HSA Excses Contribution Returned, Tax Treatment?

[Tina20222]

My employer made mistake on my HSA contribution, resulting in $329.48 over contribution for my 2021 HSA. I discovered this in December 2021 and asked them to correct. They returned the over contribution to my 12/31/2021 pay check. So the HSA contribution on my W2 is within the $7,200 limit. However, the balance in my HSA account didn't change. So the form 5498SA I received in January showed $7,529.48. I contacted the HR again. They said because it is already 2022, they couldn't correct this error anymore. They asked me to send the bank a Return of Excess Contribution Form. I did that and the bank mailed me a check of the excess contribution. I thought I would receive an amended 5498SA or a 1099SA for 2021, but the bank told me that they wouldn't issue a 1099SA for 2021 but would issue it for 2022. 

My question is: How do I do my 2021 tax return? My W2 and 5498SA don't match. Should I go by W2 for 2021 and report the returned over contribution as an income in 2022 when I receive the 1099SA? If I go by W2 for 2021, will I be in trouble since IRS has the copy of 548SA? But if I report this amount as an income in 2021, will I have to report it again in 2022 when I receive the 1099SA? Then I will double pay tax for it.

Thanks,

[BillM223]

What is the value with code W in box 12 on your W-2? 7,200 or 7,529.48?

"They returned the over contribution to my 12/31/2021 pay check." Does this mean they gave you an additional 329.48 on your last paycheck?

"However, the balance in my HSA account didn't change. " You mean that in January the amount in the HSA was still 7,529.48?

"I did that and the bank mailed me a check of the excess contribution." So you received 329.48 twice, once from your employer and once from the HSA custodian?

"but would issue it for 2022. " Since they sent you the distribution in early 2022, this is normal. That 1099-SA should report your earning on the excess while it was in the HSA before being withdrawn, and you report the earnings on your 2022 ta return in early 2023.

"My W2 and 5498SA don't match." Don't worry about it. They often don't match except by comparing multiple years of records.

"will I be in trouble since IRS has the copy of 548SA?" No, we are going to do your HSA correctly, and the IRS will not worry about this.

"But if I report this amount as an income in 2021, will I have to report it again in 2022 when I receive the 1099SA? Then I will double pay tax for it." The 1099-SA in early 2023 is going to have a distribution code of "2", not "1". As a result, only the earnings will be added to your 2022 tax return, not the entire distribution.

"How do I do my 2021 tax return?" Please answer my questions in bold above, and I will address these issues.

[Tina20222]

Hi BillM223,

Thank you so much for helping with this.

The following are answers to your questions.

1. The value with code W in box 12 on my W-2 is 7,200.

2. Yes, my employer gave me an additional 329.48 on my last paycheck and this amount was deducted from the YTD HSA contribution on my paystub.

3. Yes, the amount in my HSA account in January was still 7,529.48. I don't know how this happened. Guess my employer had bad communication with the HSA custodian. After the HSA custodian mailed me the check, the HSA amount is 7,200 now.

4. Yes, I received 329.48 twice, once from your employer and once from the HSA custodian. Not sure if my employer will ask me to give it back to them. I haven't heard anything from the HR so far. 

Thanks,

[BillM223]

"Yes, my employer gave me an additional 329.48 on my last paycheck and this amount was deducted from the YTD HSA contribution on my paystub."

That 329.48 will be taxed as part of your Wages, so that's OK. The amount listed as deducted from the YTD HSA contribution, we can ignore, because we are going to take care of it another way.

"After the HSA custodian mailed me the check, the HSA amount is 7,200 now."

OK, you have withdrawn the excess. You will tell TurboTax this when the time comes (see below).

"Yes, I received 329.48 twice, once from your employer and once from the HSA custodian. "

Let's don't worry about this. They gave you a bonus and you're being taxed on it, as is normal.

***

OK. In TurboTax, when you entered your W-2, make sure that you entered 7,200 as the code W amount in box 12. This will match your W-2 (this prevents curious notes from the IRS, who has a copy of your W-2).

