Getting withdrawn HSA excess contribution to show up on Form 8889

[dzzzmcgzzz]

We had two HSAs last year, one for my wife and one for myself. We overfunded them by mistake by $814. I withdrew these excess contributions after January 1, 2020. This withdrawal of the excess contributions should show up on line 14b on Form 8889, but it is not showing up. I am taking the following steps to do so, and it is not working. What should I be doing instead?

After going through the HSA interview and letting the program determine we could have $7000 max contribution, it says: 

"Who made the excess HSA contribution? You contributed $814 more to your HSAs than you were allowed. From this amount, you may allocate $488 of excess contribution between you. Who should we treat as having made the excess contribution of $488?"

I selected myself, but why is it saying $488, and why does this matter?

Next page, it says I have made an excess contribution, and to avoid a 6% tax on this, I should withdraw by April 15. Since I have already withdrawn this, I select that I will withdraw it all by April 15. 

Next page, it confirms that I have $814 of excess employer contributions withdrawn.

But when I go to review Form 8889 at the end preview, it doesn't show this $814 on line 14b! How do I make that happen?

[BillM223]

1. What did you tell the HSA custodian in January when you withdrew the $814? Did you tell them that this was for a "withdrawal of excess contributions"? If not, the custodian will mark this as just a distribution, that should have been for qualified medical expenses, but it was not.

The HSA is not a savings account that you can just put money in and take at will. Instead, there are discrete rules about how you do this. In the future, please do not take out what you think are excess contributions unless TurboTax asks you to.

2. How much did you actually contribute in total? May I assume that it was $7,814?

3. One way that you would be told that you had $814 in excess contributions but could withdraw only $488 would be because you carried over an excess contribution from 2018 of $326. If so, this amount cannot be withdrawn now (that deadline was April 15, 2019). Instead, now you need to make it possible to credit that amount against a future contribution limit. In other words, if you carried over a $488 excess contribution, you needed to reduce your normal contributions the next year by $326, so that the carryover would be used up.

4. If indeed you said that you overfunded your HSA last year by $326, please note that if you withdrew that amount last year before 4/15/2019, that you should answer NO to the overfunding question. The question should be worded, "Did you carry over an excess contribution from 2018?" Id you withdrew that amount last year, you "cured" the overfunding, so don't report it.

5. When you withdrew the $814 without telling the HSA custodian that it was a withdrawal of  excess contributions, then you made a distribution that was not for qualified medical expenses. Normally, this is charged not only income tax but also a 20% penalty. This is why you don't willy-nilly take money out of he HSA.

You can address this in one of two ways:

A. Call the custodian and report a "mistaken distribution" of $814. They don;t have to accept this, but if they do, they will ask you to send the $814 back to them and will send you a corrected 1099-SA in return.

B. Spend the $814 this year on qualified medical expenses. Document this show that you can show what it was for. This converts the bad distribution into a legitimate one for medical expenses - Note, these can be medical expenses that you paid with after-tax dollars at any time after you opened the HSA - even years ago. This is the most straightforward way, but requires that you document it well and keep the records in your tax file.

OK, now I need to hear back from you about how much you actually contributed, whether or not you reported an overfunding, and what you told the HSA custodian...

[dzzzmcgzzz]

Thank you for replying! I was so excited to get your detailed analysis. Here are my answers to your questions for more info, and hopefully you can help me nail this down.

1. When I withdrew the excess contribution in late January, I told the HSA custodian it was for excess contribution, and it is marked appropriately as such on my HSA detailed transaction statement. So they know it was not for qualified medical expenses.

2. You are correct, I contributed $7,814 between both my wife's and my HSA accounts.

3. My HSA contribution in 2018 was $5,364, so below the HSA contribution limit for 2018.

4. Per 3. above, I did not overfund my HSA in 2018.

5. I did tell them it was for excess contribution, and they marked it as such.

One interesting aspect of that $488 that Turbotax told me I need to allocate. My wife's contributions to her HSA this year were exactly $488; perhaps a coincidence, or perhaps relevant to your analysis.

Thanks again!

[BillM223]

OK, the $488 was chosen because it was the amount contributed to your spouse's HSA. That is, $814 is the total amount of excess contributions which can be allocated between you two in any way you like - except that the maximum your spouse can "accept" is $488, the size of the contribution to your spouse's HSA. Or you can take the whole excess upon your self.

Basically, TurboTax wants to be able to report from whose HSA the excess was/will be withdrawn. If you took it all out from your HSA, then ignore the question about the $488 because you didn't take anything out of your spouse's HSA anyway (you didn't did you?).

OK, please note that there are two 8889 forms on your return - the 8889-T for the primary taxpayer and the 8889-S for the spouse. Based on your answers, TurboTax will move numbers around to balance the allocations.

The $814 should appear on your 8889's line 14b, not your spouse's, if you told TurboTax that the excess was withdrawn from your HSA. Please check that.

Otherwise, if you find the $814 on one 8889 and not on the other, things are good.

But please, in the future, do not call up your HSA custodian to ask to withdraw excess contributions until TurboTax tells you to - it's too easy to think that the excess was a different amount than the one that TurboTax actually calculates, and then we (you) have a mess. OK?

