help with an HSA situation.

In 2022/2023, I made the maximum contributions to my HSA ($3650/$3850) via employer contributions.

In early 2024, I learned that those contributions were ineligible.  I removed the 2023 contributions before Tax Day and amended my 2022 return to reflect the excess.  So for my 2022 and 2023 returns, I had $3650 excess.

By the time I realized this, I'd already contributed to my HSA for 2024, which I was eligible for ($4150).  I then distributed $3650 worth of 2024 contributions as excess.

In summary, I have the following for 2024:

• $3650 excess carried over from 2022 -> 2023
• $7500 = $3850 (from 2023) + $3650 (from 2024) of returned excess contributions
• $4150 of new employer contributions

So my net contribution for 2024 should be only $4150.

When I try to enter my 1099-SA, it still shows that I have a carried-over balance.  Looking at Forms 5329 and 8889, the excess contribution hasn't affected either the $4150 new contributions or the $3650 carryover, nor is there any tax levied on the returned excesses.

My 1099-SA has a distribution code of 2 (box 3).

How can I set the forms to correctly reflect that the return of excess should balance out the contributions?

Thanks in advance.

[dmertz]

"By the time I realized this, I'd already contributed to my HSA for 2024, which I was eligible for ($4150).  I then distributed $3650 worth of 2024 contributions as excess."

This is the problem.  Only actual excess contributions are eligible for return and none of the $4,150 deposited as a 2024 contribution was actually an excess contribution for 2024 on its own.  Because of this, TurboTax does not allow you to claim that any of the 2024 contribution was returned.

Unfortunately, there is no good workaround for this situation.  Technically the $3,650 distributed constitutes an ordinary distribution rather than a return of contribution (since no return of contribution before the due date of your tax return was actually permitted).  You could report it as an ordinary taxable distribution (code 1 in box 3 with nothing in box 2) and provide explanation with your printed and mailed tax return, but that would subject you to a 20% extra tax on the $3,650.  The only other alternative I can think of would be to change the amount entered with code W in box 12 on TurboTax's 1099-R form to show only $500 contributed for 2024, but I can't say that that the IRS would agree with that.  It would disagree with the amount shown on the Form 5498-SA issued by the HSA custodian and would disagree with the amount shown on the W-2 provided to the IRS by your employer.

[a908234]

Thanks @dmertz . Not sure how I missed your reply.

Since it's still before the tax filing deadline, could I just contribute an additional $3650 to my HSA? Then there would actually be an excess contribution for my return of excess to correspond to.

[BillM223]

What should have happened (sorry but I am having trouble following the sequence of events) is this:

When you amended your 2022 return, the entire $3,650 was added to your Other Income and you were assessed a 6% penalty on the carry over to 2023.

In TurboTax, the carryover from the previous year is included in line 2 (form 8889) as a "personal contribution" of the current year. So the carryover of $3,650 was put in line 2 of the 8889 for 2023. NOTE: up until recently, the carryover was added invisibly to line 2, that is, it did not print but the rest of the arithmetic assumed it was there.

I think that you withdrew the excess $3,850 contributions for 2023, because you had a total of $7,500 in excess, and $3,850 were for the current year, so the $3,850 could be withdrawn as excess contributions for 2023. Then the $3,650 was taxed 6% again and rolled over to 2024.

Again, in 2024, the rollover ($3,650) is placed (at least in our imagination) on line 2 of the 8889. You contributed $4,150, for a total of $7,800 in contributions, and the excess contributions reported as $3,650, right?

As dmertz noted when you took a distribution of $4,150 in 2024, you told the HSA custodian it was an excess contribution (so the 1099-SA code was 2 in box 3), but to TurboTax it was not a withdrawal of excess since none of the $4,150 contributed in 2024 was in excess, and you cannot withdraw the excess from a prior year return this way.

So, what to do...

Stop contributing to your HSA ;-).

