Need help on HSA excess contribution roll over from last year

[LittleFatSheep]

Hi,

Here is my situation (MFJ so HSA limit for 2020 is 7100, and 2021 is 7200, both have HDHP for each year).

In year 2020, we over contributed by 3550, so on Jan 2021, we asked HSA to withdrawal and roll over the excess contribution to year 2021 (2000 for taxpayer 1 and 1550 for tax payer 2). HSA ended up contribute 1980 to taxplayer 1 and 1530 to taxpayer 2 for year 2021 (minus the 20 fee)

In Mar 2021, we noticed we over-contributed again for year 2021, so we asked HSA to wirhdraw

• Withdrawal 3000 from taxpayer 1 to our bank accounts.
• Withdrawal 2610 for taxpayer 2 to our bank accounts.

In 2021, we contributed through employer:

• $5940 for taxpayer 1
• $4600 for taxpayer 2

Now we received our 5498, which shows:

• Taxpayer 1: $7920 ($5940 from employer + $1980 from 2020 roll over)
• Taxpayer 2: $6130 ($4600 from employer + $1530 from 2020 roll over)
• Total $14050

Our 1099-SA shows:

• Taxpayer 1: gross distribution $5000, distribuition code 2 (excess distribution)
• Taxpayer 1: gross distribution $4160, distribuition code 2 (excess distribution)

Since we have withdrawan $5610 for 2021 (3000+2610), and the limit is 7200, we have still over-contributed by $1240.

My questions are:

• Our W2 does not show our 1980 and 1530 roll over from 2020, so where to type these info? (Since these 2 numbers counted in form 5498, I think we should report in Turbotax)
• Turbotax keeps telling us our excess contribution is $3340 (5940+4600-7200), it does not count in the 1980+1530 from rollover.
• We have typed our 2 1099-SA forms, but there is no where to show that the 5000 or 4160 distributions offset our excess contribution
• I think for 2021, our excess contribution withdrawals are only 3000 + 2610, not 5000 + 4160 (the delta is for 2020), so where to tell Turbotax such info?
• On the window "Let's enter XXX's HSA contributions", some times there are 2 cells to type, but sometime there is only 1 cell for taxpayer 2, not the second cell:
  • Any contribution you personally made (not through your employer): I thought this is where to type the $1980 and $1530 numbers?
  • Any contribution you personally made but withdrawal before Apr 18, 2022: I thought this is where to type the $3000 and $2610 numbers? But this cell some times do not show up for taxplayer 2 (some times do show up...)

I tried to look into Raw Tax Data and to see if I can edit form 5329 and 8889, but still don't get the result I want, as some cells are not editable. Thanks!

[BillM223]

" we asked HSA to withdrawal and roll over the excess contribution to year 2021" - I don't understand what you mean. Did you ask the HSA custodian to withdraw the excess (in which case, they would have sent you a check for the amount0, or did you allow the excess to carryover to the next year? If the latter case, then you should have reduced your normal 2021 contributions by the amount of the carryover, or you would have another year with excess contributions.

"In Mar 2021, we noticed we over-contributed again for year 2021," Did you really notice that you had excess contributions for 2021 in March of 2021?

"Our W2 does not show our 1980 and 1530 roll over from 2020, so where to type these info? " This should not appear on your W-2; this is a matter between you, the HSA custodian, and the IRS.

Your excess was $2,000 plus $1,550 - the fees charged by the HSA custodian don't reduce the rollover amount (if any).

"Turbotax keeps telling us our excess contribution is $3340 (5940+4600-7200), it does not count in the 1980+1530 from rollover." - $3,340 is your excess for tax year 2021. It does not include the excess for tax year 2020. You can withdraw the excess for 2021 (provided that you do it by the due data of April 18, 2022) but you can't withdraw the 2020 excess any longer.

"We have typed our 2 1099-SA forms, but there is no where to show that the 5000 or 4160 distributions offset our excess contribution" - I have no idea what this means.

"Any contribution you personally made (not through your employer): I thought this is where to type the $1980 and $1530 numbers?" - do NOT enter any amounts here that were part of the code W amount on your W-2! This field is ONLY for amounts that you sent directly to your HSA custodian. Any amounts you contributed by means of payroll deduction are called the "employer contribution" - really, it's OK, it works out better for you. The field you refer to is only for contributions you did NOT make through your employer.

"Any contribution you personally made but withdrawal before Apr 18, 2022: I thought this is where to type the $3000 and $2610 numbers? But this cell some times do not show up for taxplayer 2 (some times do show up...)" TurboTax is trying to understand which part of the excess that you are withdrawing is from direct contributions, not through your employer. But you have TurboTax thoroughly confused at this point which is why you see the input field at some times and not at others.

