2022 HSA Excess Contribution - Filed 5329, Custodian did something completely different

[bcbarker65]

In 2022, we had an excess HSA contribution of $75 and filed 8889 and 5329. (as per box 12 W2)

In error, we did NOT select that we would withdraw the funds before filing and paid the 6% tax penalty. We contacted the custodian to withdraw the funds and it appears to have only made things worse.

They didn't withdraw any funds.  Instead, they rolled forward  $100 (more than the excess contribution) and deemed it part of 2023's contributions and did not tell us to adjust our contributions.
Now TT is telling me I have to pay 6% per year (in perpetuity) on these funds and struggling with 2023 taxes.

We have several issues we need to fix here:

1) In-progress: We contacted custodian with a withdrawal request to remove $100 from our 2023 contributions to get the excess out of our account once and for all. Hopefully this removes the 6% in perpetuity issue. They stated they will send a 1099-SA for 2023.

2) We need to amend 2022 taxes to correctly show that this was not in fact supposed to be penalized and was rolled forward prior to the filing deadline for 2022. Having read other posts on this topic, this appears to be filing an amended 2022 return in TT, but mailing it because the 5329 cannot be generated electronically with line 47 as $0. Please verify.

3) On amending 2022, is this now classified as a "withdrawl before April 18, 2023" when it is rolled forward to the following year in TT ? and how do we account for the fact that they rolled forward $100, not the $75?

4) After amending 2022 in TT, can I reimport my amended return to synchronize TT for filing 2023 correctly?

@dmertz you appear to have answered many posts in this area and your expertise would be appreciated.

[BillM223]

"Instead, they rolled forward  $100 (more than the excess contribution) and deemed it part of 2023's contributions "

What does this mean? The HSA custodian can't carryover your excess contributions to the next year, only you can.

The easiest way to fix the carryover is if you are still under the HDHP policy, then reduce your HSA contributions so that the carryover plus your current year contributions is les than or equal to your annual HSA contribution limit. Thus your carryover will be applied as a personal contribution and "used up".

So I am confused: did you or did you not withdraw the original $75 before the due date of the 2022 return?

Come back and we'll work it out.

[bcbarker65]

I apologize.

Your reply did help, I went back to our HSA account for the exact description of the $100 money movement and it turns out to not be a withdrawl or a roll forward. It was a 2023 contribution that was mysteriously applied to our 2022 contributions.  Which were already over the limit.  Great!  So now even more of a mess to decipher.

Thank you for your assistance so far.

[BillM223]

So what was the total excess calculated by TurboTax for 2022? $75? or $175? or what?

In any case, I gather than the excess was not withdrawn (and that you said so to TurboTax on the 2022 return), so there is a carryover of $175? to 2023. The carryover will appear on line 48 of the 2022 5329, which calculates the excise tax (usually called a "penalty").

This carryover will be added to line 2 on your 2023 8889, so that TurboTax will try to use the carryover as a personal contribution to be applied to your 2023 annual HSA contribution limit. If it can, then the carryover will be extinguished. Other wise, the new excess will be carried over to 2024.

If this is possible, you will be able to wrap up this "mess" (as you said) with reasonable ease.

[dmertz]

Exactly when did the excess contribution ($75?) actually get deposited into the HSA.  If it was in 2022, it's impossible for the HSA custodian to have re-designated the excess as being part of your 2023 contribution but would instead have to perform a reportable return of excess contribution and apply the proceeds of that distribution as part of a new contribution for 2023.  The result of that would be the same as if they had given the $100 cash to you and then you gave it back to them as part of your personal 2023 contribution.

Exactly when did they do this "roll forward?"

Given that they seem to have treated $100 as a 2023 contribution, this would imply that they did a reportable return of $75 of your 2023 contribution accompanied by $25 (33% investment gain!) of attributable earnings with that $25 being reportable on your 2023 tax return as income, reported to you on a code-2 Form 1099-SA with $100 in box 1 and $25 in box 2.