YR 2021 HSA Over Contribution Question in Turbo Tax Deluxe

[mtngirl04]

My question is simple but has caused me hours of research. In a nutshell, in March 2021, I contributed $8,200 into our HSA (have a family HSA plan with husband). On July 1, 2021, we left our HDHP plan. Knowing that I overcontributed $4,100 into the plan - I called the plan administrator and completed paperwork to remove $4,100 from the plan in November 2021. We received a check for $4,100.20 in November (same calendar year). My 5498-SA indicates $8,200 contribution and I received two 1099-SA with codes 1 and 2. The code 2 indicates $4,100.20 as gross distribution. Turbo Tax is tricky.  It wanted to tack on a $246 penalty for excess withdrawal. In my way of thinking, the over-contribution correction was made within the same calendar year (2021) so I should not owe any penalty.  I am sure I am doing something wrong.  One workaround I discovered was just to key in $4100 as our contribution but that doesn't agree to the 5498 form's $8200 contribution amount (provided to IRS). I went through the HSA interview and checked the boxes (Jan through June) where I indicated that we had coverage and it calculated that part correctly, even giving us the proper credit of $500 for the additional that we qualified for. What am I doing wrong?

[RaifH · Accepted solution]

You said the $246 penalty was for an excess withdrawal, but since $246 is 6% of $4,100, I'm going to assume it was for an excess contribution. Since you had a family HSA plan for 6 months and, again I'm assuming here, over 55, your contribution limit should be $4,100 and you should not be seeing a penalty. Let's go through the steps of entering the contribution and make sure it was entered correctly:

1. Go to Federal > Wages & Income > Less Common Income > 1099-SA, HSA, MSA and click Start/Revisit.
2. Make sure you have HSA selected for yourself and nothing for your spouse.
3. Enter your withdrawals from your HSA by answering Yes to Did you use your HSA to pay for anything in 2021? Enter both, and make sure the one with distribution code 1 is marked as being used for qualified medical expenses if it was. Otherwise you will be hit with a 20% penalty on that distribution. On the one marked distribution code 2, it will ask Excess contribution deducted from your wages? If this came from a W-2 with Code W in Box 12, Select Yes. If you contributed out-of-pocket, select No.
4. Assuming you did not inherit this HSA, select No.
5. Under Let's enter your HSA contributions, if the contributed amount came from your W-2, it should already be in there. Otherwise, if you paid $8,200 out of pocket into your HSA, enter it in the field. Make sure it's not entered in both fields. 
6. Did your employer tell you about any other contributions? Probably No.
7. Answer the questions on the next two screens, making sure you answer the question related to your HDHP correctly. Enter that you had Family Coverage for January through June and none July through December. When you click Calculate Max Contribution Limit, it should determine $4,100. Hit Continue.
8. After asking about prior year over-funding, enter No.
9. The system should alert you that you over-funded by $4,100 this year and can make the withdrawal by April 18, 2022 in order to avoid the penalty. Select Ok, we will make/have made the full $4,100 excess contribution withdrawal by April 18, 2022.

No further withdrawal is required since you already made it. If the $8,200 came from your employer, you will have $4,100 of extra income appear on Schedule 1 Line 8e that will be taxed. If the contribution came from out-of-pocket and was not on your W-2, then you should receive a $4,100 reduction in your income that would appear on Schedule 1, Line 13. There should be no penalties on Schedule 2 relating to your HSA.

To preview your return to make sure Schedule 1 appears correct:

1. Open or continue your return.
2. Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
3. With the Tax Tools menu open, you can then view your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu
4. Scroll down until you see Schedule 1

[mtngirl04]

Thank you.  This worked.  It's very confusing the way this all played out.  But one thing I have learned is that I will never fund my HSA early within the year for the current year.  I will wait until the end of the year when I know my full situation.