No, seriously, don't add another $3,650 this year. Are you going to be under HDHP coverage for all of 2025?

If so, let's try this:

1. Contact your HSA custodian and report that the withdrawal of $4,150 in 2024 was a Mistaken Distribution. You will have to complete a form and send them a check for $4,150. Grovel if you need to because they don't have to accept this request. If they accept this, that cures your 1099-SA problem. (you can just ignore the 1099-SA that you got)

2. Contribute only $650 this year. Remember that you have a carryover of $3,650 to line 2, and if you don't contribute any more than $650 (this is both you and your employer combined), then your total contributions will be $4,300, which is exactly the limit for 2025.

3. You will be dinged another 6% for the carryover of 2024 to 2025, but that really can't be avoided, unless you want to start changing forms, which is, as dmertz pointed out, how you come to the attention of the IRS.

4. When the carryover of $3,650 is used up in tax year 2025, the carryover is gone - you will not see it any more.

5. Starting in 2026 (tax year, that is, in early 2027), you can start fresh, contributing the max again.

Does that work for you?

[a908234]

Thanks @BillM223 .

Everything that you said up to "so, what to do..." is correct, except that I took a return of "excess" of $3650, not $4150.

I did contact my custodian and try to do a return of Mistaken Distribution, but I was told that Return of Excess is irrevocable and the 1099-SA was correct as is. They wouldn't budge on that.

So at this point, I'm most concerned with how to reconcile this $3650 return of excess that I wasn't supposed to take. I've already accepted that I'll have to take the 6% penalty on the carried over $3650 for another year. I'm fully covered by HDHP for all of 2024 and 2025.

My idea about the extra contribution was for 2024. I would contribute an additional $3650 for TY 2024 before the tax deadline. The net result I'm imagining for TY 2024 is:

• $4150 contribution limit
• $3650 carried over from previous years
• $4150+$3650=$7800 new contributions in 2024
• Return $3650 of excess contributions, for a net new contribution of $4150?
• Continue to carry over $3650 at 6% penalty

And then I would deal with the carryover in future tax years by not contributing the maximum.

[BillM223]

Sadly, the HSA custodian does have the option to accept your report for dealing with a Mistaken Distribution, as IRS Notice 2004-50 strongly suggests.

If you look at Questions 37 and 76, you will see that it is optional for the HSA custodian to accept the request for a Mistaken Distribution (which is why I suggested that you grovel, if need be), but the custodian could accept your statement that the distribution was a mistake, as it clearly was. I don't see anything that suggests that the return of an excess contribution withdrawal is "irrevocable". It's only their policy, not the IRS's that makes it so.

OK, to your point. Since you have not filed your 2024 return yet and since it is before April 15th, if you go ahead and contribute $4,150 now, you will have created the excess of $7,800 for 2024. Now you could argue that you can withdraw $4,150 (all that TurboTax will allow anyway) - which you already have and have the 1099-SA to show for it.

Then, the residual $3,650 will carry over to 2025, and you already understand that you will limit your HSA contributions in 2025 to enable the carryover to be used up.

I can't say that this is the "right" way, but because much of what is done in HSA processing is on an annual basis, had you made the contribution first and withdrew the excess second (i.e., the "normal" way), you would have ended up with exactly the same paperwork.

So, it's your choice. If they catch on to this and audit you, then you MAY be forced to declare what actually happened (i.e., the 1099-SA was actually a distribution for nonmedical expenses subject to the 20% penalty). But if it is a chance that you want to take, then do what you suggested - contribute another $4,150 NOW, and enter it into TurboTax now as a personal contribution, to trigger the excess warning of $7,800.

@dmertz  do you have a thought on this?

[a908234]

Thanks @BillM223 .  Just to clarify, do you mean I would contribute an additional $3,650 now for 2024?  That would be commensurate to the distribution I took.

[BillM223]

No, I meant $4,150 for your 2024 contribution.

