HSA excess contribution withdrawal not showing up as income

[l141]

In 2022, I contributed the full amount ($3650) to my HSA but it turns out I was ineligible for the entire year. I realized this in May and did an excess contribution + earnings withdrawal ($3700). I then applied that money to my 2023 HSA, filed an amended return and paid the income tax due on the $3650. 

In 2023, I had already been contributing to my HSA for 6 months ($1850) when I realized the above issue (I was eligible for all of 2023). Since I returned/applied my 2022 contributions + earnings to 2023, I've now overcontributed to 2023. Turbo Tax says I have an excess contribution of $1700, which I said I will remove by the filing deadline.

This all makes sense but the $1700 excess contribution isn't showing up in "other income", only the earnings from my 2022 withdrawal are there. My understanding is this year's excess contribution should be listed as income this year and the earnings will be listed as income next year, but that's not what's happening. 

This is what is listed in Turbo Tax:

• HSA employer contributions - $1850 from box 12 W on my W-2
• HSA excess contribution withdrawal - $3700 (1099-SA)
• Contributions personally made not through your employer - $3700 (2022 excess returned/applied to 2023)
• Contributions you personally made but withdrew before April 15, 2024 – $1700 (2023 excess contributions)

I can't figure out what I've entered incorrectly.

[Mike9241]

you paid taxes on the excess in 2022 and should pay taxes on the $50 income in 2023

then that $3700 is a personal contribution for 2023. Not an employer contribution

so we have 1850 employer 3700 personal less 3850 allowed so 1700 is an excess.  the excess comes from the  personal portion and for which you already paid income taxes in 2022 so you don't pay income taxes on that again in 2023

as a matter of fact, you should be getting a $2000 deduction for the personal portion of the HSA contribution in 2023

[l141]

Ahhh, ok that explains it. This totally makes sense now! Thank you 🙂

I do have an additional question. I already did the excess contribution withdrawal for 2023 since I knew exactly how much it would be. When I did that withdrawal I had to specify to my HSA provider the date range for the contributions I wanted to remove. Thinking that my 2022 contribution returned/applied to 2023 was sort of still 2022 dollars I didn't think I could then remove them for the 2023 overcontribution, so I specified to return the money I contributed through my employer in 2023 + earnings. Given that, is still ok to treat the removal as the personal portion? I'm thinking I made this situation a lot more complicated...

[BillM223]

I don't understand why your HSA custodian asked for a date range. The earnings should be done on a Jan 1-date withdrawn basis. When you have an excess for 2022, the excess is handled on your 2022 return, and the earnings are entered on your 2023 return, because normally, the earnings span a multi-year period (2022 to 2023 in this case).

"I then applied that money to my 2023 HSA" - what does this mean? Did you not withdraw the excess so that it would carryover to 2023? How did you apply it to 2023?

If your HSA contributions were through your employer (code W in box 12 of your W-2), this would have been added back to Other Income when discovered by TurboTax. If the excess was from your personal contributions (i.e., NOT through your your employer), then the excess is removed from the amount that would have otherwise appeared on line 13 of Schedule 2 (1040), again automatically. Please do NOT try to adjust your income to allow for this - TurboTax will do it for you.

"Given that, is still ok to treat the removal as the personal portion?" - What does this mean? What is the personal portion of what?

[l141]

I don't know why the HSA custodian asked for a date range either. But that's how it went when requesting the 2022 and 2023 withdrawals. I think maybe that's how they figured out the earnings. Anyway, I had to provide them the date range for when contributions were made, the ones I wanted returned.

As part of the 2022 excess contribution withdrawal, the HSA custodian gave me the option to have it moved/applied to the 2023 contribution year, which I did. I filed an amended 2022 return and paid taxes. I got a 1099-SA for this withdrawal and the earnings show up in other income. I entered this in TurboTax as contributions personally made not through your employer.

I also made HSA contributions through my employer for 2023, but this was before I realized I wasn't eligible in 2022. When I did realize, I did the return/apply of 2022 to 2023, which put me almost to the max for 2023.

