Timely correction to Health Savings Account

[Goat and Ball]

12/27/2021 Did this excess contribution get corrected?
HDHI with HSA < 2020 layoff. changed insurance and no longer HSA qualified. 5/17/21  (tax deadline) filed 2020 tax extensions, + return of excess 2020 contribution request.  Custodian says received 5/20 or 5/21. They returned excess 5/22/2021. Since filed extensions due date of return is 10/15/2021 so I corrected in time.  2020 1040 filed 6/8/2021 > received return of excess contribution.
Is the excess contribution corrected in a timely manner and is it now cured?  Custodian states withdrawal done in 2021 so not timely for 2020 even though told them it was a 2020 correction. Custodian instructed to contact tax advisor as their 2020 Form 5498-SA does not need to be revised. They resent 2020 Form 5498-SA after correction with same values.
Any additional forms I need to complete about this issue? On 2020 form 8889 I have line 13 = $0 as I believe it was corrected when I filed 6/8/2021.
And where do I input the return of excess contribution as income for next year's income taxes?

[BillM223]

Your return is probably correct, but so probably is the HSA custodian’s paperwork.

Forms 5498-SA and 8889 do not sync on a single year basis (that is, you have to examine them year over year to see what they mean). I think you may have filed your return correctly, but the 5498-SA looks wrong because the two forms don’t sync as you would expect.

• When TurboTax told you that you had an excess HSA contribution, you replied that you were going to withdraw the excess before the due date of the return (as extended).
• If your HSA contributions were through your employer by payroll deduction (i.e., there was a code W in box 12 on your W-2), then the amount of the excess was added to line 8 (Other Income) on Schedule 1 (1040).
• If your HSA contributions were made directly to the HSA custodian and not through your employer, then the amount of the excess would be removed from any amount on line 13 on the 8889. I assume that this does not apply to you.
• Note that for most taxpayers, line 13 on the 8889 would be blank because employer contributions (both your employer’s and yours through payroll deductions - usually the amount with code W in box 12 on your W-2) appears on line 9 of the 8889.

If you did the above and the return shows that you reported the excess as Other Income, then you indeed have “cured” the excess. You will not carry over any excess to the next year nor pay any 6% penalty.

On form 5498-SA, box 2 has the “total contributions made for 2020” (this is for Tax Year 2020). The instructions for the 5498-SA (note: these instructions are for your HSA custodian, not you the taxpayer) state that “Enter the total HSA or Archer MSA contributions made in 2022. …Any excess employer contributions (and the earnings on them) withdrawn by the employer pursuant to Notice 2008-59, Q/A 24, available at IRS.gov/irb/2008-29_IRB#NOT-2008-59, should not be reported as a contribution.” However, unless the excess was your employer’s error, this does not apply to you, and furthermore, a lot of employers would not try to retrieve the excess HSA contributions even if it was their fault. Instead, they expect you to report the excess as Other Income on line 8 of Schedule 1 (1040) – which I assume you did.

This means that your excess should appear as part of the amount in box 2 of the 5498-SA even though it was excess.

If all this is true in your case, then you filed your return correctly even if the 5498-SA doesn’t seem to make sense. Please write down what happened and what you did and stick it in your tax archive in case anyone ever asks why the forms are completed the way they are. Otherwise, as long as you reported the excess as Other Income and paid income tax on it, you are OK.

P.S. When you are doing your 2021 tax return, if TurboTax asks you if you “overfunded” your HSA in 2020, answer “NO”. TurboTax wants to know if you carried over any excess, which you did not.

[Goat and Ball]

Apologies for the delay in responding. Thank you very much for your detailed response. A couple of issues surfaced from it. I timely removed some of the excess but there is still some to be removed. That opens up more questions thus this did
not wholely resolve the issue.
But after your response I redid my forms pertinent to this calculation. The recalculations did not trigger more tax owed despite not adding the return of excess contribution on Schedule 1. Thought it was 2021 taxable income. Did revise some figures on 2020 Schedule 1, 2020 1040, 2020 Form 8889. Now do I need to amend 2020 returns?

$579.69 direct to custodian
$337.24 employer match
$641.40 payroll
total excess + earnings $1559.52 as calculated below.

*Earnings on excess in account
Unsure how to calculate earnings on what is now excess? Is this calculation correct for this?
excess contribution/ total acct value end of 2020 = % of excess
% x earnings through removal of excess = attributable to excess contribution
once removed distribution revise total account contribution 2020 as not considered a contribution because withdrew timely manner
that % x earnings after removal = attributable to remaining amount to be removed

And I have not addressed the removal of the excess still in account. Trying to do that before end of year. And appreciate your tip for keeping good records on this issue.

[BillM223]

First, let's make sure I understand:

"$579.69 direct to custodian
$337.24 employer match
$641.40 payroll"

The $579.69 contribution you made directly to the HSA custodian outside of your employer (i.e., this amount did not show up as part of the code W amount in box 12 on your W-2)?

The code W amount was the sum of the $337.24 and the $641.40? $978.64?

"The recalculations did not trigger more tax owed despite not adding the return of excess contribution on Schedule 1. " Are you saying that the excess contributions were not considered Other Income line 8 on Schedule 1 (1040) on your 2020 return while you filed it, but when you changed your 2020 return to force the addition of the excess contribution to line 8 as Other Income that your tax due or other income did not change?