First I want to clarify that we are talking about an HSA contribution for 2024, made in early 2025. This is OK, but you HAVE to make sure that the HSA custodian understands this because their default behavior will be to put it under 2025. You have until April 15th to make this contribution.

Let's think about it, if your HSA contribution limit for 2024 is $4,150 and you want TurboTax to declare an excess of $3,650 (to match your 1099-SA), then your total contributions need to be $7,800, right? I did misstate that above...you do want to declared excess to match the 1099-SA that you already have.

So if your carryover is $3,650 (and secretly on line 2 as a "personal" contribution), then you need to add in $4,150 in additional contributions, so TurboTax will declare an excess of $3,650, to match your 1099-SA. I tested tis and it works.

When TurboTax asks you if you overfunded the previous year, you can answer Yes and enter $3,650, even though if all is working, TurboTax will already know this.

Make sense now?

[a908234]

@BillM223 yes, we are talking about an HSA contribution for 2024 made in early 2025.

I think there may be a bit of confusion here since some of the values are repeated.  Let me try to summarize the status of the account again.

1. In 2024, I had $3,650 carried over (call this $3,650-carryover) and $4,150 of personal contributions.  This totals $7,800 already.

2. My RoE was for $3,650.  This is my 1099-SA value.

3. TurboTax still reports $3,650 of remaining carryover balance in Form 5329, Line 48.*  This is because $3,650-carryover wasn't an excess contribution, so the RoE does not count against it, even though it's on Form 8889, Line 2 as a personal "contribution."  This is my understanding based on dmertz's first reply.

In other words, without doing anything additional, my account is currently in the status that you suggest: $7,800 of total contributions ($3,650 of declared excess), $3,650 on the 1099-SA.  But rather than the 1099-SA amount reducing the net contribution from $7,800 to $4,150, I continue to have a carryover balance.  So, the 1099-SA amount is still not accounted for.

When I mention contributing an additional $3,650 in my previous replies (call this $3,650-new), I'm trying to match the 1099-SA amount.  I was thinking I should have the following:

• $11,450 of total contributions ($4,150 + $3,650-carryover + $3,650-new)
• $3,650 on the 1099-SA that cancels out $3,650-new**
• $3,650-carryover as the remaining carryover balance

I would love to have the 1099-SA cancel out $3,650-carryover, but since this isn't possible, $3,650-new would at least provide a new contribution for TY 2024 that matches the declared excess in the 1099-SA.

*Here's the error message I get when trying to have the 1099-SA cancel out $3,650-carryover.  This is based on reporting things as-is.

**If I specify that I made an additional $3,650-new of contributions, then the declared excess is $7,300, of which I am allowed to withdraw $3,650.  This matches the 1099-SA value.

[BillM223]

Wait, that screen says that "Unfortunately, all of your excess contribution is caused by a prior year excess contribution" That's not what we want. Go back and delete the 1099-SA. Then say that you have Self-only coverage, that you had a carryover ("overfund") of $3,650, and that your current contributions are $4,150 (are you making them directly or through your employer?). 

Eventually, you should see this:

Then go back and add the 1099-SA and work through the HSA interview until you see this:

But this statement is not right: "$7,800 of total contributions ($3,650 of declared excess), $3,650 on the 1099-SA." These two numbers don't add up to $7,800. That's why the 2024 contributions need to be $4,150.

For purposes of calculating the excess, please ignore the 1099-SA. The only reason we care about it is because we want TurboTax to generate the excess screen with $3,650. As you can see, the calculation for the excess in TurboTax pays no attention to any 1099-SA (in fact, for most people, the 1099-SA for an excess does not appear until the next year).

If you do things in this order, you should get what you want.

[a908234]

@BillM223 contributions were through my employer.

I'm not following when you say "These two numbers don't add up to $7,800."  They're not supposed to, right?  In order for the $3,650 1099-SA to be a legitimate RoE distribution, the total new contribution should be exactly $3,650 in excess of the limit of $4,150 ($3,650 + $4,150 = $7,800), so that there is an overfunding that exactly corresponds to the 1099-SA distribution.  Not just for the purpose of calculating the excess.