Please answer my questions above, and then I will show you how to enter everything.

Please put "@ BillM223" (without the space in between) at the bottom of your reply so that I will be notified of your response.

[LittleFatSheep]

Hi Bill, thank you so much for the quick response.

Here are my answers to your questions.

" we asked HSA to withdrawal and roll over the excess contribution to year 2021" - I don't understand what you mean. Did you ask the HSA custodian to withdraw the excess (in which case, they would have sent you a check for the amount0, or did you allow the excess to carryover to the next year? If the latter case, then you should have reduced your normal 2021 contributions by the amount of the carryover, or you would have another year with excess contributions.

Jerry: Yes, it's the latter case. We front loaded HSA at the beginning of 2021, and when we realize the problem, we have already excess conteibuted to both 2020 and 2021. So we decided to carryover the excess in 2020 to 2021, and sum up, calculate 2021 total excess, and then in Mar 2021, we asked HSA custodian to withdrawal the excess to our banks. But later in 2021, we switched jobs, and the new company contributed additional $1240 (not from our paycheck, but simply employer contribution front load), that caused 2021 excess contribuition again...

"In Mar 2021, we noticed we over-contributed again for year 2021," Did you really notice that you had excess contributions for 2021 in March of 2021?

Jerry: We front loaded HSA (well, majority of the HSA contribution is from employer part, not our part, which contributes on the first pay check in Jan), so when we notice that, it's too late.

"Our W2 does not show our 1980 and 1530 roll over from 2020, so where to type these info? " This should not appear on your W-2; this is a matter between you, the HSA custodian, and the IRS.

Your excess was $2,000 plus $1,550 - the fees charged by the HSA custodian don't reduce the rollover amount (if any).

Jerry: on healthequity.com website, as well as their 5498 form, they actually used 1980 and 1530 as 2021 contribution. But just FYI, since it does not make big difference.

"Turbotax keeps telling us our excess contribution is $3340 (5940+4600-7200), it does not count in the 1980+1530 from rollover." - $3,340 is your excess for tax year 2021. It does not include the excess for tax year 2020. You can withdraw the excess for 2021 (provided that you do it by the due data of April 18, 2022) but you can't withdraw the 2020 excess any longer.

Jerry: For year 2020, we asked HSA to carryover the 3550 excess to 2021, so this 2000+1550 should be counted into 2021? If so, the excess contribution of 2021 should be 3340 + 2000 + 1550 = 6890? (Or 6850 if excluding the $40 fee)

"We have typed our 2 1099-SA forms, but there is no where to show that the 5000 or 4160 distributions offset our excess contribution" - I have no idea what this means.

Jerry: NVM, I will explain at the end.

"Any contribution you personally made (not through your employer): I thought this is where to type the $1980 and $1530 numbers?" - do NOT enter any amounts here that were part of the code W amount on your W-2! This field is ONLY for amounts that you sent directly to your HSA custodian. Any amounts you contributed by means of payroll deduction are called the "employer contribution" - really, it's OK, it works out better for you. The field you refer to is only for contributions you did NOT make through your employer.

Jerry: Ok, i will ignore this one

"Any contribution you personally made but withdrawal before Apr 18, 2022: I thought this is where to type the $3000 and $2610 numbers? But this cell some times do not show up for taxplayer 2 (some times do show up...)" TurboTax is trying to understand which part of the excess that you are withdrawing is from direct contributions, not through your employer. But you have TurboTax thoroughly confused at this point which is why you see the input field at some times and not at others.

Jerry: Ok, I will ignore it for now.

Jerry: So now my questions are:

• From our W2, we contributed 5940+4600=10540, which is 3340 more than the 7200 limit. But since we had the 2020 excess contribution of 3550(=2000+1550) carryover to 2021 (Which shows up in 5498 form as 2021 contribution), should we actually count our excess contribution as 3340 + 3550 = 6890? If so, where to tell Turbotax the 3350?
• On March 2021 we withdraw 5610=3000+2610 excess contribution for year 2021, should this help to reduce the above 6890? If so, where to tell Turbotax?
• Based on the above 2 numbers, looks like we will have to withdraw another 6890-5610=1280 as excess contribution to our bank accounts, right?
• Do I need to pay income tax on the withdrawal of excess contribution? (The 3000 + 2610 on Mar 2021, plus the 1280 that I will withdraw soon, equals to 6890), if so, where should I tell Turbotax, or which form in Turbotax tax filing should I see this number?

