excess HSA contribution in Box 12c W

[DSP]

i have excess HSA contribution in Box 12c W $263. In TurboTax, it says excess withdrawn of $263 after end of year. Do i need contact HSA provider for this to withdraw ? i did not have HDHP/HSA plan in 2023

i can see below two entries in fidelity hsa activity which matches the $263. Can i simply withdraw $263 from HSA to fix this issue without penalty? 

01/05/2023	CO CONTRIB PRIOR YR EMPLOYER PR YR (Cash)	72.91
01/05/2023	PART CONTRIB PRIOR YRPARTICIPANT PR YR (Cash)	190

[Mike9241]

if an employer contributes to an employee’s HSA early in the current year i.e. 2023 for 2022, the employee should report that contribution on their tax return for the prior year i.e. 2022. It’s essential to keep track of these contributions accurately to ensure proper tax reporting and compliance. The HSA custodian also needed to be notified that the payment was for 2022. 

you have to look to 2022 to see if there was an excess contribution for 2022 taking the 1/5/23 contribution into account.   you also have to look to see if your w-2 wages for 2022 or 2023 were reduced for the 1/5/2023 contribution. it should not be the 2023 wages.  

[DSP]

Thanks much for reply

So in 2022, i had HSA from old company. I moved that HSA fund in new company in Aug-2022. I was on HDHP/HSA plan throughout year 2022 in both company. In 2023, i switched to traditional co-pay medical (non-HDHP) plan in 2023.

 i have also checked 1040 tax return form for 2022 and i dont see excess amount. please find below screenshot.  

in this case, should i report this to my last 2022 HSA provider and safe to withdraw $263 from HSA to clear the excess amount ?

[DSP]

Just to add, i talked to My HSA provider. They told me they are 100% sure about no contribution from them in 2023. I need to put zero in Box 12 W as the $263 covered under 2022. 

[BillM223 · Accepted solution]

Unfortunately, this HSA contribution just after the first of the year is an all-too-common mistake made by employers. As Mike noted, was this contribution for 2022 or 2023? The employer should have indicated 2022 if that was the intent, because the default by HSA custodians is to apply it to the current year (2023 in this case).

So you need to confirm with your HSA custodian that the contribution was for 2022 (since it apparently was not for 2023).

Your next step is to contact your employer and ask them why they put a code W in box 12 on your W-2 for 2023, when the contribution was made for 2022. The IRS is going to believe that the $263 was made for the 2023 tax year unless the employer corrects your W-2 by removing the code W entry.

I am going to assume that nothing will get fixed. So if the $263 was actually intended for 2022 (your HSA custodian should be able to see that contribution was for tax year 2022), was it an excess contribution for 2022? I can't answer that because I don't know what your annual HSA contribution limit was in 2022 and I don't know how many other HSA contributions you had in 2022.

So if we assume that the $263 was for 2022 and did not cause you to exceed your HSA contribution limit in 2022. In this case, your employer should not have entered the code W and the $263 on your 2023 W-2, because that means that they have told the IRS conflicting information: (1) the HSA contribution was for 2022 (as reported to the HSA custodian), but (2) it was reported on the W-2 as if it was for 2023.

What the employer should have done is sent the $263 to the HSA custodian indicating that it was for 2022 (which they apparently did), then told you about the contribution before you did your 2022 tax filing (there is a way in TurboTax to add this contribution from the employer), and finally, not have put this contribution on your 2023 W-2.

Your employer could fix this situation by issuing a corrected W-2 without the code W entry. My experience, however, is that they won't do it. So you are left to fix the issue on your own.

If you remove the code W amount from box 12 on your 2023 W-2, this means that the W-2 that your employer sent to the IRS won't match the W-2 that you enter into TurboTax. The IRS may eventually notice this and send you a letter. This means that you must be ready to explain what happened to the IRS if this letter comes.

If I have gotten something about your situation wrong, please let me know, but if I understand correctly what happened, then and the employer won't issue the corrected W-2, then collect all the documentation together, put it in your tax file, and then remove the code W and its amount and file your return. 

[DSP]

You got it BillM223 and Mike, Thanks a lot for help

I confirmed with my HSA custodian and confirmed that $263 is from 2022.

HSA custodian said  "That is why we usually recommend not using the W2 for contribution amount per tax year. Your employer reported them since they were physically made in 2023, but they coded them as 2022 HSA contributions."  

With this, the only option i believe is to put zero in Box 12 W and let employer know about this. I know they mostly will not submit corrected W-2 and will wait for the IRS letter :(