excess HSA contribution error

[TMCJ]

When I filed my 2019 taxes I reported $2,310 in contributions for myself and checked each month as a self only HDHP.  I reported $3,500 in contributions for my wife and checked 7 months as a self only plan and 5 months as a family plan since our first child was born August 21, 2019.  When I started my 2020 taxes and transferred my info from 2019 the software told me I had $204 tax due before I even entered any income.  On the 2020 Form 8889 transferred for my wife it shows on Part III line 18 smart worksheet/section C/#1"Total maximum allowable contribution for 2019" is $4,958.  Part III line 18 smart worksheet/section C/#2 "Amount allocated to spouse in 2019" is $3,500.  Part III line 18 smart worksheet/section c/#3 "Net maximum allowable contribution for 2019" is $1,548.  Then Part III line 18 "Last month rule" shows $2,042.  Part III line 20 "Total income" shows $2,042 and Part III line 21 "Additional tax" shows $204.  I spoke to my employer and they confirmed that I DID NOT make excess contributions to my HSA.  Did I report this incorrectly for it to transfer excess contribution to HSA from 2019?

[BillM223]

"When I started my 2020 taxes and transferred my info from 2019 the software told me I had $204 tax due before I even entered any income."

I do not know where this $204 came from, but I don't know that it had anything to do with your HSA.

If you made excess contributions in 2019, TurboTax would had told you, and asked you if you wanted to withdraw it. If you did not withdraw it all by July 15, 2020, then TurboTax would have added form 5329 to your return, which would calculate a 6% excise tax on the excess contributions that were not withdrawn in time (see Section VII).

If you didn't have a 5329 on your 2019 return, then I have to assume that you entered 2019 correctly.

"On the 2020 Form 8889 transferred for my wife it shows on Part III line 18 smart worksheet/section C/#1"Total maximum allowable contribution for 2019" is $4,958.  Part III line 18 smart worksheet/section C/#2 "Amount allocated to spouse in 2019" is $3,500.  Part III line 18 smart worksheet/section c/#3 "Net maximum allowable contribution for 2019" is $1,548.  Then Part III line 18 "Last month rule" shows $2,042.  Part III line 20 "Total income" shows $2,042 and Part III line 21 "Additional tax" shows $204. "

All of the entries are related to the question at the end of the HSA interview: "What Kind of High Deductible Health Plan did [name] have on December 1, 2019?" I assume that the name here was your spouse's.

I also assume that your spouse does not have an HSA.

The problem here is that this question does not apply to most taxpayers (it should say so but it doesn't).

If your spouse did not have an HSA in 2019 or did have an HSA but did not contribute to it, then your spouse should answer NONE to this question.

These questions and answers are all a result of your spouse answering Family or Self when your spouse should have answered NONE. TurboTax thought that your spouse had used the last-month rule in 2019 but did not maintain HDHP coverage in 2020, which would result in penalties.

Don't be worried if this doesn't make sense - just go back to this questions and if your spouse either did not have an HSA in 2019 or did but did not contribute to it, then answer NONE.

P.S.

"I spoke to my employer and they confirmed that I DID NOT make excess contributions to my HSA."

Your employer does not have enough information to know if you made excess contributions or not. Neither does your HSA custodian.

Only your tax professional and/or tax software - which can see your entire tax situation - can know. I understand the desire to ask your employer, but, in fact, they cannot know. After all, your employer may not be fully aware of your and your spouse's insurance situation, and your employer would not be aware of any HSA contributions that you made directly to the HSA custodian.

If after you make the change to NONE for the HDHP question above, you have any more issues, then please come back and ask.

[TMCJ]

Hi Billm223,

Thank you for your response.  In 2019 both my spouse and I had HSA's through our employer.  When I review the HSA summary in Wages & Income in TT 2019 it shows  $2,806 in Total Distributions, $0 in Taxable Distributions, $3,500 in Tax Free Employer Contributions for my spouse.  It shows $1,911 in Total Distributions, $0 in Taxable Distributions and $2,310 in Tax Free Employer Contributions for myself.  Neither of us made any contributions on our own to our HSA and we both were covered by a HDHP all of 2019.  I also looked and there was no form 5329 generated on 2019 tax return.  When I transfer my info from 2019 to begin my 2020 return I immediately show $204 Federal Tax due.  On Form 1040 line 8 "Other Income from Schedule 1, Line 9" it shows $2,042.  When I look on schedule 1 line 9 it says Form 8889 Health Savings Accounts and has an entry of $2,042.  There is already a Form 8889 generated in my name that shows line 18 $2,042, line 20 $2,042 and line 21 an additional tax of $204.  Any idea why this is being generated when 2019 return does not show any excess contributions via form 5329? 