@BillM223 Thank you, and please see my above answers.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

[Mike9241]

perhaps you did 2020 wrong. because you did not actually withdraw the 2020 excess you should have paid a 6% penalty tax  on the $3550  (or the FMV of the accounts if lower) that would have shown on form 5329

if you did 2020 incorrectly, then 2021 Turbotax does not know that there is an excess from 2020 that needs to be accounted for. they're supposed to show up on form 5329 line 42 and get there from the Turbotax carryover worksheet.

the 5498s are not entered into Turbotax 

you say you withdrew only $3,000 and $2,610 from your HSA's but with code 2 for excess contributions the 1099-SA's are showing $5,000 and $4160 (obviously they're including the 2020 excess but they were not in fact withdrawn) 

I think they are wrong. they should only report the actual distributions.

but there may also be an issue with Turbotax since entering them has no effect on the excess even if the box employer contribution withdrawal is checked.

hopefully @BillM223 has a solution.

I would say the 2020 excess of $3550 + the 2021 excess of $ 3340 less the amount already withdrawn of $5610 should leave an excess of $1280 which if not withdrawn by the due date of the 2021 return should be subject to the 6% penalty.  however the penalty is based on the lower of the excess or the FMV of the account at 12/31/2021 (needs to be entered for the 5329)

also, forgot to mention if the 2020 excess was through employers - you should have reported $3550 as additional taxable income. the reason is that any contribution made through payroll deduction reduces your taxable income. so your taxable wages would have been reduced too much.

and for 2021 the $3340 excess should be included in income for the same reason schedule 1 line 8

the 5498's may also be wrong because my understanding is they are only you report actual contributions for the year.

[LittleFatSheep]

Thank you Mike

perhaps you did 2020 wrong. because you did not actually withdraw the 2020 excess you should have paid a 6% penalty tax  on the $3550  (or the FMV of the accounts if lower) that would have shown on form 5329

if you did 2020 incorrectly, then 2021 Turbotax does not know that there is an excess from 2020 that needs to be accounted for. they're supposed to show up on form 5329 line 42 and get there from the Turbotax carryover worksheet.

Jerry: There is no 5392 in 2020, since the 2020 excess contribution was withdrawn and carryover to 2021, so 2020 does not have any excess contribution. My understanding is that the 3550 from 2020 excess contribution should be counted into 2021 contribution (Which is true if looking at 2021 5498).

Turbotax has helped me to adjust HSA contribution for 2020 to 7100, so I have supposed to pay the income tax for the 3550. I don't think there is penalty tax, since I have withdrawn (in the form of carryover, this equals to withdrawal as cash, then contribute into HSA in next year) before 4/15.

the 5498s are not entered into Turbotax 

you say you withdrew only $3,000 and $2,610 from your HSA's but with code 2 for excess contributions the 1099-SA's are showing $5,000 and $4160 (obviously they're including the 2020 excess but they were not in fact withdrawn) 

Jerry: The 1099-SA on taxpayer one shows $5000 (2000 from carryover + 3000 withdraw) with code 2. I don't know why the 2000 carryover is counted as withdrawal.

I think they are wrong. they should only report the actual distributions.

but there may also be an issue with Turbotax since entering them has no effect on the excess even if the box employer contribution withdrawal is checked.

hopefully @BillM223 has a solution.

I would say the 2020 excess of $3550 + the 2021 excess of $ 3340 less the amount already withdrawn of $5610 should leave an excess of $1280 which if not withdrawn by the due date of the 2021 return should be subject to the 6% penalty.  however the penalty is based on the lower of the excess or the FMV of the account at 12/31/2021 (needs to be entered for the 5329)

Jerry: I felt you are right, there is indeed 1280 excess contribution that I should withdraw before 4/15/2022, so as long as I withdraw them, and Turbotax should help me to adjust my HSA contribution as 7200, so I am essentially paying the income tax for the 6890 (3550+3340).

Now my understanding is that:

• 1099-SA code 2 does mean withdrawal of excess contribution
• The 2020 carryover should be counted into 2021 contribution
• As long as the 1099-SA + additional withdrawal before 4/18 equals to the total excess contribution (6890), and tell TT so, TT will adjust my total HSA contribution to 7200, so essentially I am paying the income tax.

Now the problem is that Turbotax does not calculate it (Or maybe it just ignores all carryover and withdrawal, and ask taxpayer to calculate by themselves), see below screenshot:

• Second to the last line is 7200 limit
• Last line is the 3430 excess contribution
• No where shows my carryover of 3550
• No where shows how the second line (5000+4160) impacts the numbers
• Maybe TT never cares about how much you have withdrawn, but only:
  • How much you have excess contribution FROM EMPLOYER
  • Whether you have or will withdraw such excess, if so, then TT will simply adjust total HSA contribution as 7200. TT does not help you calculate how much net excess contribution you need to withdraw (which is 3430+3550-5000=1280), if your responsibility to calculate and make it correct. Though I don't know if IRS will get it right.

