Can Someone Guide Us How to Fix Excess Contributions Made to HSA in 2023-2024 While on Medicare-After 2023 Tax Return Was Already Filed

[Boomhauser]

We are trying to fix a mess due to contributions made to HSA while enrolled in medicare.

Some claim these are not excess contribution if they were made within allowable limit, but because my wife added funds to her HSA when she was no longer eligible to make contributions due to medicare coverage, these are considered excess contributions.  I'm asking this again because I'm getting different answers from different people and no solution.

There is a rule which prohibits any contributions to HSA while enrolled in medicare. My wife filed an application for SS benefits in April 2024, she is over 65. She's still working and we're both insured under her family HDHP plan. I don't have an HSA account. The SS application was approved in May 2024 and her medicare coverage kicked in 6 months earlier in October 2023. Because she contributed to her HSA for 12 months in 2023 we were told to remove contributions for October, November and December 2023, which she did. She also removed any contributions for year 2024. She requested in May 2024 for those contributions to be returned and the HSA custodian sent her checks already which also included earning on those contributions. Her 2024 contributions for those three months were $692 and $1920 for year 2024 plus some cents for earnings. The HSA custodian said they are not going to send any corrected 1099 forms in 2024, instead they'll send 1099 forms for withdrawals in 2025 for both years, but I don't know if this is true, since they told us before that they'd issue corrected forms. I do believe those 1099sa forms or form will have distribution code 2. Since we don't want to file an amended 2023 tax return and override a bunch of forms we're looking for an advice how to approach this. Some say an amended 2023 tax return is not the right solution in this case.

As far as I understand, one option would be to wait until they send new 1099s and w2s forms  in 2025 and take it form there, but some people advise to return 2023 contributions and only report excess 2024 contributions in 2025 as other income. Can someone guide and help us, since this is not a common issue, I'm worry that we'll have problems to fix this in TT and won't be able to e-file our next year's tax return. We would greatly appreciate any help.

[Opus 17]

You have posted about this a number of times.  You should really keep all your followup questions under the same original post because, if I want to really understand your question, I now have to go back and read several prior discussion.  I'm not sure I want to do that, if you ask your clarifying question under the same original post as a followup, the same people who replied will be notified of your followup and will have the chance to answer your questions.

I do want to clarify one point

"There is a rule which prohibits any contributions to HSA while enrolled in medicare."

This is factually inaccurate.  Medicare enrollment determines the amount of eligible contributions but does not control when they must be made.  For example, if enrollment begins October 1 2023, then the person has 9 months of eligibility, and the contribution limit for 2023 will be either $3637.50 (for single HDHP coverage) or $6562.50 (for family HDHP coverage, includes the over-55 catch-up amount).  However, that dollar amount can be contributed any time between 1/1/2023 and 4/14/2024, even after Medicare enrollment.  What counts is the dollar amount contributed, not when in the year the contribution was made.

[Boomhauser]

@Opus 17 Sorry about that, but I'm getting mixed messages about contributing while enrolled in part A Medicare after 65. There is no mention that amount contributed counts as much as date of contribution. We are not tax pros and even tax pros does not fully understand that issue.  I just want to know what to do now. We could still request those excess contributions to be returned to the HSA custodian, but they're also telling us that we might have excess contributions because the medicare kicked in in October. What's your recommendation? There are some articles about that issue below: Please advise, Thank you,

https://www.journalofaccountancy.com/issues/2021/jul/medicare-rules-on-hsa-after-age-65.html

https://www.medicareinteractive.org/get-answers/coordinating-medicare-with-other-types-of-insurance/...

https://www.uhc.com/news-articles/medicare-articles/hsas-and-medicare

[Mike9241]

Medicare kicked in 10/2023. that means the allowable contributions for 2023 would be 75% of the maximum

since she had family overage in 2023 and she was over 55 a full year's contribution would have been 7750+1000(her being over 55) - no contribution for you for being over 55 - that requires you to have your own HSA.  so the allowable max for 2023 is 75% of 8750 or 6562.50

if you were not on extension the excess had to be withdrawn by 4/15/2024. if not, then you would owe a 6% penalty on the excess. if these contributions were made personally there are no other tax consequences, However, if made through employer or employer matching contributions the excess is taxable income for 2023.

