5329 HSA Excess Contribution Tax inconsistency

[RichInPitt]

I'm completely confused on the HSA excess contribution tax.  In 2021, my employer allowed an excess contribution of $429 and I paid taxes on it.

In 2022, they screwed up again and didn't underwithold what I wanted, only $100 less than the maximum. So on Form 5329, it took the excess contribution from 2021, (line 43), $429, entered the amount less than the maximum withheld, $100 (line 43), resulting in $329, and calculated a penalty on this.  $329*6% = $20.  Fine.

In 2023, they screwed up yet again, only underwitholding by $160. On the 5329, it again carries over the previous $329, but line 43 (amount under maximum) is blank.  On line 47, it adds back $169 and calculates a penalty on $329+$169=$498. So the tax is $30 ($498*6%)

The data source for line 47 says this additional $169 is from 8889 line 2 less line 16.  This is last year's $329 less the amount underwithheld this year, $160 = $169. 

This means I'm paying a penalty on $329 from last year plus a penalty again on the $329 less the amount underwitheld this year.  I'm paying a tax on the $329 twice this year.  Why am I double taxed, and why is the calculation completely different this year?

It also seems to mean that I started the year with $329 excess, I underwitheld $160, and yet my excess contribution starting next year increased to $498.  How is this possible?

Kicker - I swear I look at this before the latest software update, and the penalty was $10 - the correct amount on last year's $329 less this year's underwitheld $160 ($329-$160 = $169.  $169*6%=$10).

Did the tax law change in the last few days since the last software update?

[dmertz]

You are experiencing a TurboTax bug that was introduced with the February 8, 2024 update to 2023 TurboTax.  When TurboTax developers changed the operation so that the applied excess appears on line 1 of Form 8889 as now required by the IRS, they failed to make a corresponding adjustment to the way line 43 of Form 5329 is calculated.

Perhaps @BillM223 can help report this bug.

[BillM223]

"In 2023, they screwed up yet again, only underwitholding by $160. "

I take this to mean that your employer contributed an amount equal to your annual HSA contribution limit less $160, so this $160 should have been applied to reduce your carryover of excess contributions.

So, yes, the $160 should have been on line 43 (the 5329 instructions say "Line 43: If contributions to your HSAs for 2023 (line 2 of Form 8889, Health Savings Accounts (HSAs)) were less than your contribution limit for HSAs, enter the difference on line 43.")

Then line 45 should be $160. And line 46 should be (329-160) $169. And Line 47 should be zero, so line 48 should be $169.

Then the penalty on your excess should be 6% of the smaller of line 48 or the value of your HSA on December 31, 2023, so in this case, $10?

Does this match your situation? @dmertz is right that the 5329 needs work and that the change you noticed was the result of the latest code update. Let me pass this on.

[BillM223 · Accepted solution]

Please see this article on the doubling of the excess HSA carryovers and be sure to sign up to be notified of any updates.

[RichInPitt]

I agree that this is what should happen.  It's what happened on my 2022 return, and what I recall seeing before the latest update.

It no longer does.

Line 42 is blank, line 45 is 0, line 47 is 169, with a  Data Source that say  Form 8889 line 2 minus line 13 , which is last year's carryover less this year's HSA deduction (from line 8 annual limit minus line 11 actual withholding - i.e. amount withheld under the limit)

[CatinaT1]

Many things have been corrected in the latest updates to TurboTax. Are you still experiencing this problem?

Make sure you have ran all updates. 

If using TurboTax Online: Clear your cache and cookies. See this FAQ, for your particular browser.

If using TurboTax Desktop: Please see this FAQ.

[RichInPitt]

It appears that one of the recent updates fixed this for me.  Though I'm still receiving "We’re still working on HSA prior year excess contribution reports incorrectly on forms 8889 and 5329" emails, as recently as Thursday 11pm, so I'm going to wait until I'm notified that it's fixed, to make sure any final fix doesn't cause problems again.

[RichInPitt]

Is there a way to find the status of this?  The last update I received was Feb. 26 via email.

"We haven’t forgotten about HSA prior year excess contribution reports incorrectly on forms 8889 and 5329"

"We’ll email you when we’ve developed a fix."

I have a sense they have.  Should I just assume it was fixed and file?

[BillM223]

The issue with the carryover of excess HSA contributions has been fixed. 

You can confirm this if - after you pay for the Online product and before you file - you look at your 5329, line 48 does not show the doubled carryover.

[RichInPitt]

OK, thanks.

"We’ll email you when we’ve developed a fix. "

I guess I'll stop expecting this.

[BillM223]

Sorry, we in the Community do not get copies of such emails. If your 5329 checks out OK, you can file (at least as far as your HSA is concerned).