excess HSA contribution error

Forum|Forum|5 years ago
March 24, 2021
1 reply
14 views

When I filed my 2019 taxes I reported $2,310 in contributions for myself and checked each month as a self only HDHP. I reported $3,500 in contributions for my wife and checked 7 months as a self only plan and 5 months as a family plan since our first child was born August 21, 2019. When I started my 2020 taxes and transferred my info from 2019 the software told me I had $204 tax due before I even entered any income. On the 2020 Form 8889 transferred for my wife it shows on Part III line 18 smart worksheet/section C/#1"Total maximum allowable contribution for 2019" is $4,958. Part III line 18 smart worksheet/section C/#2 "Amount allocated to spouse in 2019" is $3,500. Part III line 18 smart worksheet/section c/#3 "Net maximum allowable contribution for 2019" is $1,548. Then Part III line 18 "Last month rule" shows $2,042. Part III line 20 "Total income" shows $2,042 and Part III line 21 "Additional tax" shows $204. I spoke to my employer and they confirmed that I DID NOT make excess contributions to my HSA. Did I report this incorrectly for it to transfer excess contribution to HSA from 2019?

BillM223

Level 15

"When I started my 2020 taxes and transferred my info from 2019 the software told me I had $204 tax due before I even entered any income."

I do not know where this $204 came from, but I don't know that it had anything to do with your HSA.

If you made excess contributions in 2019, TurboTax would had told you, and asked you if you wanted to withdraw it. If you did not withdraw it all by July 15, 2020, then TurboTax would have added form 5329 to your return, which would calculate a 6% excise tax on the excess contributions that were not withdrawn in time (see Section VII).

If you didn't have a 5329 on your 2019 return, then I have to assume that you entered 2019 correctly.

"On the 2020 Form 8889 transferred for my wife it shows on Part III line 18 smart worksheet/section C/#1"Total maximum allowable contribution for 2019" is $4,958. Part III line 18 smart worksheet/section C/#2 "Amount allocated to spouse in 2019" is $3,500. Part III line 18 smart worksheet/section c/#3 "Net maximum allowable contribution for 2019" is $1,548. Then Part III line 18 "Last month rule" shows $2,042. Part III line 20 "Total income" shows $2,042 and Part III line 21 "Additional tax" shows $204. "

All of the entries are related to the question at the end of the HSA interview: "What Kind of High Deductible Health Plan did [name] have on December 1, 2019?" I assume that the name here was your spouse's.

I also assume that your spouse does not have an HSA.

The problem here is that this question does not apply to most taxpayers (it should say so but it doesn't).

If your spouse did not have an HSA in 2019 or did have an HSA but did not contribute to it, then your spouse should answer NONE to this question.

These questions and answers are all a result of your spouse answering Family or Self when your spouse should have answered NONE. TurboTax thought that your spouse had used the last-month rule in 2019 but did not maintain HDHP coverage in 2020, which would result in penalties.

Don't be worried if this doesn't make sense - just go back to this questions and if your spouse either did not have an HSA in 2019 or did but did not contribute to it, then answer NONE.

P.S.

"I spoke to my employer and they confirmed that I DID NOT make excess contributions to my HSA."

Your employer does not have enough information to know if you made excess contributions or not. Neither does your HSA custodian.

Only your tax professional and/or tax software - which can see your entire tax situation - can know. I understand the desire to ask your employer, but, in fact, they cannot know. After all, your employer may not be fully aware of your and your spouse's insurance situation, and your employer would not be aware of any HSA contributions that you made directly to the HSA custodian.

If after you make the change to NONE for the HDHP question above, you have any more issues, then please come back and ask.

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TMCJAuthor

Level 2

Hi Billm223,

Thank you for your response. In 2019 both my spouse and I had HSA's through our employer. When I review the HSA summary in Wages & Income in TT 2019 it shows $2,806 in Total Distributions, $0 in Taxable Distributions, $3,500 in Tax Free Employer Contributions for my spouse. It shows $1,911 in Total Distributions, $0 in Taxable Distributions and $2,310 in Tax Free Employer Contributions for myself. Neither of us made any contributions on our own to our HSA and we both were covered by a HDHP all of 2019. I also looked and there was no form 5329 generated on 2019 tax return. When I transfer my info from 2019 to begin my 2020 return I immediately show $204 Federal Tax due. On Form 1040 line 8 "Other Income from Schedule 1, Line 9" it shows $2,042. When I look on schedule 1 line 9 it says Form 8889 Health Savings Accounts and has an entry of $2,042. There is already a Form 8889 generated in my name that shows line 18 $2,042, line 20 $2,042 and line 21 an additional tax of $204. Any idea why this is being generated when 2019 return does not show any excess contributions via form 5329?

Thanks for your help!

BillM223

Level 15

Well, it looks like I am going to have to explain the last-month rule after all - this is the source of the line 18 and onward entries.

The Tax Code allows you to take advantage of the "last-month" rule - that is, if you have HDHP coverage on December 1 of the year, you are permitted to use the full annual HSA contribution limit (otherwise the limit would be pro-rated by month).

The catch is that if you use the last-month rule to artificially inflate the annual HSA contribution limit, then you have to stay under HDHP coverage for the entire "testing" period, which means all the next year.

So, if you used the last-month rule on December 1, 2019 (and you did), then you had to stay under HDHP coverage for all of 2020.

Your results are consistent with you not indicating that each of you had HDHP coverage for all of 2020.

If you failed the testing period, then TurboTax asks you a series of questions to determine how much of an annual HSA contribution you would have been allowed had it not been for the last-month rule. Any HSA contributions over that would be considered in excess.

So, let me ask you:

1. You said that each of you had an HSA in 2019 and I presume 2020.

2. You had Self-only coverage for 7 months in 2019 then each of you went under a Family plan for the last 5 months.

3. Did you both have an HSA for 2020?

4. If so, what HDHP coverage did you indicate for each of you for 2020? I ask because the symptoms are that one or both of you did not indicate that you had HDHP coverage for the entire year of 2020.

5. Did you see the question, "What type of Hight Deductible Health Plan coverage did [name] have on December 1, 2019?" You may have seen this question for one or both of you. What were your answer(s)?

6. You should have seen question #5 only if you did not enter that each of you had HDHP coverage for all of 2020, which takes us back to #4.

Please tell me what your coverages were for each of you in 2019 and 2020, and let's figure this out.

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