Form 8889 excess HSA contributions from prior year problem/bug

[spikedmd]

So 2 issues (one potentially a software bug with turbotax)...

first the background. In 2022 I had $325 excess HSA because I changed jobs and was not in a HDP for nov-dec that year. When I filed my taxes last year, I must have missed that and failed to do the withdrawal of excess. My bad, moving on...

Using turbotax/desktop right now for 2023 taxes, it recognizes that $325 excess from last year and throws it onto form 8889. Fine, I pay a 6% excess tax on that I guess... Here is my problem and question:

1. TurboTax error checking keeps bringing me back to form 8889 and the checkbox if I inherited this HSA from a deceased person. I leave it unchecked because I didnt. But I can't get past this error! (This is what I think might be a bug in the software). Note that the rest of the form shows that $325 as 2023 contributions(I am not in a HDP for 2023). Not sure what to do with that or how to report this to Intuit?

2. My other question is, can I still do the withdrawal of excess now? or is it too late(well after april 2023)? What are my options here?

[BillM223]

#1. What is the distribution code on your 1099-SA? Was it 4 or 6? There is no bug in this part of TurboTax that I am aware of.

#2. Yes, the excess HSA contributions are carried over to 2023 and shown on line 2 of the 8889. This is done so that if possible, the excess can be squeezed in under the 2023 annual HSA contribution limit and "used up".

#3. If you are truly not under HDHP coverage in 2023, then this (#3) is not going to work - the carryover will just carry over to 2024.

#4. No, as you suspect, you cannot do the withdrawal of excess contributions for the original excess because that needed to be done by April 15, 2023.

#5. I have to split this comment into two parts:

5.A The penalty for the carryover is 6% of the smaller of the carryover or the balance in the HSA on December 31, (tax year). So, once your HSA balance goes to zero, your penalty goes to zero.

5.B If 5.A is too far out, then the way you dispose of an excess carryover (assuming that you never go under an HDHP again) is to take a distribution, and when you enter the 1099-SA, say that it was not for qualified medical expenses. This will cause the distribution to be added to your income along with a 20% penalty, but this will permanently stop the carryover and its penalty.

[spikedmd]

so my 1099-SA just has a distribution code of 1, which is normal healthcare expenditures.

the repetitive turbotax error check brings me back to form 8889 where it asks if myself or spouse had HDP coverage in 2023. neither of us did... but thats not an option apparently... thats my current problem there. I guess I can just select 'myself' to get past that endless loop?

regarding your number 5 bullet... so if my 1099SA is $1000 of normal distribution for example, are you saying I should break that into 2 entries, one for $675 (normal distribution) and the other for $325 with whatever distribution code I need to say tax me on that and then I'm clear? Or do I need to wait for next years taxes and do a separate withdrawal from the HSA in 2024 to be taxed on? your option 5a is not an option as my balance is like 60k or something.

Thanks, I appreciate the advice.

[BillM223]

"TurboTax error checking keeps bringing me back to form 8889 and the checkbox if I inherited this HSA from a deceased person. I leave it unchecked because I didnt. But I can't get past this error! "

I see where this is - it's at the top of the 8889-T and 8889-S. But in 8 years of answering HSA questions, I have never seen it triggered, and I don't know what you could have done to trigger it. By any chance did you make an entry in box 4 on the 1099-SA? Could you put your cursor in that box and click on the delete key a few times? 

Is it possible that you entered something in box 4 and hit Continue, yet came back and erased the amount in Box 4?

Well, I have spent enough time trying to reproduce this situation.

But I have the nuclear option that fixes everything: the HSA Reset. This deletes all HSA data, even data you can't normally get to through the interview screens.

The HSA Reset

I am asking you to do this procedure so that hidden data that is causing you trouble will be deleted and you can continue.

***Reset***

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop***

3. go to View (at the top), choose Forms, and select the desired form (1099-SA (if one), 8889-T, and 8889-S (if one), and 8853-T (if one) and 8853-S (if one)). Note the Delete Form button at the bottom of the screen.

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one), and 8853-T (if one) and 8853-S (if one)

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview....this should give you a clean slate to start from.

[spikedmd]

Thanks Bill. I was mistaken when I thought the error was tied to that checkbox for inherited HSA. Its tied to 'who had HSA coverage --myself or spouse'. Neither of us had coverage is the issue. Thats where the error is. Look at my previous reply in case you missed that.

[RobertB4444]

Say you had coverage.  Since you're dealing with the contributions and distributions for this year think of it as a carryover of the coverage from last year.  Next year - when you are no longer dealing with this mess - you will say you had no coverage and be good to go.

@spikedmd 

[spikedmd]

Thanks. I'm still not 100% clear on how to get rid of this problem for the future. Is it one of these 2 options:

1. For the 2023 tax year (what I'm filing now), do I "fake" my 1099-SA's to have one be a taxable distribution of $325 and the other be the remainder for a normal distribution?

2. For the 2024 tax year, do a HSA withdrawal of $325 such that i get a 1099-SA for that plus a 1099-SA for whatever my normal distributions end up being?

Of course, this doesn't even go into the gains made in that HSA account since that initial $325 was made in 2022...

[BillM223]

Did you actually receive a 1099-SA for 2023? In rereading your posts, I can't tell if you did or not. In any case, in case you have a 1099-SA in hand, please do the following (if the distribution is larger than the excess being carried over):

You don't need to split the 1099-SA that you got into two pseudo 1099-SAs. 

Instead, when you enter the 1099-SA, it will ask you if the distribution was all for qualified medical expenses.

You will answer "no", and two more lines will appear. You will answer that you spent part of it on medical expenses. 

Then more lines will appear, and you can indicate how much was used for medical expenses.  You should make it so that the difference that was not for medical expenses should be the amount of the excess being carried over. That should trigger the excess to be added to income, and the 20% penalty.

Don't worry about the earnings - at this point, the IRS will take the 20% penalty in lieu of the earnings.

You should be clear of the excess problem from now on.

[spikedmd]

Beautiful! Thanks so much for the help!