Addressing Medicare 6 month retroactivity impact on previous HSA contributions

[John J1]

History:

Started HSA Jan.1, 2020 with company one time contribution and bi-weekly contributions from paycheck

Enrolled in Medicare A in June, 2020 at age 69 ... Medicare made it retroactively effective to Nov. 2019

Contacted HSA custodial bank and they provided following procedure to address Medicare/HSA issue:

- I stopped further HSA contributions

- I sent check to bank, with Withdrawal Correction Form, to reimburse account for total amount paid out for medical expenses year to date

- I then sent Excess Contribution and Deposit Correction Request Form requesting excess contribution refund

- Received check understanding that I owed taxes on this amount for HSA contributions made pre-tax

Received 1099-SA: Box 1 amount matches check I received, Box 2 has earnings and Box 3 has Code 2 (Excess Contributions)

However, after entering W2, with total HSA contributions made in Box 12W, and entering 1099-SA data, it doesn't appear that TurboTax is calculating additional tax due (amount of refund due in box at top didn't change) ... how do I confirm that additional tax due is being included in total tax due or what other action do I need to take to ensure that it's included?

[BillM223]

Did you go through the HSA interview? Do a Search (upper right) for hsa and click on the jump-to link (Mac users must find HSA in the Topics List).

In the HSA interview, indicate that you had Medicare for all 12 months in 2020.

Now, you perhaps have already done this and wondered why your tax or refund didn't change. This is because of the funny way in which HSAs are treated by the IRS.

Any contributions made through your employer (whether by your employer or by you by means of payroll deduction) are reported in box 12 with a code of W on your W-2. Before your W-2 is printed, your employer removes the code W amount from Wages in boxes 1, 3, and 5. This is why you don't see an HSA deduction for contributions made through your employer - the contributions were never in your income in the first place.

However, the IRS considers that HSA contributions are taxable until you demonstrate that you have qualifying HDHP coverage. So when you start your return and enter your W-2, the code W amount is added to line 8 (Other Income) on Schedule 1 (1040).

In the normal course of events, when you indicate that you have HDHP coverage, this code W amount is removed from Other Income, and your tax decreases or refund increases.

However, in your case, if you indicated that you had Medicare for all of 2020, then the excess contributions just stayed on Line 8 on Schedule 1 (1040), which is why you did not notice any change.

While this may appear to be odd, it is how I would expect it to work.

Make sense?

[John J1]

Hi Bill ... greatly appreciate your quick, detailed and well written reply! For me, this is indeed a complicated process to understand. 

I did go through the HSA interview and did answer that I had Medicare for all 12 months, as you indicated ... I answered the following interview question yes, is that correct? "Tell us if your excess HSA/MSA contribution was made by your employer and deducted from the wages in Box 1 of your W-2?" Also, I  answered that the total amount my company and I contributed was withdrawn.

I do see that the total amount that my company and I contributed is reported on Schedule 1 line 8 ... thanks for pointing that out! Does the fact that the company withdrew their contribution, as well, effect the number reported on Sched. 1 line 8? In other words, am I responsible for paying the tax on that portion even though the company withdrew it from the custodial bank account?

[BillM223]

"am I responsible for paying the tax on that portion even though the company withdrew it from the custodial bank account?"

Normally, the company is allowed to withdraw funds from your HSA if they contributed to your HSA when they should have known that you were not eligible. That does not seem to be the case here (that they would have known that you would become ineligible).

This means that they should not have withdrawn the money...but they did. 

So the alternative solution is for the company to give you a corrected W-2 so that the code W amount does not appear in box 12 of your W-2. This is assuming that the company withdrew the entire code W amount. In this case, when you run through your return again, TurboTax will not think that you had excess contributions so the entry on Line 8, Schedule 1 (1040) will go away.

So call them up and tell them that because they withdrew that amount from your HSA that you are being taxed on money that you never received.

It's their choice:

Either pay you the money they withdrew, or

Give you a corrected W-2 with the code W amount removed.