if you were on extension, since you timely withdrew the excess (May 2024) there would be no penalty but if the contributions were through her employer the excess would be taxable income.

there would be no penalty on the excess for 2024 since it was withdrawn by 5/2024. however, as in 2023 if these were through your employer the excess would be taxable income 

the rules read income is reportable for the year withdrawn which would seem to indicate any income on the 2023 correction needed to be reported in 2023 while the 2024 income would be in 2024. 

[Opus 17]

The articles may be broadly correct in most parts. I did not read them all, but look at example 1 in the first article, it discusses how to calculate the maximum contribution, not when to make it.

You may want to review publication 969 and the instructions for form 8889.

https://www.irs.gov/pub/irs-pdf/p969.pdf

https://www.irs.gov/forms-pubs/about-form-8889

In particular you should see from the forms and worksheets that your contribution limit is determined by the type of coverage you have on the first day of each month (single HSA-eligible HDHP, family HSA-eligible HDHP, or non-eligible coverage) but there is nothing on the form to specify what date the contributions were made.  

The bottom line is that what counts on your tax return is the amount of contributions, and not when they were made. 

[Boomhauser]

@Opus 17As you can see this issue is not as obvious as it seems. I went through all instruction and there is nothing there to help me solve the issue. If you can read the second article it clearly says: "If you enroll in Medicare Part A and/or B, you can no longer contribute pre-tax dollars to your HSA. This is because to contribute pre-tax dollars to an HSA you cannot have any health insurance other than an HDHP. The month your Medicare begins, your account overseer should change your contribution to your HSA to ZERO dollars per month",  and this is what I was told. Any idea how to fix this issue, would you recommend any of those options I mentioned before. I'm leaning now towards doing nothing until 2025 or returning the check for 2023 excess contributions which were sent to us. I was told by the HSA custodian there's still possibility to return the check to them and they'll reverse our request for 2023 contributions. I would not change anything for year 2024, we already removed all contributions. I don't think filing an amended return is an option either. Thanks,

[dmertz]

Details provided in Boomhauser's similar thread in the Retirement forum show that there was actually no excess contribution because contributions for 2023 did never exceeded 9/12 of the annual limit, making Boomhauser's request for a return of excess contribution improper.

https://ttlc.intuit.com/community/retirement/discussion/excess-hsa-contribution-problems-due-to-medi...

[Boomhauser]

Why is my request improper? Are you 100% sure that my wife who is enrolled in Medicare Part A since October 2023 and she is older than 65, can still contribute to her HSA, because her contributions are within allowable limits? So basically it means, that she can still contribute in 2024 because her contributions are lower than allowable limit, this is not what her HSA custodians and all those articles say. Even if your claim is true, I still haven't heard any solution to this problem, and this is my main question and concern. First, you told me to amend the 2023 return and then that you think I won't be able to do that.  I'm not a TT pro but I understand taxes and that's why I came here, I'm here for advise how to solve this not to argue who is right or wrong. I'm trying to find the best solution to this. Thank you,

[dmertz]

My original reply indicating that the 2023 tax return would need to be amended relied on your assertion that an excess contribution was made, an assertion which later turned out to be false.

Section 223(f)(3) of the tax code describes excess contributions that are permitted to be returned before the due date of the tax return, including extensions.  Because the total contributions originally made for 2023 by April 15, 2024 were only $4,000, which is less than the allowable limit of $6,562.50 for 9 months of eligibility with a family HDHP over age 55, there was no excess contribution that was permissible to have been returned.

Your choices are to treat the distribution as a return of an excess contribution before the extended due date of the tax return, which is how it will be reported on the 2024 Form 1099-SA, despite the fact that there was no excess contribution that was permitted to be returned, or to treat the distribution as a regular 2024 distribution with an explanation statement that you provide with your 2024 tax return indicating that the reporting on the 2024 Form 1099-SA of a return of excess contribution is incorrect.

