Should Excess HSA Contribution be Calculated by Actual Contribution Dates or Yearly Average

[Satcruiser]

I turned 65 in Feb. 2020 and retired in June.   Both my employer and I contributed to my HSA Jan through May.  My medicare coverage started in Feb  so any contributions made after January are considered excess.

Turbotax and my HSA administrator seem to differ on the excess contribution amount.  On Jan 1st. 2020 my employer contributed a $1,000 lump sum to my HSA account while the rest of the contributions were paycheck deductions.

Since I was only eligible to contribute for the month of January, Turbotax took the $8,100 yearly contribution amount and divided it by 12 calculating my Jan 2020 contribution should have been  $675.  My total contribution for 2020 was $4,004 so Turbotax calculated my excess contribution to be 4,004 - 675 = $3,329.

My HSA administrator is using the actual contribution dates to calculate the excess.  Actual contribution in Jan was $1,819.24 (includes $1,000 employer contribution) so they calculate that my excess as 4,004 - 1,819.24 = $2,184.76.

Any idea which is the correct calculation and how to fix it?  Is the excess based on actual contribution dates or yearly averages?

Following are the details of my actual 2020 contributions.

Jan 2020 = 1,819.24 (1000 employer + 819.24 employee)

Feb 2020 =    546.16 (employee)

Mar 2020 =    546.16 (employee)

Apr 2020 =    546.16 (employee)

May 2020 =    546.16 (employee)

——————————————————————

Total 2020 Contribution 4003.88 (Matches Box 12  of W2 form)

[dmertz]

TurboTax's calculation of your 2020 contribution limit is correct.

Was any portion (say, $1,144.24) of the January deposit a contribution for 2019?  Examine your 2019 Form 5498-SA to find out.

[Opus 17 · Accepted solution]

Your eligibility to make a contribution is determined based on your insurance coverage on the first day of each month.  If Medicare started February 1, then you were only eligible on January 1, and you are only eligible to contribute 1/12 of $8100.

[Satcruiser]

Non of the January 2020 contribution was for 2019. 

[Satcruiser]

@Opus 17 

Thank you for the prompt reply. 

I did some further reading on the IRS publications and you are absolutely correct.  It seems that the form provided by my HSA administrator for requesting excess funds does not accommodate for such circumstances.  They are working on resolving the issue.

[BillM223]

The terminology used is confusing. People often say that if you went on Medicare on February 1st, then you were not allowed to contribute in February or later.

But the way the calculations are done (and dmertz is right that TurboTax is doing it right), in fact, the calculations don't ask for when the contributions were made. 

So if your annual HSA contribution limit is $675 (as in your case), the system does not ask in which months these contributions were actually made. If you contributed nothing in January but $675 in February, then this would be acceptable, since the excess calculation is made on an annual basis.

When they say, you can't contribute in February and beyond, they are assuming that you contributed the full amount allowed each month already. Thus, if you contributed $675 each month, then as soon as you had Medicare, you would have to stop contributing. But really, the excess is calculated on an annual basis.

P.S. your HSA administrator should not be calculating your excess contributions amount, because they do not have access to your tax history and situation. TurboTax has access to your complete tax situation and therefore is in the position to accurately calculate your annual HSA contribution limit, which is calculated on form 8889.

[Satcruiser]

My HSA administrator finally paid me the excess contribution amount I requested however I have two more questions:

1. The HSA administrator paid me the amount requested plus an additional $6.75 described as "earnings on excess contribution".  Should this be recorded in TT anywhere?

2. Now that I have he excess contribution refunded should I expect the HSA administrator provide corrected 2020 tax forms or does this carry over to 2021 tax forms?  

[dmertz]

1.  The $6,75 of earnings (rounded to $7) will be reported on your 2021 tax return when you enter into 2021 TurboTax the code 2 Form 1099-SA that you receive near the end of January 2022.

2.  No, there will not be any corrected forms issued by the HSA administrator.  The code 2 Form 1099-SA will report the return of the excess contribution to corroborate your reporting of a lower amount of contribution on your 2020 tax return than is reflected on your Form(s) 5498-SA.

[Satcruiser]

dmertz - Thank you kindly for the prompt reply.