HSA Excess Contributions Options

Forum|Forum|4 years ago
February 23, 2022
5 replies
36 views

I made a pretty simple mistake in placing too much into my HSA this year. My husband has a family plan with our son and I have my own HSA through work. I come to realize that even though we have separate accounts and premiums, because we are married, we are limited to the $7200 threshold for the 2021 tax year, instead of $7200 for his plan and $3500 for mine. This is the first year we have overcontributed to our HSA's and we exceeded the limit by $2900. I decided to take the money from my individual plan account.

When I was filling out the forms to withdraw the excess amount, I noticed that option 1 is "Change tax year to: _____ (Contribution will count toward your yearly contribution maximum.)" The HSA company representative told me that I can in fact forward this to the next year. My question is how will this reflect in my taxes this year? Will the extra $2900 still show up as taxable income if I am forwarding it to my contribution limit for 2022? Currently, as I am doing my taxes on TurboTax, it comes up as taxable income because my initial plan was to withdraw the funds. Is there a specific form that would have to be filled out or do I have to get a corrected statement? Thank you so much for your help!

DaveF1006

Level 15

It depends. Please view this Turbo Tax post written by HelenaC. There are two options to consider.

Contact your H.S.A. administrator. The IRS is lenient on fixing excess HSA contributions. They provide two options of correction: removal or future application.

Option 1: The first removes the HSA contributions in the tax year and avoids a penalty – no harm, no foul. You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.

1) You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
2) You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

Option 2: Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6% per year penalty. The mechanism that allows this is the deduction, since next year you won’t actually deposit the contribution (it is already there), you will just deduct it on Form 8889 in 2022.

Option 3: If you don’t remove the excess contribution from your account, you must include it as taxable income for the year you made it and pay an annual 6% excise tax on the excess contribution and any associated earnings as long as the excess contribution is in your account.

In answer to your question, the $2900 will need to show up as taxable income but there will be an 6% excise tax charged for that this year if you decide to leave it in.

To remove, Turbo Tax will alert you that you have an excess contribution and that you may want to consider withdrawing. Here if you indicate that you will withdraw the excess by April 18, then it will not be taxable. Make sure though that you do this by contacting your administrator.

I hope this helps.

[ Edited 02/23/22| 07:48 PM PST]

@MariaFarr09

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whodiini

Level 6

There are 2 types of questions you are asking: 1) What is the right thing to do taxwise and 2) How to enter the information in turbotax. DaveF1006 correctly answers topic #1. Topic #2 is challenging. I havent been able to figure how to do this in turbotax because the way that turbotax calculates the excess contributions may not match your $2900. Then it doesnt allow you to enter $2900 as the amount of excess contributions removed. If you are lucky, and the $2900 matches, then just follow the interview questions under HSA.

MariaFarr09Author

Level 2

Yes, I agree, the answer above is partially helpful. From a tax perspective, if its a 6% excise tax versus the tax in my current bracket, it might be worth rolling it over. When I asked the HSA rep he thought rolling it over was the best option too. But how do you report this in Turbo tax? Is this the 8889 form? If I make this distinction with my HSA institution, how to I report this in turbotax this year? Shouldn't it either tax the $2900 as additional income or tax the 6% without the additional income tax because it is not being withdrawn and acknowledged as extra income? Or is this an incorrect line of thinking?