Neither of these choices is supported by TurboTax.  Because accurate entries into 2023 TurboTax will not cause TurboTax to indicate that an excess contribution was made (because no excess contribution was made), TurboTax will not permit you to treat the amount that was returned as a return of an excess contribution (because there is no provision in the tax code permitting the return of contributions that are not excess contributions).

[Boomhauser]

@dmertz  So, what would you recommend in our situation? I was thinking to return all those 2023 excess contributions for those three months to the custodian, I'm pretty sure this is still possible. It would show that she contributed for all 2023 within the allowable limit and first four months of 2024, which would be excess contributions (she already received the check). Then wait for 2024 1099sa form showing those January-March 2024 contributions as excess contributions. She already stopped contributing in April and her 2024 contributions are zero right now. Thanks,

[dmertz · Accepted solution]

With no excess contribution having been made and if the distribution is treated as constituting a regular distribution, the distribution can be deposited back into the HSA within 60 days as a rollover (provided that this would not result in a violation of the one-rollover-per-12-months limitation).  The challenge will be convincing the HSA custodian that the distribution cannot have been a return of excess contribution because no excess contribution had actually been made.  If they can be convinced, they should recode the distribution as a regular distribution so that the 2024 Form 1099-SA has the appropriate coding to indicate a regular distribution.  With the 2024 Form 1099-SA showing a regular distribution, it will be a simple matter in 2024 TurboTax to indicate that this distribution was rolled over.

[Boomhauser]

@dmertzSo, we can't return that 2023 check or write a new check as erroneous distribution (requested in error) so they can deposit it back to the HSA? If i understand correctly they told me that this is possible since the 2023 tax deadline has passed already.

Also, all those 2024 excess contributions for Jan-March 2024 will be treated as excess contributions on 2024 tax return, right? Thank you,

[Opus 17]

You are correct that your spouse is not allowed to make any contributions in 2024.  Those contributions should be removed as "return  of excess contribution", or else they will be subject to income tax plus a 6% penalty.

Separately, you don't have excess contributions for 2023, so you can't use the special "removal of excess contribution" rules.  If you got a check based on "return of excess contributions" and it is less than 60 days since you got the check, ask the HSA if you can re-deposit it as a rollover, or you might be able to open a second HSA at any bank that offers one, and deposit the same amount of money as a rollover.  That way, it won't be taxed.

However, if that check was received more than 60 days ago, then you need to rely on @dmertz 's recommendation because he knows these rules better than anyone else on this board.  If he says that is a "regular" distribution, then you either need to find some medical expenses to put against it, or else it will be taxed with a penalty. 

[Boomhauser]

@Opus 17Thank you for your input. No, the check was recently sent to us, our request was sent on May 30, it already shows on a HSA account (June 3rd) as Previous Year Excess Contribution Distribution: $692.28 and Earnings on Previous Year Excess Contribution Distribution: $0.04. I'm about to call the HSA custodian, but i want to confirm with you first. I'll also wait for his input @dmertz.

[Opus 17]

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@Boomhauser wrote:

@Opus 17Thank you for your input. No, the check was recently sent to us, our request was sent on May 30, it already shows on a HSA account (June 3rd) as Previous Year Excess Contribution Distribution: $692.28 and Earnings on Previous Year Excess Contribution Distribution: $0.04. I'm about to call the HSA custodian, but i want to confirm with you first. I'll also wait for his input @dmertz.

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In that case, I believe the best thing financially, is to ask if the bank will accept the check back as a rollover, or a return of mistaken distribution.  You may need to talk to a supervisor with more knowledge than the typical customer service operator, and explain that you misunderstood the rules for excess contributions and that this is not, in fact, an excess contribution situation, and you would like to put the money back.

If they can't be convinced, then I believe that you have the option of opening a second HSA in your spouse's name at a different bank, and deposit the check there.  Be sure to tell them this is a rollover and not a regular contribution.  You may be required to pay a monthly service charge on the account, but that will be less expensive than the taxes if you were to keep the money.  Then you can spend the money for medical expenses and close the account when it is empty.