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LPS2
Returning Member

How to fix HSA Excess contribution in Tax extension period with HSAs family covergage by both spouses

Hi Experts,

 

Sorry we are filing 2021 tax returns in extended period by Oct 15, 2022. We did file extension.

In 2021 I had HSA with family coverage (my HDHP coverage was me and kids) and my wife had HSA with family coverage (her HDHP coverage was her and the same kids).

 

Combining both HSA we have $1400 excess in HSA contribution in 2021.  We filed tax extension appropriately before April 15, 2022.  So now we are ready to do tax returns before Oct 15, 2022.

 

How would the HSA excess fix work now with my Tax extension period?  I was told that with tax extension period the HSA w/ family coverage for me and my wife are now treated as HSA with self only and now I have way more excess than $1400.  The IRS rules for HSA excess fix for April 15, 2022 date is different than the tax extension date I have i.e. Oct 15,2022. This is all confusing.  Can you help sort this out?

 

Thanks,

 

LPS2

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2 Replies

How to fix HSA Excess contribution in Tax extension period with HSAs family covergage by both spouses

this is straight from IRS PUB 969 on the HSA section

Excess contributions. You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the
excess contribution isn’t included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.
You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.
You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings

 

I was told that with tax extension period the HSA w/ family coverage for me and my wife are now treated as HSA with self only and now I have way more excess than $1400. The IRS rules for HSA excess fix for April 15, 2022 date is different than the tax extension date I have i.e. Oct 15,2022. This is all confusing. Can you help sort this out?

 

i don't know where you got such erroneous info. as you can see from the IRS PUB you have until 10/15 to withdraw the excess and earnings which can be from either account. when both spouses have an HSA a/c and qualifying coverage the IRS allows splitting of the maximum contribution (ignoring the extra $1000 for being over 55) any way you want. ($7200,0 or 0, $7200, or $1000, $6,200)  and since you both contributed with family health insurance coverage, that does not change. 

 

do not attempt to do the withdrawal yourself. contact an HSA custodian and tell them you need to withdraw an excess contribution of $1400, they will compute the income that also has to be withdrawn

 

your other option, leave the excess in and pay the 6% penalty.

there is a quirk in how the penalty is computed on form 5329 (Part VII). it's the lesser of 6% of the excess contributions or the fair market value of the account on 12/31/2021

then under contribute the maximum for 2022 by $1400. leaving the excess in is not advisable if you're going to have an excess year after year because you'll pay the 6% each year.  

How to fix HSA Excess contribution in Tax extension period with HSAs family covergage by both spouses

If each spouse has a family HSA, then each spouse has an individual contribution limit of $7200, unless you are over age 50.  You also have a combined maximum of $7200, unless one of both of you is over have 50.  

I assume you contributed a total of $8600, if you I think you have a $1400 excess.  

First, you contact one of the HSAs to remove excess contributions.  This is a special procedure and not a regular withdrawal.  The HAA bank will return the $1400 along with any interest earned by the $1400.  The interest will be taxable income on your 2022 tax return.  

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