HSA over contribution AND not eligible - different years, different issues

[jenn-lan]

Best way to handle this?  Just noticed this today (Jan 16th, 2020) multiple errors in my HSA account. 

Background: Was on a HDHP plan in 2018 and 2019. 2020 NOT on a HDHP plan so not eligible.  Have employer and employee contributions directly deposited through paycheck. Did not realize employer contributions factored into limit.

2018: Over contributed by $180. Had my taxes done by accountant and did not notice over contribution when she filed. Did pay the 6% penalty ($11) so really didn't cause alarm.

2019: Over contributed by $1800.

2020: NOT eligible but employer still contributed $150 on January 2, 2020 and directly deposited my employee contribution of $264 on January 10th.

Called HSA fund. They refunded my employer the $150 they contributed (Still need to verify they receive it but may take a minute as it's federal govt).  

So questions:

1.  Do I fill out the excess contribution form for 2018 + 2019 + 2020 "excess" contributions even though technically 2020 I was not eligible?  The HSA fund (BlueFund) is looking into how to calculate any "earnings" I made with it but has yet to get back to me.

2. Will I get a 1099-SA for 2019 if I withdraw it now before tax filing?

3. How do I handle the 2020 issue? I think my W2 will show i contributed $264 but hopefully I would have withdrawn it this month. I am also hoping my W2 does not show employer $150 contribution since technically it's been returned. 

4. How do I go about addressing all of this in turbotax for 2019 and 2020?

My head hurts.  Greatly appreciate any advice with this.  

[BillM223]

Let me start by addressing 2018. 

When you did your 2018 return, you got the excess contribution message in TurboTax, right? And you told TurboTax when it asked that you would withdraw the excess contribution before April 15, 2019, right? And TurboTax added the excess back to your income (on line 21 of Schedule 1) as Other Income, right? Or did you not withdraw the excess and form 5329  was added to your return to assess the $11 penalty?

If all this is true, then tax year 2018 is OK.

Now for 2109. TurboTax has told you that you have an excess contribution of $1,800. Did you withdraw the $180 in early 2019 for 2018 or did it carry over to 2019?

NOTE: if you see the question "Did you make excess contribution in 2018 (on your 2019 TurboTax interview) AND you withdrew the excess $180 before April 15, 2019, then answer NO to this question. You "cured" the excess contribution by withdrawing it. You carry over an excess contribution ONLY when you don't withdraw it in time.

When TurboTax tells you in the 2019 interview that you have an excess contribution, then if you withdraw it all before April 15, 2020, the excess contribution is cured. The amount ($1,800) is added to Other Income, and the matter is done with. IN THIS CASE< you will not have to enter anything about the excess on the 2020 tax return.

But if you can't withdraw the entire excess before April 2020, then the part that you cannot withdraw this year will carry over to next year.

As for year 2020, it depends very much on what you did previously. The $150 that the employer took back should not generate a 1099-SA, unless they already sent you one, in which case they owe you a corrected 1099-SA.

If, however, you did not withdraw the entire excess from 2019 before the due date of the return, then you will need to claim that you have an HSA and fill out the interview. You will be penalized on form 5329 ONLY if you still have money in the HSA, to the greater of the penalty or the amount in the HSA.

Now, I am not sure what you did with the excess contributions in early 2019 and early 2020, so my discussion may not exactly match what you're seeing. If this doesn't make sense, then please give me more details:

• in early 2019, did you withdraw the excess $180 or carry it over to 2019?
• In early 2020 ((i.e., now), do you plan to withdraw the excess $1,800 before April 15th? Can you?

Let us know what you did.

[jenn-lan]

Thank you so much for the detailed reply. To answer some of your questions. I mistakingly hired out my tax prep in 2017 and 2018. I previously used TurboTax and am now back using it.

1. 2018- in my tax filing, they generated a 5329 for the excess $180 and so it was carried over to 2019. I was unaware of this until this past week.

2. 2019- i am in discussions with my HSA fund to withdraw both the 2018 and the 2019 Excess contributions. They are looking into how I need to account for the "interest earned." So yes, these will be withdrawn before April 15, 2020.

3. 2020- I am currently ineligible for an HSA.  My HSA Fund did return per the online records the $150 employer contribution (which I need to still verify with my employer).  What remains is the $246 of my direct from paycheck pre tax employee contribution

I think I have an idea of how 2018 and 2019 will play out and turbo tax should help me account for those since i am withdrawing those before April 15, 2020.  My question is, do I need to handle 2020 differently since I guess it's technically not an excess contribution and more of an invalid contribution? I anticipate my 2020 W2 will say i contributed $246 to my HSA (hopefully they will not report the $150 they received back).  I currently plan on just withdrawing this 2020 accidental donation like it was an excess contribution and handle it the same way as 2018/2019 

[BillM223]

You will be unable to withdraw the $180 excess contribution from 2018 - that needed to have been done before April 15, 2019. The HSA custodian should not distribute that amount to you as a withdrawal of excess contribution (if they do, it's a mistake, and tell them so).

Note that this means that the $180 is part of the excess contribution for 2019, but that it can no longer be withdrawn as an excess. Only the amount you contributed in 2019 can be withdrawn as excess contributions.

You can withdraw any of the excess attributable to 2019 so long as you do it before April 15, 2020. When you contact your HSA again, make sure they understand that it is a "withdrawal of excess contributions" (use this phrase). I think this is what you are doing (good).

After you do this, the HSA custodian will send you a 1099-SA in early 2021. This 1099-SA (for your 2020 tax return) will have a distribution code of '2' and have an entry for earnings on your excess contributions in box 2 (yes, you don't declare the earnings as taxable income until next year, because by the end of 2019, you don't know the total of these earning yet as they are still running in early 2020).

Now, that $180 that you can't withdraw will be carried over again to tax year 2020. You will have to tell TurboTax in 2021 (for tax year 2020) that you have an HSA and enter the carryover. Since you will also state on your 2020 return that you don't have any HDHP coverage, this will create another excess contribution carryover situation, and you will be penalized again (and again and again).

The way to cut this off is to take a $180 distribution from your HSA (if you have the funds), then tell TurboTax that the distribution was NOT for qualified medical expenses. This will add the $180 to Other Income as well as ding you a 20% penalty - but at least the excess contribution from 2018 will be "cured", and you won't have to report it any longer.

As for "What remains is the $246 of my direct from paycheck pre tax employee contribution", the $150 from the employer and the $246 from you are both called the "employer contribution" (because they are both sent to the IRS from the employer). Your employer could have requested that the entire $396 be returned to them (and if they were proper, they would have cut you a check for your $246), but if they didn't, then you will need to do (right now) report the $246 as a "mistaken contribution" and ask the HSA custodian to send the money back to you. If they will do this (they don't have to) so be nice, then your HSA troubles for 2020 will be over, although you will get a 1099-SA in early 2021 showing the earnings on those contributions.

Does this make sense?