When I do the HSA interview in TurboTax, it says I have an excess of $1700 and that I can remove it before the filing deadline. When I say I will, it doesn't give me the option to specify which set of contributions to take it out of, the 2023 employer contributions or the 2022 excess retuned/applied to 2023 (personal contribution). Looking at what TurboTax shows, it's taking the excess out of personal contributions. Unfortunately, I have already done a return of excess contributions from my 2023 employer contributions + earnings (where I had to specify a date range). I don't know how to specify that these are the excess contributions I removed and how to get it to show up in other income. Or maybe it doesn't matter? 

[BillM223]

The IRS has a terminology problem. The HSA excess contributions for the current year (I call it the "Short-term excess") is treated quite differently from the contributions carried over from the previous year (which I call the "Long-term excess"). Since the IRS uses the same term ("excess") it is no surprise that most taxpayers are quite confused on how to deal with them.

The short-term excess must be withdrawn by the due-date of the return (there's an exception, but I won't deal with that now). The long-term excess cannot be withdrawn in the same way. Instead, you must do one of two things to cut off the infinite carryover:

1. In the next year that you have HDHP coverage, you must reduce your usual HSA contributions so that the carryover plus these usual contributions will be less than the current year annual HSA contribution limit. In this way, the carryover will be put on line 2 (8889) as a personal contribution, and used up (so no more carryover).

2. You make a distribution, and when you receive the 1099-SA and enter it in TurboTax, you declare that the amount equal to the carryover is NOT for qualified medical expenses. This will add the carryover amount to Other Income, and add a 20% penalty, but will cut off the carryover problem.

"it doesn't give me the option to specify which set of contributions to take it out of, the 2023 employer contributions or the 2022 excess retuned/applied to 2023 (personal contribution). " No, it doesn't for the terminology reasons above - you can't treat these excesses the same way, the same name notwithstanding.

"As part of the 2022 excess contribution withdrawal, the HSA custodian gave me the option to have it moved/applied to the 2023 contribution year, which I did. I filed an amended 2022 return and paid taxes. I got a 1099-SA for this withdrawal and the earnings show up in other income. I entered this in TurboTax as contributions personally made not through your employer."

TurboTax makes the income adjustment automatically for excess HSA contributions, either adding it to line 8f of Schedule 1 (1040), or by removing it from line 13 of Schedule 13 of Schedule 1 (1040). Now, I am afraid you may have made a manual adjustment, too, causing you to overpay your tax.

Please check your 2022 tax return and see if there are automatic adjustments (as I just described) by TurboTax as well as manual adjustments by you.

Let me know...

[l141]

I see, yes this terminology is very confusing. 

Ok, so I've withdrawn the short-term excess for this year already. For the long-term excess, I withdrew that by the extended filing deadline in my amended taxes for 2022, so I dealt with it when it was short-term? I thought since I then redeposited into my HSA as a contribution for the next year (2023), it wouldn't incur the 20% penalty.

My amended 2022 taxes show $3650 on Schedule 1, line 8f.

[BillM223]

"For the long-term excess, I withdrew that by the extended filing deadline in my amended taxes for 2022, so I dealt with it when it was short-term?" - Did you file an extension? Then OK.

"I thought since I then redeposited into my HSA as a contribution for the next year (2023), it wouldn't incur the 20% penalty." - You didn't physically redeposit it into your HSA, did you?

The way it works is that a short-term excess turned into a carryover, is carried over to the next year as a "personal" contribution (line 2 on form 8889). You don't actually put it back into your HSA. However, if you have HDHP coverage in the next year, TurboTax will try to apply this personal contribution to your HSA next year, as IF you had contributed it in the next year.

If this succeeds (because you didn't create a new excess), then the carryover is used up, and all is good.

The 20% penalty is ONLY when you do the worst case solution. See "Fixing Long-term excess" below.

***Notes***

/* Fixing the "short-term excess" */

You must remember to (1) tell TurboTax that you will withdraw the excess in a timely manner, and (2) call your HSA custodian to request the "withdrawal of an excess contribution" (use this phrase) along with the earnings. The custodian should (1) send you a check for the excess and the earnings, and (2) send you a 1099-SA with a distribution code of '2'. NOTE: the 1099-SA will be entered on next year's return, so don't wait for it.

Also NOTE: the excess will be automatically added to Other Income (line 8f of Schedule 1 (1040) or line 13 on Schedule 1 (1040) is reduced) - please do not do anything to report the excess on your 2023 return - TurboTax has already handled it.

