HSA excess contribution in 2016 and reporting in 2017 tax return.

[sjstar123]

Hello,

I joined new employer in Dec-2016 and funded $1500 to my HSA account. Later in 2017, I realized after I filed my 2016 tax return that I'm ineligible to contribute to HSA since my spouse had FSA. I didn't do any HSA contributions nor took any withdrawals in year 2017.

How do I correct above situation? I plan to take out $1500 as excess contribution by calling the HSA administrator before tax deadline and report it as "other income" in 2017 tax return. But wondering where in TT can I include the 6% excise tax for the year 2016. Also, do I need to pay additional 6% excise tax for year 2017 or am I good for 2017 since I took the withdrawal of excess contribution before tax deadline.

[sjstar123]

Can anyone help me with above question?

[BMcCalpin]

Does your spouse still have the FSA (like through 2017)? If so, you weren't eligible for 2017 either (I guess you realized that).

1. You must amend your 2016 return and show that your HDHP coverage was "None" for 2016 (you had HDHP coverage but you weren't eligible).

2. It is too late to fix your excess contribution for 2016 (that is, you can't take the excess for 2016 out without incurring a 20% penalty (don't do that). So you will have to roll the entire amount over as a carryover to 2017. TurboTax will calculate the 6% penalty, and you will pay that as part of the amended return process (1040X).

3. When you do your 2017 return, you need to answer the question "Did you 'overfund' your 2016 return?" with "yes". What this question is actually asking is did you have a carryover (yes).

4. Enter the amount of the carryover to this screen (which should be the full $1,500).

5. If you are still not eligible to contribute to your HSA, then a new excess will be generated. Tell TurboTax that you will withdraw this by the due date (which is tomorrow, April 17th).

6. Then you MUST contact your HSA administrator no later than end-of-date tomorrow (April 17th) to initiate the "return of excess contributions". If your HSA administrator asks, tell them that you have paid the 6% penalty for 2016 and that the amount has carried over to 2017 to become a 2017 excess, which you can withdraw by tomorrow.

7. If you can't accomplish this by end-of-day tomorrow, then file an extension (form 4868). This will give you until October 15 2018 to sort this out (yes, the withdrawal must be done by the due date "with extensions").

Because you did not contribute anything in 2017, this should eliminate the excess and the 6% will stop.

Note that next year, you will be asked again about "Did you overfund your HSA in 2017". If you successfully withdraw the excess this year, then answer "no", because you cured it when you withdrew the excess in a timely fashion.

[sjstar123]

Thanks for the detailed response. I did some reading over the weekend too.

My spouse doesn't have FSA in 2017 but I switched jobs in May-2017 and HDHP eligible for only four months. I didn't make any HSA contributions in 2017 but since I'm eligible for four months, I believe I can roll-over $1500 from 2016 and use it towards $1133 2017 limit.

If I ask TT to do above for 2017 tax return, I will still be left with $366 which I think will be excess contribution for year 2017 so should I ask my HSA administrator for withdraw only $366 before tomorrow.

[sjstar123]

I did trail interview in TT about the HSA contributions.

a) What is excess contribution in 2006? Entered $1500
b) It looks like you have excess contribution of $366 and gave three options.
1) OK, we'll withdraw the full $366 by April 17 2018.
2) We'll withdraw some by April 17 2018.
3) No, we are not going to withdraw.

When I select option (1), it says "Unfortunately, all of your excess contribution is caused by a prior year excess contribution. It is too late to remove this excess contribution". Does this mean I cannot remove this $366 from the HSA account now?

[dmertz]

At this point, there is nothing you can do to eliminate the 6% penalty for 2017 on the $366.  If you will be HSA eligible in 2018, you can apply it as part of your HSA contribution for 2018 to eliminate the penalty for 2018.  Otherwise, to eliminate the penalty for 2018 you must obtain a regular taxable distribution from the HSA of $366.  If you are under age 65, in addition to the $366 being taxable, it is also subject to a 20% early-distribution penalty.  This makes late correction of an excess HSA contribution quite costly.

[sjstar123]

Thanks for the reply.

So, if I understand correctly, one cannot withdraw excess contributions in prior years (not current tax year) without incurring 20% early penalty if under the age 65 and assuming there were no medical related distributions. Is that right?

But the original response from "TurboTaxBillMc" says carry forwarded amount can be withdrawn as excess contribution for year 2017 before tax deadline tomorrow so I'm little confused.

Or is it because I used some of the carry forwarded amount towards the contribution this year, I cannot term the excess amount ($366) as excess contribution for year 2017 and withdraw it. If that is the case, shall I NOT use the carry forward amount towards contribution this year and withdraw the full $1500 as excess contribution before tomorrow to avoid paying the 6% penalty for year 2017.

[dmertz]

The only excess contribution that you could have returned to you by the due date of your 2017 tax return is a new excess contribution made for 2017.  You are not permitted to treat an old (2016) excess contribution as a new excess contribution.  The only amounts that can be treated as new excess contributions for 2017 is new money contributed for 2017.

You also cannot cause a new contribution that is not an excess contribution on its own to be an excess contribution by application of a prior-year excess.  You can only apply a prior-year excess as a current-year excess if you have not yet maxed out your 2017 HSA contribution limit.

[dmertz]

It does appear that TurboTax improperly suggests that a prior-year excess can be treated as a current-year excess, which is probably where TurboTaxBillMc's suggestion came from.  However, telling TurboTax that you will obtain a return of the prior-year excess contribution by the 2017 filing deadline will not cause TurboTax to remove the penalty for 2017.  The fact that TurboTax asks the question under these circumstances is misleading.

[BMcCalpin]

You are correct, dmertz. TurboTax offers you the option to withdraw the excess...but if you choose it, THEN it tells you that you can't withdraw a prior year excess that is carried over. Thank you for pointing this out.