Now I feel much clear now, hopefully Bill can help verify my last sentence. Thank you both!

[BillM223]

Sorry, Jerryxe, I am still not sure what you did...

"We front loaded HSA at the beginning of 2021, and when we realize the problem, we have already excess conteibuted to both 2020 and 2021. " - At the beginning of 2021, did you make contributions to 2020 and 2021?

"So we decided to carryover the excess in 2020 to 2021, and sum up, calculate 2021 total excess, and then in Mar 2021, we asked HSA custodian to withdrawal the excess to our banks." When you did your TurboTax return for tax year 2020, TurboTax reported that you had excess contributions, right? And then when TurboTax asked you what you wanted to do with it, you answered that you were not going to withdraw the excess for 2020 but were going to let it ride to 2021, right?

But, later, you wrote, "There is no 5392 in 2020, since the 2020 excess contribution was withdrawn and carryover to 2021, so 2020 does not have any excess contribution. " - So, again, you have me confused. Did you actually withdraw your 2020 excess before the due date of the return? If this was the case, then, yes, you would have not gotten a 5329 on your return for 2020. But if that is the case, what do you mean when you say , "So we decided to carryover the excess in 2020 to 2021"? These are contradictory statements, which is why I am confused.

So let me ask you to present your information a different way:

How many HSAs do you have? Do you have one for you and one for your spouse, or are you using the same one? If so, who does the one HSA belong to?

What was the code W value in box 12 on your W-2 for 2020?

What was the code W value for your spouse's W-2 for 2020?

When you did your return in TurboTax for 2020, what was the amount that TurboTax said was in excess?

What did you tell TurboTax at this point? That you would withdraw all of the excess, some of the excess, or none of it? If "some of it", what was the amount that you withdrew?

On what date did you withdraw excess for 2020 (if you did), and what was the amount?

***For your first employer in 2021***

For your 2021 W-2, what was the amount with code W in box 12 on your W-2?

For your spouse's 2021 W-2, what was the amount with code W in box 12 on your spouse's W-2?

***For your second employer in 2021***

For your 2021 W-2, what was the amount with code W in box 12 on your W-2?

For your spouse's 2021 W-2, what was the amount with code W in box 12 on your spouse's W-2?

When you did your return in TurboTax for 2021, what was the amount that TurboTax said was in excess?

What did you tell TurboTax at this point? That you would withdraw all of the excess, some of the excess, or none of it? If "some of it", what was the amount that you withdrew?

"then in Mar 2021, we asked HSA custodian to withdrawal the excess to our banks. "

OK, how much did you "withdraw"? What year did you tell the HSA custodian that it was for? Did you tell the custodian that it was an "excess contribution"? 

Since then, have you asked for any other withdrawals of excess contributions? If so, on what date and for what amount?

Are either of you 55 or older?

If things like the excess are split into two numbers (i.e., one for you and one for your spouse), please indicate which spouse saw this number.

Stick with it and we will sort this out...and also remember to add "@" BILLM223" to your response (without the space in between, so I will be notified of your response...

[LittleFatSheep]

Duplicated response, see below response.

[LittleFatSheep]

Thank you @BillM223 !

Jerry:

Somehow my reply lost... Let me re-write.

Thanks you,  

To help you understand, I have summarized in a table:

 

Sorry, Jerryxe, I am still not sure what you did...

"We front loaded HSA at the beginning of 2021, and when we realize the problem, we have already excess conteibuted to both 2020 and 2021. " - At the beginning of 2021, did you make contributions to 2020 and 2021?

Jerry: at beginning of 2021, we contributed to 2021, and at beginning of 2020 we contributed to 2020. See above table for dates

"So we decided to carryover the excess in 2020 to 2021, and sum up, calculate 2021 total excess, and then in Mar 2021, we asked HSA custodian to withdrawal the excess to our banks." When you did your TurboTax return for tax year 2020, TurboTax reported that you had excess contributions, right? And then when TurboTax asked you what you wanted to do with it, you answered that you were not going to withdraw the excess for 2020 but were going to let it ride to 2021, right?

Jerry: During 2020 tax year filing (on Feb 2021), Turbotax reported we have 3550 excess contribution, and we told Turbotax that we have/will withdraw the 3550. Acutally on Jan 2021, we already filled 2 forms "Distribution of HSA Excess Contribution" to HSA custodian, one for me with $2000 and one for my spouse with $1550. We both specified the amount will be carryover to tax year 2021. The form does say the carryover will count into 2021 contribution limit.