Anyways, I did follow your instructions but still got the same result as before.  Did I miss something?  I'm assuming this relates to dmertz's original comment that the $3,650-carryover amount isn't an excess contribution, and I'd need a $3,650-new contribution to achieve the desired result of corresponding to the 1099-SA distribution.

 

(initially answered no to the next question)

(no, didn't inherit)

($3,650-new would be entered in the last box if contributed)

(no other contributions)

(no medicare)

[BillM223]

My sincerest apologies - in my test, I added the $4,150 as a personal contribution, where as you had it as an "employer" contribution (i.e., through your W-2).

So did you actually contribute the $4,150 through your employer?

If not, then make a personal contribution of $4,150, and my scenario will work.

But if you have already made this contribution through your employer, then we are stuck in terms of justifying that 1099-SA that you have.

So, what to do? 

In any case, you will carry over the $3,650 to 2025, and then use it up as a personal contribution.

As for the $3,650 that you withdrew this year, make up a spreadsheet, and as much as possible pay current year medical expenses (call this X) with that $3,650. Document this in case any one ever asks. Then, when you enter the 1099-SA, change the distribution code to 1 and say that X was for qualified medical expenses while the remainder will be taxed and penalized.

The IRS has never made very clear the idea of taking a distribution BEFORE you incur medical expenses, then paying the expenses off. What the IRS as made clear is that you can take distributions to reimburse yourself for prior year medical expenses - but only those expenses incurred after the HSA was created (generally, the first time money was put in the HSA). 

So if you plan to have a lot of medical expenses this year, or if you had a lot of medical expenses in the past that were paid by you with after-tax dollars (i.e., not reimbursed by insurance or the HSA) that were incurred AFTER your HSA was first funded, then you can make this work.

Otherwise, you will have to bite the bullet, and realize that your 1099-SA was just a mistake, which you will have to pay for if you are ever audited.

So tell me about your recent or soon-to-be medical expenses.

[a908234]

@BillM223 , yes my contributions were through my employer, so I need to justify the 1099-SA.

I first funded the HSA in 2022, though as I've mentioned, I wasn't HSA-eligible until 2024.  I've also been tracking my HSA-eligible expenses since 2022.  Between 2022-2024, I am just shy of $3,650 in expenses.  Adding expenses from early 2025 puts me over the $3,650 threshold.

***

Now that we're on the same page about the $4,150 being through my employer, I do want to revisit the previous idea I mentioned.  Instead of doing the above, could I make $3,650 as a personal contribution for TY 2024?  Then I will have $4,150 (employer) + $3,650 (personal) + $3,650 (carryover) total contributions, of which TT says I can withdraw $3,650.  That's the same amount as the 1099-SA.

(This is what my HSA custodian suggested I may be able to do.)

[BillM223 · Accepted solution]

Yes. 😉

Make a personal contribution of $3,650 (in addition to all the other stuff, the $3,650 carryover and the $4,150 employer contribution).

And THEN, the 1099-SA will work ;-). And next year, the carryover will be gone, and hopefully this will never happen again 😉

[a908234]

Fantastic.  Thanks @BillM223 for working through this with me!

To summarize, I'll ignore what you said earlier about matching expenses to the $3,650 and modifying the 1099-SA to be code 1.

Instead, I'll do an additional personal contribution of $3,650 for TY2024.

This leaves me with a total contribution of $4,150 (employer) + $3,650 (carryover) + $3,650 (personal), of which:

• $4,150 goes towards the annual HSA limit for self-only plan
• $3,650 continues to carry over to TY2025
• $3,650 is a true excess contribution from TY2024, which will balance out the $3,650 return of excess from my 1099-SA, code 2

Any other potential issues I should be aware of?