/* Fixing the "long-term excess" */

Sometimes, of course, the HSA is empty of dollars because they have been spent already.

In this case, the short-term excess is converted to a long-term excess and is carried over to the next year. Like for the short-term excess, the excess is added to line 8f (see above) or removed from line 13 (see above) AND a 6% penalty is charged on the amount carried over (usually).

However, you can't "cure" the long-term excess by withdrawing it in the same way as the short-term excess.

The cheapest and easiest way is to reduce the HSA contributions for the next year by the amount of the long-term excess carried over. This carryover will print on Line 2 of form 8889 as a "personal" contribution. So if you reduce your regular HSA contributions, the carryover amount will be used up and the carryover will disappear.

Otherwise, you have to make an HSA distribution, and when you enter the 1099-SA, say that it was not for qualified medical expenses. This will add the carryover to Other Income, and add a 20% penalty to your return.

But, at least the carryover will be ended.

[l141]

I didn't explicitly request an extension, but I was under the impression that you could do an excess contribution withdrawal and file an amended return during the 'automatic 6-month' extension for corrective action. Maybe this didn't qualify?

I did 'redeposit' the 2022 excess into my HSA for 2023. It was all part of the same transaction with the HSA custodian, part 1 - they removed the excess from 2022 and then part 2 - they redeposited it as a contribution for 2023. This was during the 6 month extension period above. In my amended return I paid income tax on the excess withdrawal so I thought this would be considered a personal contribution for 2023.

I think I now have a short-term excess from my 2023 employer payroll contributions. I did request the 2023 excess as a withdrawal of excess contributions and they took out the excess + earnings. I did get a check for that, I did not redeposit that. I haven't gotten a 1099-SA for that yet. I understand the 1099-SA will be entered on next year's return. Does that mean both the original contribution amount + earnings will both be handled on next year's return? I thought the contribution would be income on this year's return and the earnings would be income on next year's return.

Right now the $1700 excess isn't showing up on line 8f Schedule 1, only the earnings from from the 2022 excess withdrawal - $50. Line 13 on Schedule 1 shows $2000. TurboTax does say I have an excess contribution of $1700, which I said I would (and did) withdraw, but this is removed from my 'personal' contributions not my employer contributions, which is where I took them from. 

It seems in trying to fix this situation I've made it a lot worse. Is my 2022 excess contribution actually a long-term excess? Should I have paid the 6% penalty on that money last year? Since I took out the 2023 employer contributions does that help 'use up' some of the 2022 excess? Are the contributions + earnings I took out from my 2023 employer contributions actually a regular distribution and I owe the 20% penalty (and income tax?)? 

I appreciate your help with this. I thought I mostly understood how to handle this situation, but it's clear to me now that I have no idea what I'm doing.

[BillM223]

First, I would file an extension to be on the safe side. Some issues in HSAland are not well defined, so why take chances?

OK, let's start over on the excesses.

You said that you made excess contributions in 2022 because you realized that you weren't eligible for any part of 2022. OK, that's fine.

Then you said that you amended your 2022 return. What did you amend? I assumed that you amended the part about the HSA contributions. Is that what you did? 

After you amended your 2022 return to remove the contributions, did you reimport your 2023 tax return from the amended tax file? From what you've said, it sounds to me that if you did this, then your 2023 excess would go away...and you could declare victory.

So tell me what you amended in 2022 and if you reimported 2023 from the amended 2022...oh, and remind me if you are using the Online or desktop products, since the reimporting is done differently between the two products...

[l141]

Very true, I'll file for an extension.

Yes, my 2022 amendment was just to report the HSA excess contribution withdrawal as income. I don't recall exactly what TurboTax asked but on my 2022 amended tax form, I see that $3650 was added to my adjusted gross income and that I paid additional tax on that amount. It also lists $3650 on line 8f of Schedule 1 and on  line 9 of Form 8889. 

I don't think initially reimported my 2023 tax return from the amended 2022 return. But I just did that or tried to, reentered all the info, and got the same results. I'm using the online version of the software. Maybe I'm not doing it correctly?

I did receive a 1099-SA for the 2022 excess contribution withdrawal which I entered in the HSA interview. That was the $3650 + $50 earnings.

