Mistaken HSA Contribution by employer when not eligable

[Anonymous]

When doing my taxes for 2020 I discovered that my employer accidentally contributed $800.00 to my HSA in January of 2020.  I was not eligible for an HSA in 2020, nor was it reported on my W2 as income.  I discussed this with my employer, and they called the HSA company who made an adjustment distribution this month (March) of $800.00 giving the money back to my employer.  The HSA company says because the contribution was made in 2020, and the adjustment made in 2021,the $800 will still show as a contribution in 2020 and I'll get a 1099 in 2021 to show the removal. 

I'm really confused as to how I need to report this on my taxes.  I no longer have the money, but do I need to report it as income in 2020 and somehow take it away in 2021?  As I said it was never on my W2.  I reported it as an employer contribution not reported on the w2 in turbotax and they added it on to my income.  I have not filed - just want to do this right or see if there are any other forms or documention I need to get from my employer or the HSA company.

[AmyC]

No. You will get a 1099 in 2021 which shows you receiving the income. You will report it then. You do not want to report it this year and again next year.

Generally, employers contribute to HSA and it is not included in the W2. That is one of the reasons employers like HSA, no taxes paid on the money. I don't feel you should be receiving a 1099 to pay taxes on the money since you never received it or the benefit. Maybe I am missing some information or misunderstood.

[Anonymous]

Its a little hard to explain.  My employer does not contribute to our hsa normally.  In december I put $800 in from my paycheck and that contribution is shown on my w2.  Something didn’t get turned off i guess that sets what is sent to the hsa and  because the $800 went in again in January for a second time but wasn’t taken out of my paycheck (and it wasn’t supposed to be). Now its been fixed the  money is no longer there.  Its been taken out by by tax filing deadline so as far as I can tell from reading there shouldn’t be a penalty.   I now don’t think I should include it as a contribution since I bo longer have it but I’ve not been able to find any specific example onkine exactly like mine,  

[BillM223]

"I discussed this with my employer, and they called the HSA company who made an adjustment distribution this month (March) of $800.00 giving the money back to my employer. "

The employer is allowed to remove the money from your HSA if they should have known that you were not eligible when they made the contribution. It sounds like they did that.

Now, your employer should give you a corrected W-2, removing the code W in box 12 on your W-2.

Once you have that, TurboTax will have no reason to ask you any questions about an HSA that you did not have in 2020.

Now the question is whether or not the HSA custodian will suppress the 1099-SA reporting a distribution to you that you did not receive (your employer got it).

If they won't suppress the 1099-SA, ask them to issue a corrected 1099-SA showing that there was no distribution. This will cause a little problem for you because you can't enter a 1099-SA with no distribution into TurboTax (such a 1099-SA doesn't make sense). At that point, just don't enter the first 1099-SA.

Then make very sure you write this episode up and save it in your tax file at home. Your employer made a mistaken distribution, it was returned to your employer, but the 1099-SA was sent to you anyway. As a workaround, you did not enter a 1099-SA that didn't make sense for your return. You could not withdraw the excess contribution because it was no longer in the HSA to withdraw - your employer has the money.

See what your employer and the HSA custodian will do for you - it was your employer's mistake after all.

[Anonymous]

Thank you.  There is nothing on my w2 mentioning the $800 so no need for a corrected one.

the only place it currently appears is the 2020 5498-SA that they (HSA company) say won’t be corrected since they took the money out in 2021.  

[BillM223]

I reread your comments.

OK, the employer did not put a code W in box 12 on your W-2, right? He/she just told you about the contribution which is why you entered it the way you did?

Did the employer remove the HSA contribution from Wages in boxes 1, 3, and 5 on the W-2? They should have; however, there is no way for you to tell just by looking at the W-2 - you have to ask them.

Anyway, ask them to confirm that the W-2 you have is correct in light of the no HSA contribution, in which case if you don't have a code W in box 12, you don't need a corrected W-2.

[BillM223]

Well, if the HSA custodian is insistent, then you might have the employer ask the HSA custodian to treat this as a "Mistaken Distribution". In this case, the employer (who got the distribution) would give the money back to the HSA custodian.

Then you would enter the data as you did before (reporting the $800 not in box 12). Because you will say that you didn't have HDHP coverage, the whole amount will be declared in excess. It will be added to line 8 of Schedule 1 (1040), which works only if your employer has removed the $800 from Wages before they printed the W-2 (so you still have to ask them about it).

The HSA custodian will send you a check for the excess contribution, which is only fair given the grief your employer has put you through. I've lost track of where we are with 1099-SAs, but you should get one for this withdrawal of excess contribution (hopefully the only one) late this year or early next year, so that you can add the earnings made by the excess to your income for tax year 2021. This 1099-SA will have a distribution code of '2'.

[Anonymous]

I told them about it because I saw I had a contribution I didn’t make on the hsa tax form. Thanks I appreciate your help.

[Anonymous]

I wanted to post a quick update.  Today I logged into my HSA account and found they had issued a corrected 5498-SA that showed no contribution for 2020.  This makes things so much simpler.  I appreciate everyone's assistance with this.