What are my options to withdraw an excess amount from my 2017 HSA account which I failed to withdraw before the 2018 tax deadline? For 2018 & 2019, I moved to wife's Ins.

[maliekal75]

I have an HSA excess of $102 in my 2017 HSA account, which I did not withdraw before the 2017 Tax filing due date. For 2018 & 2019, I am covered under my wife's medical insurance (hence did not contribute to my HSA). I do understand that I would need to pay the 6% tax penalty on the excess HSA amount in the 2018 tax filings. However, my below 2 questions pertain to the 2019 tax filings-

1) For 2019 tax filings, how do I prevent the additional 6% penalty on the excess  HSA amount? If I do have an eligible medical expense in 2019 (such as a deductible or copay)  for a total of $102 or more, then can I just pay the $102 expense from my 2017 HSA account and in doing so, will that amount be applied against the excess HSA amount that I carry?

2) What other options do I have to get rid of the excess from my 2017 HSA? Can I simply withdraw the excess amount from my 2017 HSA account and pay a penalty? How much would the penalty be?

[BMcCalpin · Accepted solution]

As you can imagine, it is now too late to withdraw the excess from the 2017 return. As for your questions:

1. You can reimburse yourself at any time for any qualified medical expense that was incurred AFTER your HSA was created. HOWEVER, that does not solve the excess contribution carryover problem. See #2. 

2. What you can do is now in 2019 take a $102 distribution from your HSA and tell TurboTax that it was NOT for qualified medical expenses. You will pay income tax on that amount, you will pay a 20% penalty on that amount, BUT the excess will be gone!

Since it's only $102, and since when you withdraw it, the HSA custodian sends you a check for $102, you will be able to pay the income tax and the 20% penalty.

This is the simplest way to dispose of the problem in your case. Otherwise, you would have to wait until the HSA balance went to zero (the 6% penalty is on the lesser of the carryover or the value of the HSA at the end of the tax year).

[maliekal75]

Thank you very much for the solution