In the HSA interview, you will start and make whatever entries are required. On the screen entitled ""Let's enter [name]'s HSA contributions", you will see 7,200 prefilled in the top box (good). Do NOT enter anything in the second box ("personally made").

The next screen is titled, "Did your employer tell you about any other contributions?" Despite the comment here about "previous year", you will check YES.

This will cause three lines to appear below. In the third line ("Employer and payroll contributions not reported in box 12 of your W-2"), you will enter the 329.48. After all, this is a contribution made through your employer that was not listed on the W-2.

This extra money will force TurboTax to realize that "you" made an excess contribution (I put "you" in quotes because you get to report every contribution whether you or someone else made them). TurboTax will then ask you how do you want to handle the excess: withdraw it all, withdraw some of it, or let it carry over to next year. 

Since you have already withdrawn the excess amount, this is easy, just say that you will withdraw it all by the due date of the return.

What will happen is that TurboTax will add the 329.48 to Other Income on line 8 of Schedule 1 (1040), which is OK (if you get money, you owe tax on it). Then in early 2023, like the HSA custodian told you, you will get a 1099-SA for the 329.48 with a distribution code of "2", so that you can report the earnings on your 2022 return. Oh, if you spend any HSA money on qualified medical expenses this year, you'll also get a separate 1099-SA for that as well.

And, you're done.

Just keep records of everything you did in case anyone ever asks, but you should be in great shape vis-s-vis your HSA.

[Tina20222]

Hi Bill M223,

Thank you for the instruction. 

I have another issue. It is my fault that I wanted to make it simpler so I told you that the employer contribution is $7,200 on my W2. Actually my employer returned $800 to me on the 12/31/2021 pay check, instead of the over contributed $329 (this was the second mistake they made). So the Box 12 code W on my W2 is actually $6,729. In order to let the HSA custodian's record match it, I requested them to return $800 as the return of excess contribution and they mailed me the check of $800. 

I put $800 in the box of Employer and payroll contributions not reported in Box 12 of your W-2. But when I went to the withdrawn section, TurboTax doesn't allow me to put in the $800. There are three options.

1. OK, we'll withdraw the full $800 excess contribution by April 18,2022.

    Unfortunately, some of your excess contribution is caused by a prior year excess contribution. While it is too late to remove a prior year excess contribution, you can still remove he $329 contribution for 2021

If I select this option. TurboTax still adds only the $329 to my income.

2. We'll withdraw some of the excess contribution by April 18,2022.

If I select this option, TurboTax doesn't allow me to put in a number bigger than $329.

3. No, we'are not going to make this withdrawal.

Not an option we want.

Sorry for the confusion. Thank you again for helping with this.

[BillM223]

Well, now I am confused. How much did your employer actually contribute to your HSA? 6,729? 7,200? 7,549.28? The code W amount suggests that they contributed only 6,729, but now I am not sure what they actually did. So please tell me, and don't simplify things for me.

"In order to let the HSA custodian's record match it, I requested them to return $800 as the return of excess contribution " - an HSA is not just a savings account that you can withdraw money from willy-nilly. You should not withdraw money as an "excess" contribution unless it really is an excess contribution. I can't tell but it seems like your excess was only 329.48, but since I don't know how much your employer actually sent to the HSA, I can't tell.

"Unfortunately, some of your excess contribution is caused by a prior year excess contribution. " - So, did you have an excess contribution in 2020? Did you withdraw it? I am afraid that you have us (me and TurboTax) so confused that we don't know where to go.

So please do the following:

1. Tell me how much your employer actually sent to the HSA.

2. Tell me how much (if anything) the employer withdraw from the HSA (they can within limits).

3. Tell me how much (and when) you withdraw money from the HSA (and why).

4. Tell me how you answered the question "Did you overfund your HSA in 2020?"

5. Also please delete all HSA data from your return by doing the following (so we can start over):

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop***

3. go to View (at the top), choose Forms, and select the desired form (see below). Note the Delete Form button at the bottom of the screen.

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one) 

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview. 