Thanks for your help!

[BillM223]

Well, it looks like I am going to have to explain the last-month rule after all - this is the source of the line 18 and onward entries.

The Tax Code allows you to take advantage of the "last-month" rule - that is, if you have HDHP coverage on December 1 of the year, you are permitted to use the full annual HSA contribution limit (otherwise the limit would be pro-rated by month).

The catch is that if you use the last-month rule to artificially inflate the annual HSA contribution limit, then you have to stay under HDHP coverage for the entire "testing" period, which means all the next year.

So, if you used the last-month rule on December 1, 2019 (and you did), then you had to stay under HDHP coverage for all of 2020.

Your results are consistent with you not indicating that each of you had HDHP coverage for all of 2020.

If you failed the testing period, then TurboTax asks you a series of questions to determine how much of an annual HSA contribution you would have been allowed had it not been for the last-month rule. Any HSA contributions over that would be considered in excess.

So, let me ask you:

1. You said that each of you had an HSA in 2019 and I presume 2020.

2. You had Self-only coverage for 7 months in 2019 then each of you went under a Family plan for the last 5 months.

3. Did you both have an HSA for 2020?

4. If so, what HDHP coverage did you indicate for each of you for 2020? I ask because the symptoms are that one or both of you did not indicate that you had HDHP coverage for the entire year of 2020.

5. Did you see the question, "What type of Hight Deductible Health Plan coverage did [name] have on December 1, 2019?" You may have seen this question for one or both of you. What were your answer(s)?

6. You should have seen question #5 only if you did not enter that each of you had HDHP coverage for all of 2020, which takes us back to #4.

Please tell me what your coverages were for each of you in 2019 and 2020, and let's figure this out.

[TMCJ]

1)  Yes we both had an HSA in 2019 and 2020.

2)  We both were covered by a HDHP in 2019.  I reported that I was covered all 12 months of 2019 by a self only plan.  I reported that my wife was covered by a self only plan for 7 months and then by a family plan for the last 5 months.  I reported it this way when going through the interview in TT because our first child was born in August of 2019.

3)  Yes we both had an HSA for all of 2020.

4,5,6)  I have not even started filling out 2020 yet.  All I have done is install TT 2020 on my desktop, opened the program, installed updates and transferred tax file from TT2019.  As soon as I transferred the TT2019 file it brought up a screen showing my personal info that was transferred from 2019 and the Federal Tax Due box at the top of the screen showed $204.  I had not begun entering any information yet and that is what prompted me to switch to the form view to see how I could owe any tax when I had not even entered any tax documents yet.  In form view I found form 8889 with the Part III Line 18 smart worksheet already filled out showing self only coverage for January-July 2019 and Family for August-December.  Section C of smart worksheet line 1 is $4,958.  Line 2 is $3,500 and Line 3 is $1,458.  Then it shows Line 18 $2,042.  Line 20 $2,042 and Line 21 $204.

I was covered all year 2019 by a HDHP as self only and my total contribution was $2,310.

My wife was covered all year 2019 by a HDHP as 7 months of self only and 5 months as family and her total contribution was $3,500.

Although I have not started entering my 2020 information yet I was covered all year 2020 by a HDHP and my total contribution was $3,360.

Although I have not started entering my 2020 information yet my wife was covered all year 2020 by a HDHP and her total contribution was $4,800.

TMCJ

[TMCJ]

Any thoughts?

[BillM223]

Well, it doesn't make sense that you start with owing $204; however, not everything that TurboTax does during the return is obvious; what matters is that the finished product be correct.

So, when you describe the line 18 worksheet on line B showing your coverages for 2019, this sounds like TurboTax carried over your 2019 coverage. I was not aware that this was on the Carryover worksheet, but OK.

So it sounds like TurboTax was prefilling out the Part III section on the 8889, in case you failed to keep HDHP coverage for all of 2020. Then, when you showed full HSA coverage for 2020, this information would be removed.

Why would it do this? Because when you switched from Self to Family in 2019, you had Family coverage on December 1, which allowed you to use the Family limit for the entire year - the last-month rule. Hence the possibility that you might have to pay a penalty for not maintaining HDHP coverage in 2020 - and, of course, at the start of your 2020 return, you have not shown any HDHP coverage at all (because you haven't had a chance to).

So let's do this:

Go through your 2020 return, especially the HSA interview. See if the Part III section on the 8889 goes way.

Also, if one of you does not have an HSA (I can't remember), be sure to answer NONE to the question "What type of High Deduction Health Plan did [name - whoever did NOT have the HSA] have on December 1, 2019?".

