How do I get excess contribution out of an hsa that has a zero balance?

[granny65-]

"I contributed to an hsa, and used it to pay medical bills, drawing the balance down to zero. Then I found out I wasn't eligible since I'm on Medicare. Now how do I get the "excess contribution" out of the account? There's nothing there."

[BMcCalpin · Accepted solution]

In your case, the answer is: you don't.

However, again in your case, it won't matter, because of penalty for carryover over an excess contribution is 6% of the lesser of the carryover or the value of your HSA at the end of the year. Yes, because the value of your HSA was presumably zero at the end of the year, your penalty is 6% of zero, which is zero.

And since you are on Medicare, you will never be able to contribute to an HSA again, which means that the value of your HSA will never be anything other than zero.

So, while you do have an excess contribution to carryover, you have no way to pay it off but no penalty for not paying it off.

in 2017, TurboTax will report your excess contributions as taxable income. If by some chance, the value of your HSA was not zero by December 31, 2017, you will have some small penalty to pay, but since the fair market value of the HSA is now zero, for every year to come, the penalty will be zero.

I imagine that you made distributions out of that money that you contributed when you weren't eligible - you will need to contact the HSA administrator and try to return the "mistaken distributions". 

[granny65-]

Hmm. Okay, I understand that, but what do I tell Turbo Tax to put on my return? Options are: (1) I will withdraw the entire excess contribution by April 17 (which I can't, because I used it to pay bills) (2) I will withdraw a portion of the excess contribution (which as it turns out, I did have a balance of a few dollars, and I can withdraw that) or (3) I won't withdraw any of it. I'm not sure how to answer that one, and TT won't let me proceed without checking one of the above? Thanks so much for whatever help you can be!!

[BMcCalpin]

Tell TurboTax that you will withdraw those few dollars and run the balance down to zero. This will generate the excess processing and the penalty calculation (remember: 6% of the smaller of the excess or your balance on 12/31/2017).

Then next year, you should get a 1099-SA for the earnings which you will have to report as income. After tax year 2018, though, you can stop answering any questions about an HSA, since you won't have HDHP coverage and you won't have an HSA, either.

[granny65-]

Whew! Thank you so much for this comprehensive answer! We really appreciate it!

[granny65-]

Hi, Bill, okay, now TurboTax is asking for HDHP coverage for "self" or "family." I understand why (because we mistakenly made contributions to the HSA), but we didn't have hdhp coverage (we are on medicare) I don't know what to answer so that I can finish my return. TT won't let me get past it. Can you advise please?

[BMcCalpin]

Which questions are you trying to answer? "Was [name] covered by a High Deductible Health Plan (HDHP) in 2016?" or "Was [name] covered by a High Deductible Health Plan (HDHP) in 2017?" The answer is probably "None" in either case. What do you mean "TurboTax won't let me get past it"? What is the message?

[granny65-]

Hi, Bill, sorry for the vague-ness. As I was going through the program, where it asked for HDHP coverage for (husband) or (me), I put "None". BUT When I run Smart Check, TT asks for form 8889, Indicate your coverage under HDHP for 2017. The choices are"Self" or "Family". There is no "none" alternative. I have left it blank, but Smart Check keeps asking for an answer. Can I file with just leaving it blank, even though TT wants me to answer it? I'm so sorry, this is my first time doing our taxes and I want to get it right. You have been such a help and I appreciate whatever assistance you can give.

[BMcCalpin]

Let's do this.
A. Delete all your HSA information. Do it as follows (skip the W-2 part if you don't have W-2s).

1. make a copy of your W-2(s) (if you don't have the paper copies)
2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen
*** Desktop***
3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.
*** Online ***
3. go to Tax Tools (on the left), and navigate to Tools->Delete a form
4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one)
5. go back and re-add your W-2(s), preferably adding them manually
6. go back and redo the entire HSA interview.

B. Now as you go back through the HSA interview (Federal->Deductions & Credits->Medical->HSA MSA Contributions), always indicate "none" as your coverage (like to both questions: "Was [name] covered by a High Deductible Health Plan (HDHP) in 2016?" or "Was [name] covered by a High Deductible Health Plan (HDHP) in 2017?").
You should get the excess contributions message and the fact that you can withdraw only a little, and that's fine.

This should get you through the Federal Review without incident. If it doesn't come back and tell me...

[granny65-]

Thank you SO much for this quick, elegant answer. I will give it a try and let you know. I appreciate it so much, thanks again.

[granny65-]

Good morning Bill and thank you again for all your help. I followed your instructions very carefully and the Federal Review comes out fine. But unfortunately when I get to Smart Check, TT is still asking on form 8889-T, what kind of HDHP we had last year, "Self" or "Family". There is no way to indicate None.
I read in another thread that I can check "Self" as a workaround, as it will not affect my taxes. However, I don't want to raise any red flags.
If you have any other suggestions, please let me know. Otherwise I guess I am going to try to leave it blank, if TT will let me file that way.
Thank you again so much you have spent a lot of time on this and I am very grateful as my husband always did the taxes before and (1) this is my first time with TurboTax and (2) I have this mess to straighten out! You are very generous with your time and I appreciate it so much.

[BMcCalpin]

I can't get SmartCheck to reproduce what you are describing, because I have surely made different input from you.

OK, we'll have to do this:
 Can you post a screenshot of what you see? That is, take a screenshot, copy it into something like Paint (Windows), then save it somewhere, and finally edit your initial question and attach the screenshot.

If you can't do that, then please do the following and answer in the comments:
1. On the SmartCheck screen, what is the first line under "Check this entry"?
2. What is the second line (if one)?
3. What is the window below this showing? (it's showing a part of form 8889 - what lines? Note that you can scroll that window up and down if it helps you see where you are). Especially tell me which line has a colored box.

[granny65-]

Hi, and thank you for your patience and persistence!
On the SmartCheck screen, the line under "Check This Entry" says:
Form 8889-T: HDHP coverage check box needs to be checked to indicate the type of coverage held under a high-deductible plan during 2017.
[button] No entry [I choose this, but please see my further explanation below]
[button] Line 1, Self
[button] Line 1, Family
Then there is a window with form 8889, Part I
Line 1: Check the box to indicate your coverage under a high-deductible health plan (HDHP) during 2017
[blue box] Self-only    [pink box] Family
I always indicate "No entry" in the buttons provided by SmartCheck. However, when I try to proceed, SmartCheck keeps asking me to fix this.
I am so sorry this is being such an issue for me. Thank you again for your help.

[BMcCalpin]

I now see the problem (thanks for the description). The problem is that you can't withdraw the excess so TT assumes that you had an HDHP coverage to contribute under. Apparently, it doesn't allow for the situation of there being no coverage...hmmmn, at this point (late in tax season) I am not sure what it was supposed to do, but to move you along, just click the Self box. It won't change your tax at all (you've already fixed that when you said that you were on Medicare the whole year), and hopefully SmartCheck will be happy and let you finish.

I am sorry for the confusion, but checking that box in this case will be fine for the IRS...

[granny65-]

OMG You are so good to bird-dog this as far as you have! Thank you again for all the hard work and I am SO grateful!!! Blessings!