I removed a 2019 HSA $5250 excess in this calendar year on 3/10/20. How do I report this excess in TurboTax for 2019?

[sfdave]

I originally contributed $7000 to my HSA in 2019. That is what is reflected in my 2019 W-2 Box 12 W and 2019 5498sa.

However, I later discovered I was limited to $1750 due to getting married in March and my wife having an FSA. I removed the $5250 excess in this calendar year on 3/10/20. How do I report this $5250 excess in TurboTax in my 2019 taxes?

[BillM223]

When you run TurboTax now, does TurboTax tell you in the HSA interview that you have an excess contribution of $5,250?

The moment that TurboTax did that, it added the $5,250 to Other Income (line 8 on Schedule 1 (1040)).

Therefore, you do not need to do anything further, other than making sure that you withdraw this excess prior to July 15th (if you told TurboTax that you were going to do that).

[sfdave]

TurboTax is not reporting I have an excess contribution. I was in a Family High Deductible plan all 12 months so TurboTax thinks I was eligible all 12 months. TurboTax doesn't ask/know that my wife had a FSA and therefore once we were married I was no longer HSA eligible.

So I think I need to somehow manually report the $5,250 to Other Income (line 8 on Schedule 1 (1040)).

[BillM223 · Accepted solution]

You need to go back through the HSA interview, and note that you did not have HDHP coverage from March through the end of the year (even if you did).

Please do not try to fix this yourself, do it through the HSA interview.

So, go to the HSA interview, and when it says that we are going to work on your HSA, go through the process. When if asks if you had HDHP coverage for at least one month during 2019, check "yes". Then on the three new lines that appear, click on "I had different coverage at different times of the year".

Then check off that you had Family coverage for January and February, and None for the rest of the year.

NOTE: the issue is what your coverage was on the first day of the month, so if you got married after March 1, then you check off that you had HDHP coverage for Jan, Feb, and Mar. 

Later in the interview, TurboTax will tell you that you had an excess contribution. If you indicate that you were covered by an HDHP in March, then the amount that you withdrew on 3/10/2020 will be wrong. In the future, please do not make withdrawals from your HSA for excess contributions unless TurboTax instructs you to. 

Did you tell the HSA custodian that the withdrawal was for "excess contributions"? If not, then the custodian has it incorrectly noted in their records.

You will probably be better off - if you told the custodian that the withdrawal was for excess contributions - declaring None for HDHP coverage in March.

Then, when TurboTax asks you if you will withdraw the excess by the due date of the return, answer "yes" (since you already did).

As I noted above, TurboTax will add the $5,250 automatically to Other Income on line 8 of Schedule 1 (1040). Please do NOT do this yourself.

If you don't do this the way I have described, your form 8889 will be wrong, and you will totally confuse an IRA auditor in case of an audit.

Also, unless you told the HSA custodian that it was for excess contributions, then the custodian will have it wrong in their records, and you will not only owe income tax on the withdrawal but will also owe a 20% penalty. If you did not tell the custodian that this withdrawal was for excess contributions, then please call them now and see if you can get it reclassified as a withdrawal for excess contributions. Otherwise on the books it will appear that you owe a 20% penalty in addition to income tax.

Please note, an HSA is not like a savings account where you can deposit and withdrawal money for any reason at will. The rules are not obvious, so let your employer and TurboTax be your guides.

[sfdave]

Thanks for detailed explanation! I do see now in that the "I had different coverage at different times of the year" page has the following text. I guess her FSA falls under the "Medicare or another non-HDHP plan" section. I missed this before because the question before this doesn't mention the "other plan" aspect other than Medicare.

Note, I did have my HSA provider distribute them as excess contributions so I think I am fine there.

[BillM223]

Yes, it is not obvious the number of "other" coverages that you might have that would preclude being able to contribute to your HSA, and it would be difficult to list/explain them all (see IRS Pub 969 for the detailed discussion).

And most taxpayers don't realize that one spouse's FSA automatically covers the other spouse, whether you want it to or not. This is not like regular health insurance where you can decline to be covered on your spouse's health policy.

Good luck with your filing.

[sfdave]

I have one follow up question.

On Schedule 1 Line 8 under "list type and amount" it says the "Form 8889 Health Savings Accounts $5,250", but the $5,250 isn't listed anywhere on the actual Form 8889. Is that to be expected since the $5,250 excess distribution was done in 2020? I guess I am wondering how the IRS knows I distributed the excess in 2020 before the end of the year.

I'll add that "SMART WORKSHEET FOR: Form 8889: Health Savings Accounts (Taxpayer), Line 12 Excess Employer Contributions and/or HSA Funding Distributions Smart Wksht" lists the $5,250 under "Excess withdrawn after the end of the year". But that smart worksheet isn't sent to IRS, correct?

Thanks!

[BillM223]

"Is that to be expected since the $5,250 excess distribution was done in 2020? " - yes

"I am wondering how the IRS knows I distributed the excess in 2020 before the end of the year." - actually, you did the withdrawal of excess contributions after the end of the year, which is permitted by the IRS. This means that any time they look at the HSA, it is a multi-year view, but the forms don't reflect that.

"But that smart worksheet isn't sent to IRS, correct?" - No, it is not.

Your questions, I think, are rooted in wondering how does the IRS really know what is happening, and the answer is "they don't at this level of reporting."

There are quite a number of things that would not be laid bare unless there was an audit of the taxpayer's return, complete with the examination of several years' worth of returns and records.

For example, how does the IRS know that you were actually covered by an HDHP? They don't, because the return doesn't ask for anything like the insurance company name or group number. They would not discover that you were not properly covered by an HDHP until they do a detailed audit on your return and ask you to produce a variety of records.

My "guess" is that this is because HSAs are relatively new (started in 2004) and in the time since then, Congress has been cutting the IRS' budget so that there hasn't been a form redesign to cover these things or increase the "letter audits" in this area (where an IRS computer detects a funny situation and spits out a letter asking you for clarification).

Our goal, however, is to help you make your 8889 and other parts of your filing as correct as possible so that if audits ever come, that you will not be (negatively) surprised.