Erroneous excess distribution withdrawal for HSA

[deeleo]

I'm new to HSAs, and I'm hoping someone can help me with a tricky situation I got myself into. I recently made an excess-contribution withdrawal from my HSA that I now believe I made in error. Here's what happened:

- I made an HSA contribution in January 2020 for the 2019 tax year to reach the maximum contribution limit of $3,500.

- Last month, I withdrew most of that amount as an excess contribution. Why? I was enrolled in a high-deductible health plan for only three months in 2019, so I thought I was eligible to contribute only a quarter of the annual limit, or $875.

- After withdrawing the funds and depositing the check I received from the bank that holds my HSA, I found out about the IRS's "last-month" rule, which states that if you were enrolled in a high-deductible plan on Dec. 1, 2019 (which I was), your contribution limit actually is the full $3,500 for the year. So I really didn't have to withdraw the funds at all.

I contacted the bank that holds my HSA about this, and they told me to just fill out their standard contribution form and send a check to have the amount I withdrew redeposited back into my HSA for 2019. That sounds a little too simple to me, but maybe it is that simple. Just wondering if anyone has any insights into this kind of situation. Thanks in advance.

[BillM223 · Accepted solution]

Did anyone mention "mistaken distribution"? That's when you ask for distribution but later discover that you shouldn't have - for example, you paid for a medical expense with your HSA debit card that was actually covered by your health insurance.

It sounds to me that the HSA custodian is treating this as a mistaken distribution - if so, that's fine, and it is as simple as completing a form and sending the money back. Note that the HSA custodian does not have to honor your request to process a mistaken distribution, so whatever you do, be nice to them.

Yes, you will also return the money, but the HSA custodian has to handle the paperwork correctly so that it does not appear to be another contribution. If they say they have it handled and won't be reported as an additional contribution, be content.

In the future, please do NOT withdraw amounts that you might think are excess contributions. Wait until you do your tax return in the following spring and let TurboTax tell you what the excess is (if any). Withdrawing the wrong amount can subject you to penalties because you are supposed to withdraw money only for qualified medical expenses and the exact amount of the excess contribution. Anything else is subject to a 20% penalty.

[deeleo]

I appreciate your reply. My custodian actually didn't refer to it as a mistaken distribution; they have a different form for that, and that form specifically states that it's not to be used for erroneous excess distributions. The form they sent me was their standard contribution/deposit form. So I will fill that out and send it along with a check. I will also include a nice letter explaining the situation and asking them not to report it as an additional contribution.

And yes, I realized too late that I should have just let TurboTax figure out any excess instead of trying to do it myself. Lesson learned!

[BillM223]

"I will also include a nice letter explaining the situation and asking them not to report it as an additional contribution." Yes, please get their confirmation in writing that is it not being treated as a contribution, lest in a few years during an audit, no one at the HSA custodian remembers just what they did...

Good luck!