Here are my numbers from the 2023 'Your HSA Summary':

Deduction - $2000 

Total distributions - $3,700 

Taxable distributions - $0 

Taxable earnings on excess contributions - $50 

Tax-free employer contributions - $1,850 

Excess employer contributions withdrawn - $0 (I feel like the $1700 I'm over and took out should go here)

And TurboTax says I have an HSA excess contribution - $1700

[BillM223]

Remind me, did you have access to the full annual HSA contribution limit for this year (2023)? That would be $3,850.

You had $1,850 with the code W amount in box 12 on your W-2. That would leave room for $2,000 in personal contribution. You see "Deduction - $2000 "? This $2,000 should show up on line 13 on Sch 1 (1040).

However, I think your carryover was larger than $2,000, right? Maybe it was $3,700? So, $2,000 to be used up this year and $1,700 to report as excess.

"Excess employer contributions withdrawn - $0 (I feel like the $1700 I'm over and took out should go here)" - If my forensic reconstruction is correct, then the excess was not in the employer contributions but in the carryover, which is counted as a personal contribution. I believe that TurboTax asks you where the excess came from when it starts talking about the excess.

Anyway, since it was not employer contributions that was in excess, the excess was not added to Other Income. Instead the amount on line 13 (Sch 1 (1040) is reduced.

Remember to call the HSA custodian to ask for a "withdrawal of excess contributions". 

If TurboTax did not object to you withdrawing the excess this year, then you are OK. However, you need to look to see if you have a form 5329 again. If you have an entry on line 48 on your 5329, then you are carrying over an excess to 2024.

If you have an excess on line 48, then this will be reported as a personal contribution (line 2 on the 8889), so make sure that you reduce your HSA contributions so that the $1,700 will fit along with it under your 2024 annual contribution limit. This is the first option if "Fixing the Long-term excess". 

[l141]

Yes, sorry. I've memorized this by now and forget that you don't have all the info. I was ineligible for all of 2022 and eligible for all of 2023, so I was able to make the full contribution this year of $3850.

I think you are right that my excess was ultimately from my personal contribution (the 2022 excess contribution withdrawal/redeposit to 2023 - $3650 + $50 earnings for a total of $3700). TurboTax did say I could remove the $1700. I clicked the button that I would and looked at the tax forms, I don't see anything coming in from Form 5329.

I think where I went wrong is I took an excess contribution withdrawal from my 2023 employer contributions, not the 2022 withdrawal/redeposit to 2023 (personal contribution). This was that whole date range thing I mentioned earlier. So I don't know where/how to report this. I figured the IRS probably cares which contributions I removed and wants the tax on the employer stuff. But maybe it doesn't matter as long as money came out? And I did already pay tax on $3700 of it. It doesn't look like Form 1099-SA specifies which particular $ were removed, just that X amount was removed.

If this does matter and I don't know if this is ok, but do you think I could redeposit the '2023 excess contribution withdrawal from employer contributions' and do an excess contribution withdrawal from the 'personal contributions'? It seems like that would 'fix' the issue, but I'm hesitant to do it since me trying 'fix' stuff is what got me into the current mess. I don't want to have another big headache next year...

[BillM223 · Accepted solution]

No, the 1099-SA doesn't specify which kinds of contributions it is from.

Deduction - $2000 

Total distributions - $3,700 

Taxable distributions - $0 

Taxable earnings on excess contributions - $50 

Tax-free employer contributions - $1,850 

Excess employer contributions withdrawn - $0 (I feel like the $1700 I'm over and took out should go here)

You said that your employer contributions in 2023 was $1,850. There it is in the HSA Summary. It is being utilized in 2023 - so leave it alone.

Your excess from 2022 was $3,700, right? $2,000 of it has also been utilized in in 2023 as a personal contribution, and this results in a $1,700 excess, which you are withdrawing.

Right now, you are in a great position:

1. HSA excess has been straightened out

2. There is no carryover to 2023.

"but do you think I could redeposit the '2023 excess contribution withdrawal from employer contributions' and do an excess contribution withdrawal from the 'personal contributions'?" - From what I see, you already did this (take the withdrawal from personal contributions).

Please don't do anything more. Declare victory and see you next year...

[l141]

Ok whew, what a relief! Thanks so much for sticking with me and explaining everything, I really appreciate it.