Excess HSA contribution in 2024, need to correct issue on 2025 taxes

[skyip83]

Hello, I filed 2024 taxes with incorrect HSA contribution amount and have not amended it yet. I also had excess contribution of $1656 that I need to fix for my 2024/2025 taxes. I don’t have a HDHP after 2024, and have not incurred any HSA expenses.

Should I amend my 2024 first, and then contact my HSA plan administrator to do a distribution withdraw? Should this be a normal or an excess contribution withdrawal? Would I pay the 6% on the carryover from 2024 into 2025, and 6% and/or 20% penalty for 2026 taxes on the excess amount for 2025 taxes?

I would like to get this resolved and not have to deal with continuous future carryovers, even if I have to pay the penalty + taxes. I am planning to do a filing extension for 2025 to have more time to fix this issue. Thanks! - Steven

[BillM223]

Should I amend my 2024 first, and then contact my HSA plan administrator to do a distribution withdraw? 

If you amend your 2024 return, will you still have such a large excess in 2025? If amending your 2024 return will alter your 2025 return (by having a changed HSA carryover), then, yes, amend your 2024 return first.

Should this be a normal or an excess contribution withdrawal? 

The excess for 2025 you will be able to make a withdrawal of excess contributions. But the excess for 2024 can no longer be withdrawn this way. You will note that TurboTax will combine the carryover from 2024 with whatever you created new in 2025, and tell you this is the excess for 2025. But that confuses the issue. You want to mentally separate the 2024 excess which you can't fix in a cheap way with the 2025 excess which you still can.

Since you did not withdraw the 2024 excess in a timely manner (April 15, 2025), then you must withdraw the excess amount (no need to worry about earnings) as a "normal" withdrawal. Don't mention excess contributions to the HSA custodian for this withdrawal, because that will just confuse them and foul up their paperwork.

This withdrawal will come to you as a check and as a 1099-SA with a distribution code of '1'. The distribution (i.e., withdrawal) amount will be added to your Other Income and in addition there will be a 20% penalty applied. However, the 2024 carryover with be over and done with.

Would I pay the 6% on the carryover from 2024 into 2025, and 6% and/or 20% penalty for 2026 taxes on the excess amount for 2025 taxes?

Yes, you will owe 6% (0.06) of the smaller of line 48 (excess contributions) or the value of your HSAs on December 31, 2024 (including 2024 contributions made in 2025) for carryover 2024's excess to 2025. When you "fix" the 2024 excess in 2026, then, as I noted above, you will pay tax on the amount of the 2024 excess and an additional 20% of that excess.

If you do what I suggest (below), you will not owe the 6% for carrying over the 2025 excess to 2026, because you will fix it.

I suggest that you immediately file an extension for your 2025 return. This will give you until October 15th to file your return AND take care of the 2025 excess. Note that this does mean that you have to wait until October to file your return - you could do it next week, if you like.

Now, you have already taken care of your 2024 excess, with a 1099-SA that you will receive in late 2026 or early 2027, and which you will file on your 2026 return in early 2027. For your 2025 excess, in TurboTax, when it tells you your excess, tell it that you will withdraw all of it by the due date of the return (remember, you just extended the due date). Depending on timing, TurboTax may tell you that you can't withdraw all of the excess - this would be some of the 2024 excess that can't be withdrawn as an excess contribution but must be withdrawn the "normal" way. Withdraw as much as you can.

If the 2025 excess was made through your employer, then the excess is immediately added back to your income. But this amount won't carry over to 2026.

So, do the following:

1. Extend your 2025 return NOW.

2. Amend your 2024 return.

3. Contact your HSA custodian and ask for a normal distribution of the 2024 excess amount.

4. Wait a couple of weeks (like when you receive the check from the custodian for the step #3 distribution), and then contact the HSA custodian and ask for a "withdrawal of excess contributions" for your 2025 amount. Also ask them to calculate the earnings and include that in the distribution. 

5. You will eventually receive 1099-SAs for #3 and #4 - add both of these to your 2026 return.

[skyip83]

Thank you for the thorough explanation on helping me resolve this issue. So the only excess contribution I had occurred in 2024, with no additional contributions in 2025 for the 2024 year since I switched employers and they don’t have a HDHP for HSA. I did have a couple more questions, specifically on steps 3 & 4.

1. Extend your 2025 return NOW.

  I’ll do this immediately.

2. Amend your 2024 return.

  I’ll do this next since I need to correct the contribution amount in 2024, and that large amount will carryover into 2025.

3. Contact your HSA custodian and ask for a normal distribution of the 2024 excess amount.

  When you said “Withdraw as much as you can” should I take a normal distribution of the amount I provided in my initial question, or more (my HSA balance has more) to cover capital gains/interests? I know you mentioned not to worry about earnings, but my HSA only keeps back $1k not invested, and the rest of the balance is being invested.

4. Wait a couple of weeks (like when you receive the check from the custodian for the step #3 distribution), and then contact the HSA custodian and ask for a "withdrawal of excess contributions" for your 2025 amount. Also ask them to calculate the earnings and include that in the distribution.

  After the “normal distribution” to fix 2024 taxes, then would I contact HSA again to handle the “withdrawal of excess contributions” to fix the earnings portion of the carried over for the 2025 taxes? Is that correct?

5. You will eventually receive 1099-SAs for #3 and #4 - add both of these to your 2026 return.

[BillM223 · Accepted solution]

OK, thank you for the additional information about no new 2025 excess contributions. This simplified things.

I should mention that if your amend your 2024 return, that you should carry over your 2025 return from the 2024 return, i.e., if you already created your 2024 return, you'll need to redo it after you amend 2024.

OK, so all of your excess contributions for 2025 will be those carried over from 2024. But, if I remember correctly, you did not have HDHP coverage in 2025. This means that you cannot use up your carryover as a "personal" contribution in 2025; worse, since the time has past to withdraw the excess 2024 contributions.

So delay filing your 2025 return (since you will be on extension) until you get the 1099-SA for the "normal" distribution for the 2024 excess. With this 1099-SA, you can file your 2025 return, and have the "normal" distribution cut off the excess carryover from 2024. So you can clear things up this year and not wait until next year.

Ask the HSA custodian to distribute only the 2024 excess to you - as I said, don't worry about the excess. It sounds like you will have additional dollars in the HSA after this distribution - that's good for you.

To clarify, in this new scenario, you won't ask for a withdrawal of the 2025 excess, because if I understand you correctly, there were no new contributions for 2025, so no new excess. Just do the "normal" distribution of the 2024 excess, and not worry about "withdrawal of excess contributions".

That is, if you can get the 1099-SA for the 2024 excess and enter it on your 2025 return, there will be no excess for 2025.