5329 HSA Excess Contribution Tax inconsistency

[RichInPitt]

I'm completely confused on the HSA excess contribution tax.  In 2021, my employer allowed an excess contribution of $429 and I paid taxes on it.

In 2022, they screwed up again and didn't underwithold what I wanted, only $100 less than the maximum. So on Form 5329, it took the excess contribution from 2021, (line 43), $429, entered the amount less than the maximum withheld, $100 (line 43), resulting in $329, and calculated a penalty on this.  $329*6% = $20.  Fine.

In 2023, they screwed up yet again, only underwitholding by $160. On the 5329, it again carries over the previous $329, but line 43 (amount under maximum) is blank.  On line 47, it adds back $169 and calculates a penalty on $329+$169=$498. So the tax is $30 ($498*6%)

The data source for line 47 says this additional $169 is from 8889 line 2 less line 16.  This is last year's $329 less the amount underwithheld this year, $160 = $169. 

This means I'm paying a penalty on $329 from last year plus a penalty again on the $329 less the amount underwitheld this year.  I'm paying a tax on the $329 twice this year.  Why am I double taxed, and why is the calculation completely different this year?

It also seems to mean that I started the year with $329 excess, I underwitheld $160, and yet my excess contribution starting next year increased to $498.  How is this possible?

Kicker - I swear I look at this before the latest software update, and the penalty was $10 - the correct amount on last year's $329 less this year's underwitheld $160 ($329-$160 = $169.  $169*6%=$10).

Did the tax law change in the last few days since the last software update?

[dmertz]

You are experiencing a TurboTax bug that was introduced with the February 8, 2024 update to 2023 TurboTax.  When TurboTax developers changed the operation so that the applied excess appears on line 1 of Form 8889 as now required by the IRS, they failed to make a corresponding adjustment to the way line 43 of Form 5329 is calculated.

Perhaps @BillM223 can help report this bug.

[BillM223]

"In 2023, they screwed up yet again, only underwitholding by $160. "

I take this to mean that your employer contributed an amount equal to your annual HSA contribution limit less $160, so this $160 should have been applied to reduce your carryover of excess contributions.

So, yes, the $160 should have been on line 43 (the 5329 instructions say "Line 43: If contributions to your HSAs for 2023 (line 2 of Form 8889, Health Savings Accounts (HSAs)) were less than your contribution limit for HSAs, enter the difference on line 43.")

Then line 45 should be $160. And line 46 should be (329-160) $169. And Line 47 should be zero, so line 48 should be $169.

Then the penalty on your excess should be 6% of the smaller of line 48 or the value of your HSA on December 31, 2023, so in this case, $10?

Does this match your situation? @dmertz is right that the 5329 needs work and that the change you noticed was the result of the latest code update. Let me pass this on.

[BillM223 · Accepted solution]

Please see this article on the doubling of the excess HSA carryovers and be sure to sign up to be notified of any updates.

[RichInPitt]

I agree that this is what should happen.  It's what happened on my 2022 return, and what I recall seeing before the latest update.

It no longer does.

Line 42 is blank, line 45 is 0, line 47 is 169, with a  Data Source that say  Form 8889 line 2 minus line 13 , which is last year's carryover less this year's HSA deduction (from line 8 annual limit minus line 11 actual withholding - i.e. amount withheld under the limit)

[CatinaT1]

Many things have been corrected in the latest updates to TurboTax. Are you still experiencing this problem?

Make sure you have ran all updates. 

If using TurboTax Online: Clear your cache and cookies. See this FAQ, for your particular browser.

If using TurboTax Desktop: Please see this FAQ.

[RichInPitt]

It appears that one of the recent updates fixed this for me.  Though I'm still receiving "We’re still working on HSA prior year excess contribution reports incorrectly on forms 8889 and 5329" emails, as recently as Thursday 11pm, so I'm going to wait until I'm notified that it's fixed, to make sure any final fix doesn't cause problems again.

[RichInPitt]

Is there a way to find the status of this?  The last update I received was Feb. 26 via email.

"We haven’t forgotten about HSA prior year excess contribution reports incorrectly on forms 8889 and 5329"

"We’ll email you when we’ve developed a fix."

I have a sense they have.  Should I just assume it was fixed and file?

[BillM223]

The issue with the carryover of excess HSA contributions has been fixed. 

You can confirm this if - after you pay for the Online product and before you file - you look at your 5329, line 48 does not show the doubled carryover.

[RichInPitt]

OK, thanks.

"We’ll email you when we’ve developed a fix. "

I guess I'll stop expecting this.

[BillM223]

Sorry, we in the Community do not get copies of such emails. If your 5329 checks out OK, you can file (at least as far as your HSA is concerned).

[astiz]

My case is slightly different, but along the similar lines and worst.   In my case, the problem is that I am trying to get rid of the excess contribution for which I have been paying the 6% pentalty for two years now (2022 & 2023).  I removed the money from HSA as an excess contribution in 2024 and the 1099-SA gave it a code of 2 (Distribution of excess contribution).    Turbo tax does not provide the capability to treat all or part of that distribution as a non-qualifying distribution which is the only way to eliminate that excess contribution from Form 5329 and stop paying the penalty.  They refuse to acknowledge that this is a bug in their software so they are giving me a cludge.  What makes matters worst, is that the IRS forms 5329 and 8889 are broken or at minimum unfair because if one does not remove the excess contribution the year in which it happened the only way to remove it is to pay a 20% penalty plus pay taxes on it again, which is my case.  

[dmertz]

"I removed the money from HSA as an excess contribution in 2024 and the 1099-SA gave it a code of 2 (Distribution of excess contribution)."

@astiz , the problem is that that is not permitted under the tax code.

"They refuse to acknowledge that this is a bug in their software so they are giving me a cludge."

Who are "they?"  If you mean TurboTax, TurboTax is correct in not allowing a code-2 Form 1099-R to eliminate an excess contribution made for an earlier year because the tax code does not permit doing so.  The only permissible correction made by obtaining a distribution is to obtain an ordinary code-1 distribution and make it taxable by not applying it to medical expenses.

"What makes matters worst, is that the IRS forms 5329 and 8889 are broken or at minimum unfair because if one does not remove the excess contribution the year in which it happened the only way to remove it is to pay a 20% penalty plus pay taxes on it again, which is my case."

That is what the tax code requires.  Changing that would require changes to the tax code.

[astiz]

In my opinion, the reason that this is a bug/defect in the TTax software is because Turbo tax should have recognized that the 1099-SA that I received had an amount on Box 2 (earnings on excess contributions) and also had the carryover excess contribution from the carry over worksheet.  A human would have recognized that an earning on excess contributions would have been reported only on a contribution that has been sitting in the HSA account and was not withdrawn on time.  Furthermore, a human would have recognized that there was an excess contribution from prior year by looking over at the carryover worksheet.  Therefore, as part of the step-by-step process TTax should have asked additional question related to the information reported in the 1099-SA and adjust accordingly for the amount that should have been reported as an unqualified distribution that needed to be taxed.      

[dmertz]

TurboTax does not support reporting of your Form 1099-SA in a meaningful way because the transaction reported on this Form 1099-SA was not a legal transaction.  To be a legal transaction it must be reported as a code-1 ordinary HSA distribution.