But, later, you wrote, "There is no 5392 in 2020, since the 2020 excess contribution was withdrawn and carryover to 2021, so 2020 does not have any excess contribution. " - So, again, you have me confused. Did you actually withdraw your 2020 excess before the due date of the return? If this was the case, then, yes, you would have not gotten a 5329 on your return for 2020. But if that is the case, what do you mean when you say , "So we decided to carryover the excess in 2020 to 2021"? These are contradictory statements, which is why I am confused.

Jerry: Since we said we have/will withdraw the excess contribution for year 2020, there was no 5392 generated by Turbotax.

So let me ask you to present your information a different way:

How many HSAs do you have? Do you have one for you and one for your spouse, or are you using the same one? If so, who does the one HSA belong to?

Jerry: One for me and one for spouse, for each year.

What was the code W value in box 12 on your W-2 for 2020?

Jerry: 7100

What was the code W value for your spouse's W-2 for 2020?

Jerry: 3550

When you did your return in TurboTax for 2020, what was the amount that TurboTax said was in excess?

What did you tell TurboTax at this point? That you would withdraw all of the excess, some of the excess, or none of it? If "some of it", what was the amount that you withdrew?

Jerry: Turbotax does say we contributed 10650, which is 3550 excess contribution, and since we have filled the forms "Distribution of HSA Excess Contribution" to HSA custodian with 2000+1550=3550 amount, we choose the option that we will withdraw the 3550, therefore Turbotax belived we only contributed 7100, so there was no 5392 for penalty.

On what date did you withdraw excess for 2020 (if you did), and what was the amount?

Jerry: Jan 2021. 2 forms of "Distribution of HSA Excess Contribution" filled, mine is 2000 and spouse is 1550. Both selected to have the amount carry over to 2021. There were 20 fee for each form, so after the forms were processed, we did see in HSA website, my account has 1$980 contribution for 2021, and spouse has $1530 contribution for 2021.

***For your first employer in 2021***

For your 2021 W-2, what was the amount with code W in box 12 on your W-2?

Jerry: $5700

For your spouse's 2021 W-2, what was the amount with code W in box 12 on your spouse's W-2?

Jerry: $3600

***For your second employer in 2021***

For your 2021 W-2, what was the amount with code W in box 12 on your W-2?

Jerry: $240

For your spouse's 2021 W-2, what was the amount with code W in box 12 on your spouse's W-2?

Jerry: $1000

When you did your return in TurboTax for 2021, what was the amount that TurboTax said was in excess?

What did you tell TurboTax at this point? That you would withdraw all of the excess, some of the excess, or none of it? If "some of it", what was the amount that you withdrew?

Jerry: Turbotax says 10540 (=5700+3600+240+1000, the 4 W-2), therefore Turbotax says I have 3340 excess contribution (=[removed]). We haven't filed the tax for 2021, but we will definitely choose "we will withdraw all excess". Below is a screenshot from Turbotax, last 4 numbers equal to 10540, and last 2 numbers equal to 3340.

The 5000 and 4160 are from 1099-SA.

"then in Mar 2021, we asked HSA custodian to withdrawal the excess to our banks. "

OK, how much did you "withdraw"? What year did you tell the HSA custodian that it was for? Did you tell the custodian that it was an "excess contribution"? 

Jerry: 3000 for mine, and 2610 for spouse. The requests were filled in form "Distribution of HSA Excess Contribution", and we choose to withdraw to bank account.

Since then, have you asked for any other withdrawals of excess contributions? If so, on what date and for what amount?

Jerry: Nothing else

Are either of you 55 or older?

Jerry: All under 55

If things like the excess are split into two numbers (i.e., one for you and one for your spouse), please indicate which spouse saw this number.

Jerry: I sort figured out how Turbotax worked, but need your confirmation, and maybe there is need for future Turbotax improvement:

1. Turbotax does know my total contribution for 2021 through employers is 10540 (5700+3600+240+1000)
2. Turbotax does NOT know (or have anywhere to let me input) my carryover contribution from 2020 to 2021, which is 3510 (=2000+1550-40 fees). This number is reflected on 2021 5498 forms.
3. Turbotax does NOT know (or have anywhere to let me input) I have withdrawn some excess contribution for 2021, which is 3000+2610.
• In my 1099-SA 2021, it shows 5000, which equals the 3000 withdraw and the 2000 carryover
• In spouse 1099-SA 2021, it shows 4160, which equals the 2610 withdraw and the 1550 carryover
4. Therefore Turbox believes I have 3340 (=[removed]) excess contribution, but inreality I have 1240 (=3340+3510-5610) excess contribution.

