Introduction
I am hoping to receive detailed information on how to correctly navigate the difficult situation I have created for myself concerning HSA excess contributions. I will try to be as detailed as possible in explaining my situation to hopefully receive an accurate response for someone much more knowledgeable than I on this topic...
(Please note that I will be using rounded and made up figures in my explanation to hopefully make things a little easier to follow. I feel confident in my calculations abilities (even though I did over contribute...) and am more just looking for the processes that I need to follow when filing my 2023 tax return).
Situation
In 2022, I became HSA Eligible by enrolling in an individual HDHP plan in mid-October, 2023. I was enrolled in the plan through January 31, 2023. As of February 1, 2023, I was no longer enrolled/covered in the individual HDHP.
A few months later, I got a new position at a company and was enrolled in a FAMILY HDHP plan - making me HSA Eligible - on August 1, 2023. I am still currently enrolled in the plan and will be the rest of 2023 (through Dec. 31, 2023).
Before we go further, I want to get out of the way that I understand there is a "Last-Month Rule". However, as explained above, I did not meet the testing period requirements since I was ineligible to contribute to the HSA for a few months in 2023 during which time I was covered under state health insurance (i.e. medical assistance).
Now.. This is what I have gathered so far...
Since I did NOT meet the "Last-Month Rule" requirements, I was only allowed to contribute a pro-rata (or prorated) amount for 2022. I actually knew this in 2022, but where I went wrong was, I did not realize that I had to be covered on the FIRST of the month for that month to count in the prorated calculation. Therefore, I thought I could contribute 3 months worth (Oct. - Dec.) when I could actually only contribute 2 months worth (Nov. - Dec.)
So (again, made up numbers), for the sake of this explanation, I over-contributed by $500 to my HSA in 2022. This includes any employer contributions as well. Also important to note that NONE of the contributed amount was invested. In other words, it just sat in my HSA account much like a bank account untouched. I also did NOT withdraw any money from my HSA at any time in 2022 for any expenses.
For 2023, I was HSA eligible for January and August - December for a total of 6 months. Where I went wrong in 2023 was I had not accounted for an employer contribution that was pretty large which lead me to over-fund my HSA... again...
Also, I DID invest a portion of the HSA funds in 2023 and had capital gains mentioned below. I did NOT withdraw any money from the HSA for any expenses.
For the sake of this explanation, I over-contributed by $2,000 to my HSA in 2023.
In case it is pertinent, I will state other important figures below:
Total Individual 2023 Contribution: $2200
Total Employer 2023 Contribution:$3500
Total 2023 HSA Contribution: $5700 ($2200 + $3500)
2023 Interest Gained: $1
2023 Capital Gains: $299 (Note: This is not prorated. It is just the difference between amount initially invested and amount cashed out when I liquidated all investments back into my HSA account).
(Let's assume that the prorated amount allowable for 2023 contributions is $3700. YES, I know that this - mathematically - is incorrect because the 2023 Family Maximum contribution = $7750 and multiplied by (6/12) would equal $3875. I am just looking for the process, not the actual calculations.)
To summarize:
2022 Excess Contribution: $500
2023 Excess Contribution: $2000
2023 Capital Gains: $299
2023 Interest Gained: $1
Now, I have spent hours and hours trying to figure out what the best course of action is to take to fix these mistakes.
I believe I should do the following:
Since it is December 12, 2023 at the time of writing, I still have plenty of time to withdraw excess contributions for 2023. I also know that a person is allowed to carry forward any excess contributions ONE YEAR provided that that excess amount from the prior year counts towards the next year's contribution total.
Combining these two ideas, I believe I should submit an Excess Contribution and Deposit Correction Request via the appropriate channels to my HSA custodian (provider) in the amount of $2800 ($500 + $2000 + $299 + $1). By doing so I am withdrawing the amount equivalent to the excess contribution in 2023 (plus capital gains and interest gained) AND making room for the excess contribution amount for 2022 (= $500) to carry forward one year into 2023. I also will avoid the excise 6% tax by doing so, I believe.
Questions
1. Is the above line of thinking correct? If so, please move onto the next question (#2) below. If not, please explain where I am mistaken, and what steps I should take instead.
2. Am I correct that I can avoid the 6% excise tax with the plan mentioned above?
3. I believe by submitting the "Excess Contribution and Deposit Correction Request" form to my HSA Custodian/Provider, this will result in them providing me with a tax form (like a W-2 but I know it is not that) detailing how much I withdrew for excess contribution. Is this correct? If so, what is the form number?
4. If I submit the "Excess Contribution and Deposit Correct Request" form and it is processed successfully with all of the mathematical calculations correct, do I need to do anything else? In other words, do I need to fill out an IRS form when filing my taxes that documents this withdrawal AND/OR that I am planning on carrying forward $500 from 2022 contributions and counting it towards my overall 2023 contributions? This latter half in bold is especially where I am unsure because I have not been able to find anything at all that touches on this part.
I have seen several forms mentioned in my research, mainly IRS Form 5329 & IRS Form 8889, and I do not know if I need to fill out either or both of these.
If anyone could provide detailed, step-by-step instructions on the process and specific forms I need to fill out to solve this HSA nightmare, I would be forever grateful.
Thank you.
