Not if you are withdrawing an excess contribution. See the bottom regarding the possibility of them not being "excess".
The IRS instruction
forms for 5329 and 8889 indicate that your 'excess contributions will be
treated as if they had not been contributed if you do 3 things.
1. Withdraw your the
2017 tax due date (April 17)
2. Do not claim a
deduction on the excess - no problem TurboTax knows this already
3. Also withdraw
income earned on the excess contribution.
You can avoid all
penalties by removing the excess contributions (and any of their earnings) from
your HSA and treating them as normal taxable income. Per the IRS:
"You may withdraw some or all of the excess
contributions and not pay the excise tax on the amount withdrawn if you meet
the following conditions.
1) You withdraw the excess contributions by the due
date, including extensions, of your tax return for the year the contributions
were made.
2) You withdraw any income earned on the
withdrawn contributions and include the earnings in “Other income” on your tax
return for the year you withdraw the contributions and earnings."
The IRS spells it
out pretty clearly there, but the removal of the excess contributions and the
earnings on those excess contributions must occur before your tax due date. The
removed is taxable since HSA tax benefits do not apply. Earnings on excess contributions
occur if your HSA is invested or earning interest. Removing those seems fair,
since those investments shouldn’t have been made in the first place. The IRS
solves all of this by saying just remove them, don’t deduct (i.e. pay tax on )
the excess amounts, and declare any earnings as other income.
It'is a little hard
to determine exactly which investment they were put into and from where they
should be removed. This makes it difficult to determine the exact earnings for
the dollars specifically declared excess contributions. Thus, the IRS permits an
“average” determination of the gains of the HSA during that time, and the pro
rata share of those average gains that can be attributed to excess
contributions.
Forms for Removing Excess Contributions
You will need to
specifically inform your HSA trustee of a correction and that you wish to
remove an excess contribution to your HSA. This triggers them to classify the
transaction separately, as opposed to a normal withdrawal for qualified medical
expenses. They will proceed to file an additional Form 1099-SA showing the
excess contribution being distributed from the HSA with a distribution code of
“2”. Be sure to remove and identify any earnings on the excess contribution as
well. This form will be provided to you to indicate 1) a distribution from the
account that 2) was for excess contributions.
The other thing that
should occur is your HSA trustee will correct your Form 5498-SA which shows HSA
contributions for the year. While they initially would have included your
excess contribution (they didn’t know it was excess), once you alert them and withdraw
it, they will remove it from Form 5498-SA. That means that your Form 5498-SA
will be accurate for the year and should not include any excess contributions.
EXCESS?
In
most cases, your HSA contribution has already been reported in Box 12 of your
W-2 with code W: Employer Contributions to
Health Savings Account.
Despite
the misleading name, code W reports both your
and your employer's contribution. (If you think the name is confusing, think of
it as just "Contributions to Health Savings Account".)
A
common error that usually results in excess HSA contributions, which are
taxable with a penalty, is if you, on the Let's
enter your HSA contributions screen, accidentally duplicated the
amounts already reported in the first line, contributions from Box 12 of your W-2.
For
example, if you have $3650 on your W-2, Box 12 (Code) and also entered $3650
separately on the Let's enter your HSA
contributions screen, that would equal $7300 which is $550 over the
maximum allowed HSA contribution for a family plan ($6750). This results
in the Form 5329 (Additional Taxes).
This
should remove Form 5329 generated by the above-described error.
Double
check your W-2. If you have an entry in Box 12 with a code W, then go to the
HSA Contribution screen delete the entry, unless you made other HSA
contributions besides through your work
