Withdrew Employer HSA contribution - Claim as income?

[Dshow]

Hi

I separated from my employer in Feb of 2022 due to disability.  In Jan, they contributed $1000 to my HSA.  Since I went on Medicare, HSA contributions are not allowed and  I had the HSA company send me the $1000 (-$20 fee) for this over-contribution.

I am working on my taxes.  I assume I need to claim this as income on my taxes, but how?  (With a regular HSA distribution, TT asks if it was spent on medical and I assume it would be taxed, if not.  But, since this is coded as an 'excess contribution',  TT just asks if I withdrew the excess contribution (which I did) and then moves on.

Do I need to claim this as income somewhere?

Thanks!

[ThomasM125]

You need to make a Form 1099-SA entry for the distribution from an HSA account and code it as a normal distribution. If you choose the return of excess contribution option the assumption is the contribution was not deducted from your income so it shows up as not being taxable. Of course, the assumption here is that your employer never included the contribution in your income.

[Opus 17]

When was your Medicare enrollment effective?

[Dshow]

Thank you, do I modify the 1099-SA I received for that distribution (change the code to normal distribution) or create another one?

[Dshow]

I went on Medicare in Feb. 2022.

[Opus 17]

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@Dshow wrote:

I went on Medicare in Feb. 2022.

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I think the expert has misunderstood how things work.  But, you made a mistake too, and I may need to do some research on what you need to do next.

Let me also remind you that if you have money in an HSA, you can spend it for qualified out of pocket medical expenses at any time, even if you can't contribute because you are on Medicare or some other non-eligible insurance. 

First, what should have happened:

If you were enrolled in a qualifying HHDP in January and started Medicare effective February 1, then you were eligible to contribute either $691 (for a family HDHP) or $388 (for a single HDHP).  So your excess was not $1000, your excess was either $309 or $612.  Turbotax will automatically calculate that you made an excess contribution and will automatically add it back to your taxable income.  Then, if you don't remove the excess, Turbotax will assess an additional 6% penalty on the excess. The add-back of taxable income and the penalty are two different steps and the add-back happens automatically.

Now, what did happen:

You should have a W-2 showing $1000 in box 12 with code W, that's the employer contribution.  In the interview, indicate you had a qualifying plan for part of the year and then check yes for January and No for all the rest of the months.  Turbotax will automatically calculate that $309 or $612 is excess and will automatically add it back to your taxable income.

The problem is that you withdrew $1000, but there isn't a good way to indicate that in Turbotax.  Of the $1000 withdrawal, $309 or $612 would be a return of excess and the rest would be a normal distribution ($691 or $388).  If you spent at least that much on qualified out of pocket medical expenses, then I would ignore the problem, because your expenses would cover the withdrawal and it won't be taxable.  If you did not spend that much on medical expenses, then the withdrawn amount is subject to income tax plus a 20% penalty, but there is no good way to report it.  

Let's hope you had enough out of pocket expenses that we can ignore the portion of the withdrawal that is not technically a return of excess.  If you really didn't have any out of pocket expenses, post back and I can ask for more help on how to report it. 

[Dshow]

Thank you.  You seem to have a good understanding of the situation.  I had self only coverage.  TT says I had a contribution limit of $388, which makes sense.  I didn't want to mess with any contribution, so I withdrew all the $1000 employer contribution.  Unfortunately, I don't think I have $612 of unreimbursed medical expenses...  (Since I was on disability, I did not receive any $$ from my employer.  I think they paid an insurance premium for me and that was reported on my W2.)

Thanks-

[Opus 17]

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@Dshow wrote:

Thank you.  You seem to have a good understanding of the situation.  I had self only coverage.  TT says I had a contribution limit of $388, which makes sense.  I didn't want to mess with any contribution, so I withdrew all the $1000 employer contribution.  Unfortunately, I don't think I have $612 of unreimbursed medical expenses...

Thanks-

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What expenses do you have for 2022?

Also, you can apply an HSA withdrawal to any unreimbursed expenses you ever had, as long as they occurred after the HSA was opened.  For example, if your HSA was opened in 2019, and you have $30 for contact lens cleaner from 2020 that you never requested reimbursement for, you can consider this a reimbursement for those older expenses.  

Also, if you are enrolled in Medicare Part B or Part D, those premiums are eligible to be reimbursed from an HSA.

I'll bet you can come up with $612 of medical expenses.  You would just need to be able to prove it in the unlikely event you are audited.  Make a list or spreadsheet with the best evidence you can locate. 

Allowable expenses are the same as those listed for the expense deduction here.

https://www.irs.gov/forms-pubs/about-publication-502

[Dshow]

So... my HSA has been open for many years.  I was saving receipts from around 2017ish that I paid for out of pocket and I planned to someday reimburse myself for those expenses...  Also, I had over $1000 of Medicare premiums I paid last year that did not come from my HSA...  Can I apply those?

[Dshow]

... I forgot about my Medicare premiums.  I had ~$1700 in premiums.  Can I just apply that $1000 toward those and say now I have only $700 in unreimbursed premiums?

[Opus 17]

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@Dshow wrote:

... I forgot about my Medicare premiums.  I had ~$1700 in premiums.  Can I just apply that $1000 toward those and say now I have only $700 in unreimbursed premiums?

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Yes, that will work.

[Dshow]

Thanks for your help!  That is a simple solution.

[Dshow]

Hey @Opus 17 ,

I got to thinkin' more about this...  TT says I have a 2022 Contribution Limit of $388.  So far, I have contributed $0 for 2022 and asked for a refund of the $1000 contributed by my employer.  To make the numbers add up...  What if I went ahead and contributed the $388 for 2022?  Then the 1099-SA, code 2, for $1000 I already received would be correct.  I think that would make TT happy...

My question then would be, does TT automatically add the $1000 to my income for 2022 so I don't need to add it in anywhere else?

Thank you

[Opus 17]

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@Dshow wrote:

Hey @Opus 17 ,

I got to thinkin' more about this...  TT says I have a 2022 Contribution Limit of $388.  So far, I have contributed $0 for 2022 and asked for a refund of the $1000 contributed by my employer.  To make the numbers add up...  What if I went ahead and contributed the $388 for 2022?  Then the 1099-SA, code 2, for $1000 I already received would be correct.  I think that would make TT happy...

My question then would be, does TT automatically add the $1000 to my income for 2022 so I don't need to add it in anywhere else?

Thank you

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Your employer contributions are "your" contributions, and count against your overall limit.  Employer contributions are automatically detected by Turbotax because they are recorded on your W-2 in box 12 with code W.  You don't enter them again.

If you did make a new deductible contribution of $388, that would be reported later in the program as part of the HSA interview, which can be accessed from both the income page and the deduction page.  If you contributed an additional $388, that would show you have an excess of $1000, and your excess would match the withdrawal indicated on the 1099.  Remember that when making a deposit for a prior year, you will have to indicate that in advance to the bank, there may be a menu selection for an electronic payment or a special paper form if you mail a check for deposit.