[Tina20222]

Hi BillM223,

The entire story is I changed job at the end of 2021. My first employer contributed 6,246.12. For my second employer, I selected a total of 800 personal contribution plus company contribution 83.34  for the rest of the year. However, they somehow took 1,200 personal contribution form my 12/15/2021 paycheck. I notified them immediately and told them I only wanted to contribute a total of 800 for year 2021. They said they would correct it, but they returned 800 to me on the 12/31/2021 paycheck. So my contribution in my current job is personal contribution (1200-800)+company contribution 83.34, totaling 483.34 on my W2. Add the two W2 up, the code W value is 6,729.46.

As I mentioned before, the value in my second HSA account was 1,283.34 (1200 personal contribution + 83.34 company contribution)  in January. My current employer said they couldn't do anything since it is already 2022. They told me that I should request the return of over contribution. They didn't advise how much I should request, since I always talked about the 800 with them, I requested 800. Then the HSA custodian sent me the check of 800.

The following is the answer to your questions.

1. Tell me how much your employer actually sent to the HSA.

In total my two employers originally contributed 7,529.46. But 800 was returned to me on 12/31/2021. So the two W2 code W value add up to  6,729.46.

2. Tell me how much (if anything) the employer withdraw from the HSA (they can within limits).

$800 was returned to me by my employer on 12/31/2021, but I am not sure if they withdrew the 800 from the HSA, because my HSA balance was still 1,283.34 in January. After the HSA custodian sent the check to me, the HSA balance is 483.34 now.

3. Tell me how much (and when) you withdraw money from the HSA (and why).

I withdrew $800 from HSA. I sent out the request in February 2022 and received the check in March. I withdraw 800 because I think the HSA balance should match my W2/paystub.

4. Tell me how you answered the question "Did you overfund your HSA in 2020?"

I answered "no" to the question. I guess why TurboTax said part of the money is a 2020 over contribution is that it only recognized 329 but I want to do 800, so it assumed it was a 2020 over contribution.

Hope I made it clear. If you have any further questions, please let me know.

Thank you very much!

[BillM223]

"In total my two employers originally contributed 7,529.46. But 800 was returned to me on 12/31/2021. So the two W2 code W value add up to  6,729.46."

So the sum of the two code W mounts on your two W-2s is 7,529.46. It does not matter what you had returned in terms of calculating the excess contributions. TurboTax told you that you had excess contributions of 329.46 (note: in your initial post, you said, "329.48") because your annual HSA contribution limit was 7,200 and you and your various companies contributed 7,529.46 in the aggregate to your two HSAs.

"$800 was returned to me by my employer on 12/31/2021, "

Since they did not take this from your HSA, it's just free money (well, I assume they added it to your W-2 as Wages).

But in the future put everything in writing with your new payroll department, because they seem very poor at following instructions.

When TurboTax allows you to withdraw only 329.46 in excess, you have a problem. As I told you you just can't willy-nilly withdraw amounts out of the HSA, because if/when the IRS audits you, your tax returns and the HSA custodian's records won't match.

The problem is that you withdrew 470.54 too much. Ordinarily, the IRS would consider this a withdrawal for reasons other than paying for qualified medical expenses, which means it gets added to your Other Income and penalized another 20%.

What to do? The first thing is to contact the HSA custodian (whichever one you withdrew the $800 from) and tell them that the $800 withdrawal was a "Mistaken Distribution". Tell them it should have been only 329.46. 

They don't have to accept this, so be nice to them, but it they do, then you will sign a form and send them the 470.54 that you should not have withdrawn, and they will change their paperwork, which will go a long way to straightening things out.

Let me know if they will go along with this.

OK, you have explained everything except "Unfortunately, some of your excess contribution is caused by a prior year excess contribution." I assume that you did not have an excess contribution on your 2020 return.

This is why I asked you to clear all of your HSA data by doing those 6 steps. Sometimes when you go through the HSA interview more than once, TurboTax sets a variable to an amount, and then won't show it to you again so you can change it. Based on what you have told me, you should not be getting this prior year excess message.

