Excessive HSA contribution in prior year

[ays71]

Hello, here is my situation:

1). 2021:  Switched employers so I over contributed

• Old company:  Contributed $1154
• New company:  Contributed $3600

2).  Tax filing for 2021:  We paid 6% penalty

3).  Tax filing for 2022:  We paid 6% penalty again (but it was okay because I was under an HDHP)

4).  Tax filing for 2023:  I was not under an HDHP so the excess contribution is not recognized in 2023, Turbo Tax flagged it as an error.

What are my available options now? I want to remove the excess $1154 from 2023, as if subject to a 20% penalty. How can I achieve this using TurboTax? Thank you for your advice.

[dmertz · Accepted solution]

It's too late to correct the $1,154 excess contribution made for 2021 and avoid a penalty on your 2023 tax return unless you obtained distributions from your HSA in 2023.  If you do have a code-1 2023 Form 1099-SA showing distributions, in TurboTax you'll enter as the amount applied to medical expenses the amount from box 1 minus $1,154 (but not less than zero).  This will make the portion not applied to medical expenses taxable and subject to the 20% early-distribution penalty, reducing the excess.

If after doing the above you still have some excess carried into 2024, to avoid a penalty again on your 2024 tax return you must make a taxable distribution from your HSA before the end of 2024.  

[ays71]

Thanks @dmertz.

I have more questions:

1). If we ask the bank (Health Equity) to see if we can withdraw $1104 (I contributed $50 less than the maximum in 2022, so $1154 was reduced to $1104) knowing that we will pay a 20% penalty, will we get another 1099-SA (for 2023) before the IRS tax deadline to represent that amount taken out?

2). Will this approach clean up the over-contribution and stop the year-over-year penalties?

3). How do we fill out TurboTax (online version) form 5329 to show that we pulled out the $1104 and will pay the 20% penalty?

4). Right now if we go through the prompts, form 8889 is also generated, but we did not have an HDHP in 2023.  How do we JUST fill in form 5329 above?

Appreciate your help!

[dmertz]

1) "will we get another 1099-SA (for 2023) before the IRS tax deadline to represent that amount taken out?"

No.  A distribution made in 2024 will eliminate the penalty for 2024, not for 2023.  The deadline to obtain a regular distribution to eliminate the penalty for 2023 was December 31, 2023.

2)  Taking a taxable distribution in 2024 to eliminate the excess will eliminate the excess for 2024 and beyond.

3)  2024 TurboTax will automatically include on your 2024 Form 5329 line 44 any taxable HSA distribution made in 2024.

4)  I don't know why 2023 TurboTax would generate Form 8889 if you made no HSA contributions for 2023 and made no HSA distribution in 2023.

[ays71]

@dmertz Thank you again for your help.

The following two posts also outline the issue and suggest a workaround:

https://ttlc.intuit.com/community/taxes/discussion/handling-excess-hsa-contribution-from-prior-year-...

https://ttlc.intuit.com/community/taxes/discussion/2023-turbotax-desktop-treats-2022-hsa-excess-cont...