Excess HSA contribution

[Djamesfamily09]

Hello,

my wife and I worked for same

company and I had the HSA and medical coverage . I resigned in November 2024 and my wife took over medical coverage and opened up an HSA under same high deductible plan. Not thinking she also received the seed money which put us over $1550 in excess contributions for 2024. We were able to work with health equity to submit the paperwork to have that $1550 switched to contribution year 2025. Is there any other form needed when filing our taxes such as form 5329 or because we were able to adjust contribution year is this all we need to do…and is this able to be done on turbo tax? Thank you!

[Mike9241]

it seems you left the excess in to use as part of your 2025 contribution. That will require you to pay a 6% penalty - form 5329. the penalty is based on the lower of the excess or the fair value of the HSA on 12/31/2024

yes Turbotax can handle this situation. Since the excess came through payroll you'll see the 1550 as taxable income on schedule 1 

[BillM223]

It depends.

When you run TurboTax with your data, does TurboTax tell you that you (two) had an excess of $1,500?

If by some miracle you calculated the excess to be the same as what TurboTax calculates (calculating excess is a non-trivia task), then back in the HSA interview when TurboTax asks if you want to withdraw the excess, say NO.

Then the $1,500 will be carried over to 2025 as a personal contribution. This is what you have asked your HSA custodian to do.

TurboTax will also generate a form 5329 so that you can be assessed a 6% excise tax (penalty) on the carryover.

However, in the likely case that TurboTax calculated a different excess amount than you, there is no way to change it.

In the future, it would be better to let TurboTax calculate the excess.

If TurboTax did not calculate $1,500 in excess, come back and tell us what it told you the excess was, and if you decided to tell TurboTax what amount you were going to withdraw (if any).

[Djamesfamily09]

Yes Turno tax calculated my over amount… but I was not sure if the 6% tax would be assessed every year or now that it will be looked at at as a 2025 contribution of a one time 6% penalty would be assessed.  Also I figure this was a better way to go rather than income tax on the same $1550 amount.

so once walking back through  to complete I will say “No” to if I want to withdraw any amount but want to make sure each year they won’t penalize me the 6%. So will I be charged income tax as well as a 6% penalty by leaving it in for 2025? Instead of pulling it out and being only taxed as income and avoid the 6% penalty? 

[BillM223]

So, to confirm, TurboTax calculated $1,500? If so, this is good news.

You have two ways to deal with this excess:

1. Withdraw the excess before April 15th. I don't know if you have enough cash in the HSA to do this, and I don't know how the HSA custodian will respond to your change of plans. If you can withdraw the entire excess, then there is no carryover and no 6% penalty.

2. Carryover part or all of your current year excess contribution. This carryover amount will be assessed a 6% penalty.

Then, in year 2025, make room for the carryover to be treated like a personal contribution - that is, make sure that you reduce what you would have otherwise contributed so that carryover+2025 contributions is less than or equal to the annual HSA contribution limit in 2025. In this way, the carryover is "used up" and there will be no more 6%.

As for what I think you mean by "earned income tax", the moment that TurboTax detected the excess contributions, IF the contributions were all listed on your W-2(s), then the excess is added to Other Income to be taxed. Why? Because the code W amounts were removed from Wages in boxes 1, 3, and 5 when the W-2 was printed. That is, the code W amounts would have been tax-free, so if they are in excess, they need to be added to Income to be taxed.

But if you carryover the excess to 2025, then if the carryover can be used in 2025, it will appear as a deduction on line 13 Schedule 1 (1040)...so your income will indeed be reduced in 2025.

[Djamesfamily09]

Hello Bill,

Yes,  Turbo tax told me how much was in excess and it makes sense as to what I saw the limits to be and how much my wife and I contributed. She does have enough to withdrawal the amount of the excess . By your response it appears  if we can stop what we set in motion we can at least avoid the penalty rather than paying penalty and paying income tax this year.  So with all things considered would it be true to say withdrawing the

excess would be less out of pocket then moving it to a 2025 contribution?  If we do keep it or they do not allow us to change back to withdrawing it, as long as we adjust our contributions to not exceed the current t limits we should not be penalized again correct?

[BillM223 · Accepted solution]

Yes, if your HSA custodian is game, you can change things to withdraw the excess this year (before April 15th). NOTE: you have to tell TurboTax that you are withdrawing the excess in the HSA interview, so that it won't create form 5329 which is where the 6% penalty appears.

So, yes, this would be less out of pocket.

If you are forced to carryover some amount, then, yes, make sure that you leave space under your HSA contribution limit for the amount carried over. Otherwise, you may just create a new excess amount, which will be harder to fix.

[Djamesfamily09]

I really appreciate it. Thank you. One last confirmation.

if they do not allow us to change and it is carried over we will owe the penalty and tax for 2024 and want to adjust our savings to not over contribute .. But the 6% penalty would not be carried over the following years? And our income reduced next year by the $1550?

[BillM223]

Yes and yes.

If the $1,500 is carried over to 2025 AND can be used in 2025 because you cut back on your contributions to allow for it, it will appear as part of line 13, Schedule 1 (1040), which will have the effect of reducing your 2025 income.

And of course, the 6% penalty will not repeat, because (if you are careful) there will not be an excess in 2025 to carryover to 2026.

[Djamesfamily09]

Update: called HSA provider and they cancelled our request .. so we will now be removing excess and avoiding the 6% penalty.

will we need to fill out any additional forms other than replying yes in the interview on TT next year or this year?

thank you again!

[BillM223]

Excellent!

Enjoy your HSA, which is one of the best tax features that you can have, because with it, you are in essence, getting a discount on every medical expense.

[Djamesfamily09]

Will we need to fill out any additional forms next year as a result of taking out the distribution this year? To avoid any type of early withdrawal penalty ?

[BillM223]

No. If you use TurboTax next year, it will automatically carryover the excess contribution amount, and it will place it on Line 2 of form 8889. It may also appear on line 13, Schedule 1 (1040).

TurboTax will apply the carryover as a personal contribution along with any other personal contributions you have. No more effort is needed on your part.

Oh, if you are using TurboTax next year (I hope you do, because we really do a lot of stuff automatically for you), you may see the question, "Did you overfund your HSA in 2024?" If you see this question, answer "Yes". What it is really asking is, "Did you have a carryover of excess contributions from 2024? (the answer of course is yes)". If asked for the amount, enter the amount that was carried over. 

In the HSA world, there is no such thing as early withdrawal penalty.

[Djamesfamily09]

Hello Bill,

But we are taking out the excess money ? Not carrying over, so does your answer still

apply if we submitted the full excess to be removed and sent to our bank?

[BillM223]

Oh, sorry, yes, if you withdrawing all the excess this year (before April 15th), with all the posts, I got confused.

If you withdraw all the excess this year, then when you see that question next year, "Did you overfund your HSA in 2024?" answer NO, because the question really wants to know if you carried over anything.

If you withdrew the whole excess in early 2025 then in 2026, you will answer No to overfunding your HSA in 2024, because you "cured" the excess when you withdrew it.