Does that mean, as long as I withdraw another $1240, I should be fine? what I am more concerned is that, since Turbotax does NOT know the info on #2 and #3, will IRS know it?

Stick with it and we will sort this out...and also remember to add "@" BILLM223" to your response (without the space in between, so I will be notified of your response...

**Say "Thanks" by clicking the thumb icon in a post

**Mark the post that answers your question by clicking on "Mark as Best Answer"

[LittleFatSheep]

Duplicated response, ignore it

[BillM223]

2020

Your annual HSA contribution limit was 7,100. You contributed 7,100 and 3,550 for a total of 10,650. The created an excess of 3,550.

You said that you withdrew 3,550 in January 2021. This means that the excess has been “cured” (as if it never existed). There is no carryover to 2021.

2021

Your annual HSA contribution limit is 7,200. You contributed (5,700+240) + (3,600 + 1,000) for a total of 10,540. This makes an excess for 2021 of 3,340. You appeared to have withdrawn 5,610, did you?

In the future, please do the following:

1. Ignore the 5498-SA. It will just confuse you because some of the boxes don’t mean what you would think they mean.

2. Do NOT withdrew any money from an HSA until TurboTax tells you that you have excess contributions and tells you the amount. It is difficult for taxpayers to correctly calculate the amount of the excess. This means that you should not have withdrawn any money in March 2021 for 2021, because at that point, you didn’t know what the excess would be (if for no other reason, that your second employer made more contributions at the end of the year, that you didn’t allow for in March).

3. In the same vein, don’t try to calculate the earnings on the excess while they were in the HSA. Let the HSA custodian do that (it will appear on the 1099-SA with a distribution code of 2.

4. If you withdrew 3,550 for 2020 and 3,450 for 2021, then your HSA is set. If, however, you withdrew more than 3,340 for 2021, then you have withdrawn too much and this will need to be corrected.

5. MOST IMPORTANTLY, you cannot “withdraw” the excess for a year and also “carry over” the same excess to next year. This is why I was having trouble understanding what you were talking about. If you withdraw the entire excess, then there is nothing left to carry over to the next year. We use these terms in very specific ways.

OK, tell me, did you withdraw 3,340 for 2021 or 5,610 as your table suggests? If you withdrew 5,610 for 2021, then you withdrew 2,270 too much. Please call your HSA custodian, apologize profusely, and see if they will let you declare that 2,270 of that last distribution was a “mistaken distribution”. They don’t have to allow this, so grovel if you need to. Otherwise, you will owe a 20% penalty on that 2,270.

Now, does this all make sense?

@Jerryxe

[LittleFatSheep]

Thank you @BillM223 !

You explanation is quite clear. I still have the question regarding my withdrawal of 3550 for 2020.

1. This is the form I filled in Jan 2021 to withdraw the 2020 excess contribution, and it did say it will be counted to 2021 contribution

2. In HSA website contribution history page, it does say I have an individual contribution of 1980.21 (2000 minus the 20 fee, plus the 21 cents interest). Can I really ignore it as 2021 contribution?

3. I know 5498 form is just informational, but it does say the sam amount as the screenshot in #2.

So now the question is:

1. If I should acknowledge the 3550 withdraw for year 2020 that I mean to carryover to 2021 as 2021 contribution? If so then my excess contribution would be 3340+3550, which is large than the 5610 withdraw, so I don't have the over withdraw problem, and just need to withdraw some more to balance it

2. If I could just ignore the 3550 as contribution? If so, I will face the over withdraw, that I will probably need to talk to HSA as you suggested. And where to tell Turbotax that I have withdraw 5610, so that it will know I have over withdraw, and tell IRS I owe 20% penalty?

Or maybe the question is: If IRS knows the 3550 as contribution to 2021?

[BillM223]

Thank you for showing me the HSA custodian form. Now I understand.

In fact, you did not withdraw anything, correct? That is, you did NOT receive a check for $3,550 in early 2021 from the HSA custodian, but instead carried the 2020 excess over to 2021. Unfortunately, since we use precise terms in the tax world, what I was reading was quite confusing.

OK, when you were doing your 2020 TurboTax tax return, and TurboTax asked you how you wanted to handle the excess, did you answer (1) you would withdraw it, (2) withdraw some of it, or (3) withdraw none of it and let it carry over to next year. If you said that you would withdraw it, well, that was the wrong answer, so your 2020 tax return will need to be amended. However, I will admit that at this point, I am not sure what you did, so please remind me what you told TurboTax. Hint: if you answered option #1, then the 3,550 would have been added to line 8, Other Income, on Schedule 1 (1040). If you answered option #3, then that income would not be there (which would be correct).