Did TurboTax tell you that the excess was $1.558.33? And how did you determine that the earnings were $1.19? Did the HSA custodian send you a 1099-SA reporting this?

In any case, you should not try to calculate either the excess nor the earnings. Let TurboTax calculate the excess (which it did in the HSA interview), and let the HSA custodian calculate the earnings when they send you the 1099-SA with an amount in Box 2. And to repeat, the TurboTax reported excess should be reported by TurboTax as Other Income for tax year 2020, and the 1099-SA reporting the earnings is taxable income for tax year 2021. NOTE, this 1099-SA will probably be sent to you in early 2022.

But I am not sure if I understand your real situation. So please tell me the following (if you will):

On what date did your HDHP coverage cease? I can't calculate the proper excess without knowing that.

Was your coverage Self-only or Family?

Please confirm that I understood the contribution amounts above correctly. Confirm the code W amount in box 12 on your W-2 and the direct contribution amount. 

[Goat and Ball]

My total contribution for the year 2020, on Form 5498-SA box 2 is $4970.83, of which allowed $3412.50 by i 8889 line3 worksheet, due to ceasing HDHI on 9-30-2020, and self policy.
$4970.83 comprises payroll deductions, employer match and seed contributions (these on W2 coded W), AND direct to custodian funding which is not included on W2 as a personal contribution not payroll. It is included in the above total for the 2020 contributions
Removed portion in May 2021 before tax deadline however thought that was for next year's income and did not include in line 8, Schedule 1.

The amounts I posted of "$579.69 direct to custodian, $337.24 employer match, $641.40 payroll" are the over limit I contributed for 2020 that I attribute to these methods of contributing. A portion of that has been already removed but due to my calculation error it has not been resolved fully.

The direct to custodian contribution was higher than the above figure AND you are correct, it did not appear on the W2.
"The code W amount was the sum of the $337.24 and the $641.40? $978.64? "
No, W2 box 12 has the amount of $1804.16 in it.
"The recalculations did not trigger more tax owed despite not adding the return of excess contribution on Schedule 1. " Are you saying that the excess contributions were not considered Other Income line 8 on Schedule 1 (1040) on your 2020 return while you filed it, but when you changed your 2020 return to force the addition of the excess contribution to line 8 as Other Income that your tax due or other income did not change?"
Yes, while I didn't add the return of excess contributions done in 5/2021, to Line 8 Schedule 1 other income when I filed return, even upon recalculating it still nets a negative # on line 8 due to the federal tax unemployment benefits forgiveness (pandemic).
"Did TurboTax tell you that the excess was $1.558.33? "
No, I calculated that.
"And how did you determine that the earnings were $1.19?"
It is a bit higher than that; I posted early today the calculation asking if that was a correct calculation
"Did the HSA custodian send you a 1099-SA reporting this?"
No, the only communication I received from custodian was the Form 5498-SA which shows the total 2020 amount contributed ($4970.83). Once I removed amount in a timely manner before deadline filing taxes (May 2021) that is not suppose to be considered a part of contribution so now my actual contribution for year 2020 is revised down by amount removed, right? I have not received any 1099-SA reporting any removal. Should that have been?  Should I have if I removed in a timely manner amount contributed so as to be viewed as not being contributed? Custodian has clients calculate and submit amount to remove including earnings, they did not calculate it.
Thank you for your response.

[BillM223]

Let's restate what we know:

So the code W amount in box 12 is 1804.16 - this represents the sum of what your employer contributed and what you contributed through payroll deduction, right? And you sent directly to the HSA custodian $3,166.47, right?

In the TurboTax interview, you indicated that you had Single HDHP coverage for 9 months and you had previously stated that you were 55 or over in Personal Information, right?

So the full year HSA contribution limit would have been $4,550, right? But TurboTax calculated your limited limit (for 9 months) as $3,412.50 right?

So TurboTax said that you had an excess of $1,520, right? (TurboTax rounds off cents)

Did you indicate that you were going to withdraw all of it?

If so, then ALL of the "employer contribution" (i.e., code W in box 12 on the W-2) of $1,804 is used and $1,646 of your direct contribution was also used, but the remaining $1,520 of the direct contribution was not used.

NOTE: the excess is not allocated between the employer amount, your payroll amount, and the direct amount - rather, the "employer contribution" (the code W in box 12 amount) is applied first, then the direct contribution. So, in your case, TurboTax has determined that only the $1,520 of the direct amount is the excess.

NOTE: If the excess is part of the code W in box 12 amount, then it must be added back to Other Income, because your employer removed it from Wages in boxes 1, 3, and 5 before the W-2 was printed. This confuses most taxpayers, so please tell me if you don't understand. NOTE: TurboTax does the add-back automatically, if it needs to be done - you do not need to do anything to make this happen.

In your case, however, none of the "employer contribution" was considered excess so none of it needed to be applied to Other Income on Schedule 1 (1040).

The direct contribution to the HSA ordinarily appears on line 12 of Schedule 1 (1040) as a deduction from Adjusted Income. However, in your case, not all of the direct contribution was allowed, so whatever should have appeared on line 12 of Schedule 1 (1040) is the $1,646 of the direct contribution that was not in excess.

OK, my numbers don't seem to match yours exactly, but if you started off with the numbers on the W-2 and what you told me was the direct contribution, then this should have been the result.

If for some reason you did not tell TurboTax that you were withdrawing the entire amount of the excess, then my numbers would change...

But read this carefully and see if it makes sense.

@Goat and Ball