If after you finish the 2020 return you find that Part II still has stuff in it - especially on line 21 - then come back and tell us.

[TMCJ]

Thanks.  I will try that.  Just a quick observation on the Line 18 worksheet transferred over to 2020 Part C line 2 "Amount allocated to spouse in 2019" it shows $3,500.  Not sure if that makes sense because as the spouse I was covered all year 2019 by a HDHP self only plan and only contributed $2,310 of the maximum $3,500 I was allowed for 2019.  I think this is where the issue is coming from.  Any ideas why it would allocate $3,500 of her contribution to me when I had my own plan?

[BillM223]

When you each have Self-only, you have Self-only, and the limit is $3,550 for each of you...but when either one of you has Family coverage, then you are both considered to have Family coverage (your actual Self-only coverage notwithstanding), so you two SHARE the $7,100 HSA contribution limit.

You two can allocate this $7,100 any way you like. If you need $4000, then you can allocate $4,000 of the Family coverage to you, leaving your spouse the remaining $3,100 to apply to your spouse's limit.

TurboTax does this allocation automatically - it's not something that you choose (i.e., you could if you were doing the return by hand, but you're not).

I am not sure how much to read into this, since you shouldn't be worrying about this anyway until you get to the end of your return...I am interested in hearing how it turns out...

[svgsttvi]

Similarly, I am having problems completing this HSA portion of the questionnaire. My spouse was the only one that had an HSA account in 2020 or even 2019. As her husband, I had not such HSA account since I have delt with my own health services.  When near completion of the questionnaire of HSAs, the Turbo Tax responses with "You may want to withdraw money from your HSAs.  It looks like Ken has an excess contribution of $500. This amount is being taxed an extra 6%.  But, anything withdrawn between January 1 and May 17, 2020 avoids this additional tax. It gives three options to select then continue.  Ok, we'll withdraw the full $500 excess contribution by May 17, 2021.  We'll withdraw some of the excess contribution by May 17, 2021. No, we're not going to make this withdrawal.    Our response is that there is a logic error in the coding. It is assuming because two people are filing a joint return that they both have an HSA account. In our case, this is absolutely incorrect, because I am use my medicare and tricare for life policies with absolutely no HSA account since 1999.  My spouse is the only one with an HSA account, therefore, Turbo Tax 2020 should not be telling me that I need to withdraw any monies because we had no such account or made any such savings.  I need a Turbo Tax employee expert to advise me how to proceed.  I recently returned to using Turbo Tax since 2015.

It was a great product up to that time, but I got discouraged due to a "print" function error on Mac OS, where it would not print the SSN at the top of the page.  After two weeks of troubleshooting on the phone with the team, it was not resolved. 

I look forward to an appropriate response... Has anyone else observed this challenge? How do you proceed beyond the HSAs questionnaire with the right action? 

Thanks

[BillM223]

@svgsttvi

"You may want to withdraw money from your HSAs.  It looks like Ken has an excess contribution of $500. "

This should not happen unless you indicated that the (or an) HSA was owned by you. 

Your spouse made HSA contributions through her W-2 (box 12 code W), right? In the screens after entering the W-2, did you indicate that your spouse put all of her HSA contributions into her HSA or your HSA (or both is possible)? Go back and see what you answered.

When you started the HSA interview, the landing page should ask about your Health Accounts. Were the boxes for both taxpayers checked for HSA? They should not have been; only hers should have been.

Then when you went through the HSA interview, were you asked about your HSA?

I can't reproduce what you are describing unless I make an error in attribution for the HSA.

Please go through the interview again to see if there are any anomalies in the your data entry.

If you just can't find it, I suggest that you delete all HSA data and re-enter it. This is sometimes faster than going through the interview over and over again.

***HSA RESET***

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. 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.

P.S. If you see the question, "What type of High Deductible Health Plan did Ken have on December 1, 2019?" (yes, 2019), be sure to answer NONE, because this question does not apply to you.

[svgsttvi]

Great news! My issue was rectified with some appropriate recommendations from Bill223 (Employee Tax Expert). The corrective action was to review the W-2 entered. My first observation when I looked at the W-2 page that was entered into the application indicated that I had incorrectly marked the "W-2" as Ken's instead of my spouse's. Once that simply correction was made, I was able to successfully finalized the HSA questionnaire without issue.

The application was correct in indicating that "Ken" needed to withdrawn the $500.00 from HSA account because I had incorrectly selected the "W-2" as Ken's instead of my spouse's own. Ken had no W-2 in 2020.

Thanks BillM223 for your prompt guidance that was right on spot.

Have a great day.