So after you do the 6 steps above to erase all your HSA data, please go through your HSA interview again. Do you get this prior year excess message again?

[Tina20222]

Thank you for the advice! I called the HSA custodian. They told me to fill out a Return of Incorrect Distribution form and send it back to them with a $470.54 check. It seems we should be good.

Thanks,

Tina 

[BillM223]

That's great news! Too often, the HSA custodian (for no good reason) won't do this bit of customer service.

So did you erase all the HSA data and re-enter it? Did the message about a prior year excess go away?

[Tina20222]

Yes, I deleted all the HSA data and re-entered it. My part looks good now. But for my husband, I got a message "We see XX has a break in HDHP health plan coverage during 2021. Let us know if this was the result of a disability". Why do I get this? I bought family HDHP plan for the entire year. All my family members were covered for Jan-Oct and Dec. 2021. We didn't have coverage for November 2021, in which I was changing job. 

Thanks,

[BillM223]

Most people who see that question shouldn't see it - it's a long story, but that question is only for people who had an HSA in 2020 (yes, 2020) and who contributed to it in 2020. If neither of those things are true, just answer NONE and move on.

Let us know if you have a problem after to go back to that and answer NONE.

[Tina20222]

Thank you! I am all set.

[Tina20222]

Hello, 

I come back this year for this issue again.

To summarize what happened last year, my employer overcontributed to my 2021 HSA by $329 and they asked to withdraw the overcontributed amount by myself. However, we mistook the withdrawal amount. Because I thought my contribution should match my W2,  I requested a withdrawal of $800. I received the $800 distribution in March 2022. When I was working on my return, I found out the I can only withdraw the overcontributed amount, which is $329. I contacted the H.S.A custodian and they told me to send them a check and file a form called Return of Incorrect Distribution. I did so and thought we were all set. On my 2021 return, I selected that I would withdraw $329.

This year, I received an Form 5498 from the H.S.A custodian, saying my 2021 total contribution they received is $1,753.88, which is the original company contribution $1,283.34 plus return of incorrect distribution $470.54. I also received Form 1099-SA with $800 in box 1 and a distribution code 2.

The following is a table of the forms and amounts, hope it can make things clear.

	2021 H.S.A on W2	2021 Form 5498	Overcontribution withdrawal (March 2022)	Return of incorrect distribution (March 2022)	Form 5498 2022	1099-SA 2022
1st Job	$6,246.12	$6,246.12
2nd Job	$483.34	$1,283.34(Box 3: HSA contribution made in 2022 for 2021)	-$800	$470.54	$1,753.88 (box 3)	$800(box 1) distribution code:2
Total	$6,729.46	$7,529.46

My question is how I enter these two forms? My 2021 return says I would withdraw $329, but now the 1099-SA says I withdrew $800. Will this case any problem?

And how should I answer the below questions?

Excess contribution deducted from your wages? I answered No

Did you overfund your H.S.A in 2021? I answered Yes

Enter the amount from Line48 on your 2021 Form 5329. I couldn’t find this form on my 2021 return. So I left this question blank. I see on my 2021 return schedule 1 line 8E Taxable HSA distribution $329 and on Form 8889 line 11 $7,529.

After I answer questions as the above, my refund increased by about $1,000. There must be something wrong.

Thank you!

Tina

[BillM223]

"My 2021 return says I would withdraw $329, but now the 1099-SA says I withdrew $800. Will this case any problem?"

No, you fixed this when you filed a form for Mistaken Distribution with the HSA custodian. In theory, you owed income tax and 20% penalty on the overage of the withdrawal (800-329) which require you to amend your 2021 return, but I would not amend your return, but would just keep good documentation of what you did and why. Since you filed a form for mistaken distribution, you undid that distribution.

"Did you overfund your H.S.A in 2021? I answered Yes" On the contrary, answer NO. When you withdrew the excess, you "cured" it. The question wants to know if you carried over the excess (which, I agree, is not what it appears to ask). You did not have a 5329, which just shows that there was no excess carried over, so just say NO.