OK, now let me redescribe the process for you.

2020

Your annual HSA contribution limit was 7,100. You contributed 7,100 and 3,550 for a total of 10,650. The created an excess of 3,550.

You "carried over" the 3,550 excess from 2020 to 2021. Behind the scenes (because this is not very clear from form 8889) what happens is that the annual HSA contribution limit for 2021 is reduced by the carry over amount, so the 2021 limit of 7,200 is reduced to 3,650. Again, this is not obvious on form 8889 in 2021.

2021

Your annual HSA contribution limit for 2021 is now 3,650 (see above). You contributed (5,700+240) + (3,600 + 1,000) for a total of 10,540. This makes an excess for 2021 of 6,890. 

However, note this: you have until the due date of the return (as extended) to withdraw the excess for any given year; after the due date, has passed, you can no longer fix the excess by withdrawing it.

This means that for the excess for 2020 of 3,550, you can no longer withdraw to "cure" it, because today's date is after May 17, 2021 (June 15, 2021 for taxpayers in Texas, Louisiana, and Oklahoma), i.e., the "normal" due dates as changed by the IRS last year. 

Now there are only two ways you can fix the excess from 2020: 

• reduce your HSA contributions in a future year so that the excess which is carried over is used up by being added to the next year's contributions, or
• make an HSA distribution NOT for medical expenses, which will show up as Other Income on Schedule 1 (1040) and will also generate a 20% penalty.

So when you actually withdraw the excess for 2021, you can withdraw only the 2021 excess of 3,340 before the due date of the 2021 return (April 18, 2022 this year, except for Maine and Massachusetts which are April 19, 2022). The 2020 excess cannot be withdrawn with 2021 excess; instead the 2020 excess must be cured in one of the two ways listed above in the bulleted list.

The most less painless way to handle this is to reduce your HSA contributions in the following year so that the carry over is used up along with your regular HSA contributions.

Does all this makes sense?

[LittleFatSheep]

Hi @BillM223 

Thanks again for the explanation.

For 2020 tax filing, I said to turbotax "(1) you would withdraw it", since I have already filled the "distribution of excess contribution" form, and the 3550 is added as other income in 1040 form, as well as schedule 1. So I paid income tax on the 3550. There is no problem for 2020 right? So I don't understand why you believe I should "cure" it?

(The 3550 carryover is essentially: 1. I withdraw the 3550 and paid the income tax for the 3550 for year 2020. 2. for 2021, I personally contributed 3550, except that HSA custodian holded the 3550 for a few days, instead of going to my bank account and coming out).

For the 2021 tax, your are right, my contribution limit is 7200-3550 = 3650, and I contribued 10540, which is 6890 excess contribution. Since I have withdraw 3000+2610 on Mar 2021, I just need to withdraw another 1250 = 6890-3000-2610 before 4/15/2022, and in turbotax, I should choose "(1) you would withdraw it", and I am good to go, right?

So looks like in Turbotax, I should fill the below cell ($2000), since the carryover is considered as personal contribution, not employer contribution.

(I think even if I type the 2000 and 1550 into the above cells, and Turbotax does calculate correctly that I have 6890 excess contribution, the summary table below is still incorrect/incomplete, which only shows I have excess of 3340 from EMPLOYER, and it does not say I have excess contribution from personal contribution that I need to withdraw)

And I should choose this:

And I don't need to tell (no where to tell?) Turbotax the 3000+2610 withdrawal I have done, right? Since Turbotax only care about if I have or I will withdraw all or part of the total 6890 excess contribution, and it does not help me to calculate how much I have withdrawn and how much left to withdraw.

[BillM223]

Jerry, I fouled up a little. When TurboTax detects excess contributions AND when these contributions are "employer contributions" (i.e., part of code W in box 12 on your W-2), then TurboTax immediately adds the excess to Other Income (line 8 on Schedule 1 (1040), whether or not you actually withdraw it from your HSA or carry over to the next year. I apologize for saying differently.

The form from your HSA custodian is misleading. It asks you "How would you like the funds distributed?" But when you have a carryover to the next year, the IRS does not refer to it as a "distribution". This is what confused me, because you can't actually withdraw excess contributions (which IS a distribution) and have a carry over at the same time (which is NOT a distribution in the land of the IRS). You can see this because a withdrawal will generate a 1099-SA to be sent to you, whereas the carry over will not generate a 1099-SA.

So the custodian's form is misleading in its terminology. Please ignore its use of the words.

