2023 TurboTax Desktop treats 2022 HSA excess contribution (carryover) as 2023 contribution

[nereith]

TurboTax Desktop has a bug when it comes to filling up these questions for an HSA, after importing a 2022 tax return that had excess HSA contributions carried over all the way from 2018.

1. Did you inherit this HSA (No)

2. Did you put money into an HSA in 2023 (No)

3. Did you have Medicare at anytime in 2023 (No)

4. Were you covered by a HDHP in 2023 (No)

5. Enter last year's excess contribution, 2022 Form 5329 Line 48 ($100 - this has been carried over since 2018)

6. You may want to withdraw money from your HSA (No)

7. What is the total value of all your HSAs ($XXX)

8. What type of HDHP did you have in Dec 1 2022 (None, HMO since 2019)

With the above answers, TurboTax ends up generating a Form 8889 that populates line 2 (HSA contribution for 2023) with $100 which is the excess carryover from 2022, even though I had answered No to Q2. This then causes Smart Check to fail since it expects a checked box in Form 8889 line 1.

The only way around this issue is to answer Yes to Q2, and in the next page answer $0 to the question on "Excess HSA contributions carryover from 2022 still in HSA account". I verified that Forms 5329 and 8889 are identical pre-workaround and post-workaround, except that pre-workaround fills up Form 8889 line 2 with $100 and expects line 1 to be filled. 

Logically, "Excess HSA contributions carryover from 2022 still in HSA account" and Q5 "Enter last year's excess contribution, 2022 Form 5329 Line 48" should have the same value of $100, so this looks like a bug.

I compared the post-workaround 2023 Forms 5329 and 8889 to my 2020 return that also used those forms, and they have the same lines filled up and left blank. So the forms generated by the workaround seems correct.

[BillM223]

This is not a bug, but a change in how TurboTax fills in the 8889.

For a number of years, TurboTax has handled a carryover of excess HSA contributions by putting it invisibly on line 2 on the 8889. The IRS never said how to handle such carryovers.

This created an odd case of line 13 apparently not being correct, when line 13 on the 8889 is not the smaller of what is printed on line 2 and line 12 (because the carryover on line 2 isn't printed). However, the final result of the 8889 was correct.

The IRS in 2023 added an additional check on line 13, and started rejecting many e-filed returns. So TurboTax was changed to start putting the carryover on line 2 of the 8889.

So the $100 being on line 2 is not a bug. Note that this means that comparing the 8889 from different years may prove confusing.

Smart Check fails because the Review process is confused on why you would not have indicated what HDHP coverage that you had if you had an HSA carryover.

Your workaround is to just enter "Self" on line 1. This is OK because you indicated that you had no HDHP coverage, so all the calculations on the 8889 are correct. Therefore, marking line 1 as Self is OK, because this will (1) not affect any numbers on your return, and (2) will let you bypass the check in the Review.

[PNR1]

I have a question related to Line 1 in Form 8889.  

I am on Medicare and my dependent is on COBRA HDHP.  I didn't make any HSA contributions in 2023 or 2024 and answered TurboTax questions correctly.  However, the excess contributions I made to HSA family in 2022 are getting carried forward to 2023 & 2024 (Form 5329) and I am paying 6% penalty/tax on the remaining excess amount since the current value of the HSA is higher than $0.  This part is  clear and no issues with it.

Form 8889 line 1, "Check the box to indicate your coverage under a HDHP during 2024".  If I don't pick either "Self-only" or "Family" the TurboTax review gives an error message.

Since Medicare isn't a HDHP, though I can use the HSA to pay medicare premiums and deductibles, I am concerned about picking either the "Self-only"or the "Family" option may trigger an audit.

Also, Form 8889 line 2 shows the Excess amount as "HSA contributions made in 2024" which isn't correct either. Since I am on Medicare and my dependent is on HDHP COBRA, we can't make HSA contributions in 2023 or 2024.

What should I do?  The IRS instructions don't offer much help with these issues and TurboTax online help and the pop-up explanations within the software package aren't addressing these either.

Please help. 

Thank you.

[BillM223]

Form 8889 line 1, "Check the box to indicate your coverage under a HDHP during 2024.  If I don't pick either "Self-only" or "Family" the TurboTax review gives an error message.

Yes, this error message is created because TurboTax doesn't understand why you have an 8889 when you have no HDHP coverage. Of course. yours is a perfectly understandable (and common) case.

Since you told TurboTax in the HSA interview that you did not have any HDHP coverage for 2024 (correct), if, in the Review when you are asked to enter on line 1 either Self or Family, just enter Self. Because you have already indicated no HDHP coverage, all the numbers in the 8889 will be correct, and this will let you get past this impasse in the Review.

Since Medicare isn't a HDHP, though I can use the HSA to pay medicare premiums and deductibles, I am concerned picking either Self-only or Family may trigger an audit.

The IRS may wonder why you chose Self-only coverage and then showed zero for your annual HSA contribution limit, but I have not heard of them doing this. The worst case is that they write you a letter wondering why this is the case. If they ever do this (unlikely), just explain that this was required to get around an issue in your tax software, but the company states that all the calculations are correct.

Also, Form 8889 line 2 shows the Excess amount as "HSA contributions made in 2024" which isn't correct either. Since I am on Medicare and my dependent is in HDHP COBRA, we can't make HSA contributions in 2023 or 2024. What should I do?  The IRS instructions don't address this and TurboTax online help and the pop-up explanations within the software package aren't addressing these.

Actually, the line 2 amount is correct. Excess HSA carryovers from previous years are carried over to the current year to see if they can be used as a personal contribution and therefore "used up".

Your issue is that you will never be able to use up the carryover, because you will never be free of conflicting coverage (i.e., Medicare).

The only remedy left to you is to

1. Take a distribution (i.e., call your HSA custodian, or maybe look at their website) for $100.

2. Enter the resulting 1099-SA into TurboTax (at this point , in your 2025 return) and tell TurboTax that it was NOT for qualified medical expenses.

3. This will add the $100 to Other Income and also add a 20% penalty to your 1040.

4. This will also remove the carryover for good.

Please note that the 6% penalty on the carryover is the LESSER of the carryover amount OR  the value in your HSA at the end of the tax year. So when your HSA values drops to zero, you will no longer be penalized (although TurboTax will still keep trying to add the 8889). So you will want to add on your fingers whether or not it is worth it to make the distribution. In your case, it probably is, if you have a lot in your HSA, and don't want to mess with the 8889 on future returns.