HSA excess contributions withdrawn after due date of tax return, but withdraw request submitted before due date. Penalty owed?

[mclark1987]

My employer made excess contributions to my HSA in 2021. I submitted a request to withdraw the excess contributions on 4/17/22, but the request was sent to the wrong email address (not my fault), and ultimately the cash did not leave my HSA account until 4/25/22. The money came out of the account after the due date of my tax return (4/18/22), but my request was signed, dated, and submitted before the due date of my tax return. Do I still owe penalties on this amount? Will the IRS accept the date the request was submitted as the "withdraw date"?

Thanks.

[Mike9241]

The actual withdrawal had to be on or before the due date including any extensions. You owe the penalty 

[dmertz · Accepted solution]

As long as you filed your 2021 tax return or requested a filing extension by April 18, 2022, you had until October 16, 2022 to obtain the return of excess contribution to avoid a penalty on your 2022 tax return.

If you did not file your 2022 tax or request a filing extension by April 18, 2022, your distribution missed the deadline and you do owe the penalty for 2022 and the excess contribution must be included in your income on your 2022 tax return.    The excess will be eliminated on your 2023 tax return by treating the distribution as taxable (by indicating that it was not used for medical expenses), but if you are under age 65 you'll own a 20% additional tax on the distribution.

[mclark1987]

Can you clarify what you mean by:

As long as you filed your 2021 tax return or requested a filing extension by April 18, 2022, you had until October 16, 2022 to obtain the return of excess contribution to avoid a penalty on your 2022 tax return.

I did file my 2021 tax return by April 18, 2022. I did not file an extension. Do I owe the penalty?

Thank you.

[mclark1987]

Does the extension date for HSA withdraw only apply if I filed for an extension?

Thank you.

[dmertz]

Pursuant to section 301.9100-2 of the tax code, the extended due date applies since you filed your tax return by the regular due date.

[mclark1987]

Thank you- I really appreciate the response. I was not aware of section 301.9100-2 of the tax code. In my case, I checked the box that excess contributions were withdrawn by the tax return due date, so the amount was taxed as income and no penalties were assessed. I see now that this was not correct. It seems I should have reflected the excess contribution, paid the 6% penalty, and then submitted an amended return referencing section 301.9100-2 which would have eliminated the penalty and treated the excess as taxable income. 

To unwind my mistake and make everything correct, I will have to amend my return to add back the excess contribution withdraw, and then submit another amended return to include the withdraw with a note referencing section 301.9100-2 of the tax code. Ultimately, the dollars paid to the IRS are the same either way, but the documentation is not correct currently. Am I understanding this right?

If there is no change in the amount due, it does not seem like a worthwhile endeavor at this point.

[BillM223]

No tax professional here is going to advise you not to correct your documentation. However, if you chose not to amend the return (twice), in case you are ever audited on this issue, it would be prudent to keep complete records of what happened and why you did what you did, including copies of this thread.

[dmertz · Accepted solution]

I agree that it's not worthwhile to do anything more at this point.  Because the Form 1099-SA reporting the return of the excess contribution does not indicate the date of the distribution, it would take an audit by the IRS for them to even know that the distribution occurred after April 18, 2022.  In the unlikely event that that happens, you can provide the explanation then.  Just keep the documentation supporting your position that the tax return was timely filed and that the distribution was made by October 16, 2023.