You chose Option 1, which was to carry the excess over to next year. So the 3,550 was added to Other Income (good) and you did not get an actual distribution (a check) from the custodian. When I say "cure" the excess, what I mean is that when you ask for a withdrawal of the excess (and the custodian sends the excess to you which is Options #2 and #3), then the excess is "cured", that is, it is as if the excess never happened. So you no longer talk about having an excess in 2020, and when TurboTax asks you in 2021 if you "overfunded" your HSA in 2020, you would answer "NO" because the excess never happened.

However, in your case, as you know, you carried over the excess to 2021. The carryover should be done automatically by TurboTax (assuming you used TurboTax the previous year). You might not even see this question about overfunding because TurboTax should see the carryover on the Carryover Worksheet - note that if you are an Online user, I don't know if you can see the Carryover worksheet even of you pay for the return and can see all the other forms (you might look) - I see it in the forms list of the CD/download software. 

"For the 2021 tax, your are right, my contribution limit is 7200-3550 = 3650, and I contribued 10540, which is 6890 excess contribution. Since I have withdraw 3000+2610 on Mar 2021, I just need to withdraw another 1250 = 6890-3000-2610 before 4/15/2022, and in turbotax, I should choose "(1) you would withdraw it", and I am good to go, right?"

Well, no. This is one of the most difficult things to understand. The excess for 2020 is separate from the excess for 2021. Remember I said that you have to withdraw the excess by the due date of the return? The due date of the 2020 return was either May 17, 2021 or June 15, 2021 (see the discussion in the previous answer), so we are passed that; you can no longer withdraw that 3,550. This is difficult for taxpayers to understand because both the 2020 excess and the 2021 excess are called "excess" but they are not treated in the same way.

So your withdrawal of 5,610 plus 1,250 doesn't do what you think it did. You were allowed under the rules to withdraw only the 2021 excess of 3,340 (6,890-3,550); the only way to clear the 3,350 from 2020 is to report it as a distribution not for qualified medical expenses.

But I don't think that TurboTax will let you try to withdraw the entire 6,890. It should give you another screen saying that you can withdraw only the 3,340 , and that you have to treat the 3,350 from 2020 differently. But you may not have gone far enough through the interview to see it.

Go a little bit farther in the HSA interview and see if this screen pops up.

In any case, you can certainly withdraw another 1,250. However, on the 1099-SAs that you get for the two distributions (the 5,610 and the 1,250) you have to indicate that a total of 3,350 is not for qualified medical expenses. You will do this on your 2022 return when you can enter these 1099-SAs. Marking the 3,350 as not for qualified medical expenses would make the amount taxable and you would also get a 20% penalty.

BUT, as I have explained, you have another option. Since TurboTax won't let you withdraw the 3,550 (in terms of your tax return), it will rollover to next year - so in 2022 CUT YOUR HSA CONTRIBUTIONS so that the 3,550 will be used up in 2022. If you use TurboTax next year, this will be done automatically, and you will finally be done with it.

So to make this work, don't withdraw the 1,250 AND report to the HSA custodian that you asked for a mistaken distribution of 2,270 when you made that withdrawal in March 2021 of 5,610. That is, you were legally able to withdraw 3,340 (the excess for 2021) of the 6,890 excess and just needs to carry over.

If you can do this the way I have outlined in the previous paragraph, you will save the 20% penalty at least. 

I know this is very confusing but in this way your tax returns will match the records of the HSA custodian if you are ever audited.

[LittleFatSheep]

hi @BillM223 

I kinda get what you mean, if in the custodian form I choose Option 2 or 3, then 2020 tax year is all set, but if I choose Option 1, I still need to deal with it?

My question is: why cannot I treat option 1 as:

• I get a check (like option 2) for 2020 excess contribuion, so just like I choose option 2.
• I then made a personal contribution (not employer contribution) using this check for 2021. Except that HSA custodian hold the check for me and made the contribution for 2021, instead of me receiving the check, and then make the personal contribution using the check?

If so, does that mean my 2020 tax is still ok, and I just need to add the 3550 to 2021 as PERSONAL CONTRIBUTION? Even in the contribution history screenshot (see previous responses) from HSA custodian, it does say my 2000+1550 are INDIVIDUAL CONTRIBUTION.

I don't know how does personal contribution to HSA works exactly, and if the 5610 withdrawal could consider as 3550 for the personal withdrawal and 2060 for the employer contribution? I do see the below screen that asks how much you personally contribute and how much you have withdrawan for the personal contribution, so my initial thought is that I should just say 3550 personal contribution and 3550 withdraw for the personal contribution.