How to withdraw excess HSA contribution after the initial year.

[jay66899]

So I contributed $3550 (the max for single in 2020) to my HSA for 2020.

In Nov 2020 I changed my health care plan so I no longer were eligible for the HSA contribution; and I've been remaining not eligible for HSA contribution since then.

So I had two months worth of excess contribution.

(3550 / 12 * 2 = 591.66 or 592)

In 2021, before I filed my 2020 return, I withdrew (sorta) the excess contribution + earning;

during the form filing, I made a mistake, I entered 3500 instead of 3550.

So instead of 592 excess, I entered 583 (3500 / 12 * 2 = 583.34 or 583).

So in my 2020 return, I withdrew 583 + earning, reported this portion properly,

and leaving 9 excess contribution in the account, and paid the 6% excise tax ($1).

The tax filing part was all done correctly, but I realized the $9 excess too late so couldn't fix that before the Oct 15 deadline.

The $1 annual penalty isn't that much of an issue, but I rather just fix it this year.

What are my options at this point?

The regular withdraw form doesn't seem to work as it requires making a withdrawal before the filing deadline of the year in which the excess was made.

What is(are) my option(s) at this point if I would like to properly fix it rather than just pay $1 per year?

Thanks a lot.

[jay66899]

Adding to this bummer is that I'm not in a high deductible plan, not planning to get one in the near future;

so I can't simply go with the "apply to next year" route. 😐

[Mike9241]

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount with-drawn 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.

since this is not possible, contribute $9 less than the max for 2022 or spend the entire account for reimbursable medical expenses.

the penalty is based on the lower of the excess contribution or the FMV of the account at the end of the year.

[jay66899]

Thanks for the tips,

I won't have eligible high deductible plan to qualify for HSA contribution so I can roll over that $9.

Do you mean I can just spend that $9 as a mean of withdrawal, or I have to spend all money in the HSA account?

The confusion is that the rules sound like I can withdraw the $9, and pay tax + 20% penalty or whatever;

but just don't know how to get the record updated so it knows that I'm taking out the excess, not just the "regular" fund..

So there are two known options for now:

#1: roll over / re-contribute the $9 to a future year whenever I get an eligible health plan; until then, just keep paying the excise tax every year.

#2: spend the whole HSA account (which isn't quite feasible since I do have an insurance plan, and don't have any severe illness atm..luckily...)

Curious if any other option available 🤔

[DianeW777]

No, there are no other options available.  You should remove the $9 now to eliminate any future penalty.  You will have at the very least withdrawal documentation should you need to verify it in the future. Keep a copy with your tax records to show the withdrawal.

You are correct, that the full amount of the account would need to be zero to eliminate penalty as noted by @Mike9241.  And as you stated, this would not be the right action for you based on your healthcare plan and to maintain the account in good standing.  You definitely do not want to remove funds that are not used to pay medical expenses with the exception of the $9.

[jay66899]

Thanks for the reply.

Now I'm definitely going to remove the $9 before filing my 2021 tax.

Just to confirm, can I remove it by withdrawing $9 from the HSA account using the regular withdraw/transfer, then during filing, report that I withdrew $9 for non-medical use (in order for turbotax to calculate the 20% penalty), and call it done? Meanwhile, leaving the rest of the fund + earning associated with the $9 in the HSA?

By doing this, I think the "system" would still think that I over-contributed $9 for 2020. However, if IRS questions about why I paid the 6% for 2020 but not afterward, I can show them my 2021 return, and explain that this "regular transfer" was the removal of that $9. Would this work?

Before the 2020 filing deadline I could use the excess contribution withdrawal form provided by the HSA account broker firm to sort of update my account; but now it's like doing all these under the table, and I will have to explain this to IRS should I get an audit on this.

Anyway, at this point the only unclear to me is how to remove that $9..

Any special form/procedure (like the form I could use before filing 2020 tax) or just regular transfer.

Do I need to also calculate and withdraw earning associated with the $9?

Thanks in advance

[JillS56]

Yes, you will need to remove the excess amount (and any earnings attributable to the excess contributions).   The amount you will need to remove is the $9 plus earnings attributable to the $9.   To get help with withdrawing the excess I would go to the bank or organization that holds your HSA account.   They should be able to assist you with the removal of these funds.  To remove the excess funds you will need to complete HSA Distribution Request form.

The removal of the excess amount needs to be completed by April 18, 2022.   Unless you file an extension, by the date your personal return is due.   

Here is an article that talks about how to remove HSA Excess Contributions.