How to handle HSA overcontributions from 2022 for 2023 taxes

[hkg5]

Hello wonderful community,

I have read a lot of different posts related to issues similar to my own, but it really got into the weeds with some of the responses and I just started getting confused about what I should be doing. I thought I'd post here to be sure that I understood my situation correctly and what exactly I need to do in order to correctly file my 2023 tax return. 

Situation: 

• 2022:
  • Husband overcontributed $1000 to his HSA.
  • Paid 6% excise tax on overcontribution and planned to reduce HSA contributions in 2023 by $1000
• 2023:
  • Both of us were under a Family HDHP and made contributions to our individual HSAs (so max contribution allowed as in 2023 was $7750)
  • Forgot to reduce contributions for 2023 by $1000 and ended up contributing the following amounts:
    • Me: $1283
    • Him: $6775
    • In total, we overcontributed $1308 for 2023
• 2024, ie. now: 
  • Filing for 2023 taxes (extended till Oct deadline)
  • When filling out TurboTax
    • I included that my husband had an excess contribution from 2022 of $1000
    • I filled out the section "Any employer and payroll contributions made but withdrew before April 15, 2024" with
      • $1283 for myself (I'm interpreting this section as "Did you make any withdraws due to overcontributions?" - is that correct?)
    • TurboTax gives a message saying "You contributed $1308 more to your HSA than you were allowed. From this amount, you may allocate $1283 of excess contribution between you. Who should we treat as having made the excess contribution of $1283?"
      • I selected myself
    • TurboTax later says "You may want to withdraw money from your HSAs. It looks like [your husband] has an excess contribution of $25. This amount is being taxed an extra 6%." 
      • Just curious why is it saying the excess is $25 and not $1308? Anyone have insights on this?

What I plan to do: 

• Submit request to HSA banks to withdraw the overcontributed amount of $1283 from my HSA and $25 from his HSA
• In 2024's tax return:  report the above as income as additional income with the 1099-sa the banks would issue us

My questions to the community: 

1. Is this the best way to handle the overcontributed amount?
2. If I did this, would we eliminate the need to pay any additional excise tax on 2022's $1000 overcontribution? Or regardless of what we do, we'll always pay an excise tax on 2022's $1000 overcontribution?
3. Is there anything we'd have to worry about with our 2024 HSA contributions? 

Thank you so much for your help! Hope I wrote this out clearly, if not I'm happy to revise/ clarify 🙂

[Opus 17]

You can't withdraw the $1000 from 2022 as a "removal of excess contribution."  It is too late to use that procedure for tax year 2022.

You have an excess of $308 for 2023.  What you can do is remove $1308 from 2023 as "removal of excess contribution."  That will allow the $1000 excess from 2022 to be "used up."

HSA accounts are individual.  Your tax return will have 2 copies of form 8889 , one for each of you, and mostly the numbers are separate (except for the coordinated limit of $7750.)  Your total excess is $1308, but because you did not have an HSA in 2022, the most you can remove from your personal account is your 2023 contribution of $1283, that leaves an excess of $25, that can only be removed from your spouse's account.  To put it another way, you could remove the entire $1308 from your spouse's account.  Or you can divide the removal, but only $1283 can be divided, and $25 can only be removed from your spouse's account.  

You need to tell Turbotax that you will also remove $25 from your spouse's account.  Go back into the interview and access your spouse's 1099-SA entry so that you are working on his form 8889 instead of yours. 

"In 2024's tax return:  report the above as income as additional income with the 1099-sa the banks would issue us"

No.  The removal of excess contributions is added back to your taxable income for 2023, Turbotax does this automatically.  You must also add back any income (investments or interest) from the HSA that was attributable to the excess contributions--even though the interest is physically paid to you in 2024, it is 2023 income.  This might only be a few dollars, depending on the interest rate.  I don't recall if this is part of the HSA interview, if not, enter it as bank interest not reported on a 1099-INT.  When you contact the bank about the "removal of excess contribution" procedure, they should automatically calculate this and add it to your payment.  

These actions will clear the 2022 excess resulting in no further penalties and you have the full limit available for 2024. 

[hkg5]

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@Opus 17 wrote:

You can't withdraw the $1000 from 2022 as a "removal of excess contribution."  It is too late to use that procedure for tax year 2022.

Understood. I wasn't trying to do this (wish I could do it to avoid this right now haha). Sorry if it was unclear!

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@Opus 17 wrote:

You have an excess of $308 for 2023.  What you can do is remove $1308 from 2023 as "removal of excess contribution."  That will allow the $1000 excess from 2022 to be "used up."

HSA accounts are individual.  Your tax return will have 2 copies of form 8889 , one for each of you, and mostly the numbers are separate (except for the coordinated limit of $7750.)  Your total excess is $1308, but because you did not have an HSA in 2022, the most you can remove from your personal account is your 2023 contribution of $1283, that leaves an excess of $25, that can only be removed from your spouse's account.  To put it another way, you could remove the entire $1308 from your spouse's account.  Or you can divide the removal, but only $1283 can be divided, and $25 can only be removed from your spouse's account.  

You need to tell Turbotax that you will also remove $25 from your spouse's account.  Go back into the interview and access your spouse's 1099-SA entry so that you are working on his form 8889 instead of yours. 

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Having it all removed from one account sounds easier. I'll do that then.

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@Opus 17 wrote:

"In 2024's tax return:  report the above as income as additional income with the 1099-sa the banks would issue us"

No.  The removal of excess contributions is added back to your taxable income for 2023, Turbotax does this automatically.  You must also add back any income (investments or interest) from the HSA that was attributable to the excess contributions--even though the interest is physically paid to you in 2024, it is 2023 income.  This might only be a few dollars, depending on the interest rate.  I don't recall if this is part of the HSA interview, if not, enter it as bank interest not reported on a 1099-INT.  When you contact the bank about the "removal of excess contribution" procedure, they should automatically calculate this and add it to your payment.  

These actions will clear the 2022 excess resulting in no further penalties and you have the full limit available for 2024. 

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Got it. So for on my 2023 tax return, I'll include the excess contribution as income. For my 2024 tax return, I'll include the earnings from the excess contribution as income based on the 2024 Form 1099-SA. Awesome 😀 Thanks so much for making it clearer! This was super helpful. 

[Opus 17]

@hkg5 

Got it. So for on my 2023 tax return, I'll include the excess contribution as income. For my 2024 tax return, I'll include the earnings from the excess contribution as income based on the 2024 Form 1099-SA.

No.  The interest is 2023 income, even though it will be paid to you in 2024, and it gets reported on your 2023 tax return.

Also note, that if you enter the withdrawal of excess contributions correctly, it will be automatically added to your 2023 income by Turbotax, you do not manually enter it a second time.