[dzzzmcgzzz]

Thank you again, I'm finding this so helpful, and it's validating what I thought should be occuring.

I did choose to take the whole $488 by myself, and it was all done after my 5498 SA and 1099 SA were produced, so effectively, "when turbotax told me to".

I didn't ignore the question about the $488 allocation because it won't let me ignore it, so I assigned it all to myself, since ultimately I took all $814 from my HSA as an excess contribution.

I did see both 8889 forms in my turbotax preview PDFs, and neither shows the $814 on line 14b, and that's why I'm concerned. The only place I see $814 in the entire PDF is on the "Schedule 1: Additional Income and Adjustments to Income" on line 8 Other Income it says "Form 8889 Health Savings Accounts" and lists $814.

On both my 8889 form and my wife's 8889 form, nothing in 14b. I would expect to see it on mine.

[BillM223]

OK, did you receive a 1099-SA for the withdrawal of the excess contributions?

If so, what was the distribution code in box 3 on that 1099-SA? and what was the gross amount in box 1?

Remember that you will get a 1099-SA for any normal distributions and a special 1099-SA for your withdrawal of excess contributions. You can tell them apart by the distribution code.

After you enter this special 1099-SA, TurboTax will ask you if the excess contribution was deducted from your wages (i.e., it was part of the code W amount in box 12 on your W-2).

If you answer "yes", then the gross distribution amount in box 1 of this special 1099-SA will be put in line 14b.

So,

1. have you gotten that special 1099-SA, and

2. was the excess coming out of the code W amount or from a direct ("personal") contribution, which is treated differently?

[dzzzmcgzzz]

No, we have not yet received a special 1099-SA for the withdrawal of the excess contributions. My HSA custodian rep said they don't send out new forms, although my company's HR office said that's bogus and the rep was just misinformed.

So answering your questions:

1. No, I haven't received it yet.

2. The excess did come out of the code W, not for a personal contribution.

So I'm wagering I'll get one at some point. If I am to get one, and I can assume it'll say $814, I can preemptively add this to my turbotax knowing what it will say? 

[BillM223]

Well, yes, you can "pre-emptively" enter the phantom 1099-SA, but you had better write down what you did and why, in case there is ever an audit. 

My concern is that your HSA custodian decides not to send the 1099-SA to you or sends it to you next year, in which case your tax return and the IRS's records are no out-of-sync.

Note that you are going to get a special 1099-SA next year anyway, for the earnings on the excess while it was in the HSA. Enter this and the earnings will be added to Other Income (as it should be).

[dzzzmcgzzz]

I spoke to my HSA custodian, and they said that a 1099-SA for the distribution of the excess contribution will be available January 2021, because the distribution was made in 2020. 

At this point what do you advise? Submit as is with box 14b blank?

[VictorW9]

Check your Schedule 1. Both your excess contribution and earnings should be showing up as income (line 12) and other income (line 😎 respectively. You will pay the tax on the excesses for this year and avoid the 6% penalty.

[dzzzmcgzzz]

It doesn’t show up on line 12, just on line 8. How can I force this to happen without a 1099-SA with a 2 in box 3 showing the distribution of excess contribution?

[BillM223]

Line 12 on Schedule 1 is the direct or "personal" contribution to the HSA, which is not at issue here.

Line 8 on Schedule 1 is where Other Income is initially put, which flows through to line 7a on the 1040 itself. 

Let me clarify - you should receive two 1099-SAs: one for tax year 2019 with the amount of the excess contribution sent back to you, and the second early next year for tax year 2020 with the earnings.

So let's concentrate on why line 14b on the 8889 is blank.

We have gotten so far into the weeds that I missed something obvious. The amount of the excess contribution withdrawn before the due date of the return should appear automatically in line 12b, not 14b.

Only if you entered a 1099-SA with a distribution code of 2 and $814 in box 1 will the $814 appear on line 14b.

So it sounds like if you enter your phantom 1099-SA, the return will be the way you want. Try it.

[dzzzmcgzzz]

Thank you clarifying why line 12 on schedule 1 is blank.

As it stands, I don’t have a line 12b on my 8889, just a regular line 12, and it says 0. Line 14b still zero also.

My HSA custodian is saying I won’t receive a second 1099-SA with the distribution of the excess contribution.

If I’m not going to be receiving that, is it really advisable to enter a phantom 1099-SA? 

[BillM223]

"As it stands, I don’t have a line 12b on my 8889, just a regular line 12, and it says 0. Line 14b still zero also."

Hmmmn, 

1. You got the excess contribution message the last time you went through the HSA interview, right?

2. You agreed to take the whole excess on yourself, right?

3. You told TurboTax that you were going to remove the excess by the due date of the return, right?

Then the amount of the excess should have appeared on line 12b.

It makes me wonder if you changed some numbers on these multiple passes so that on the last pass, there was no longer an excess contribution message. Not that I want to point fingers, but I am genuinely puzzled why you are not seeing an amount in line 12b.

As for your last (philosophical) question "If I’m not going to be receiving that, is it really advisable to enter a phantom 1099-SA? " I am going to answer "NO" in the end.

It is not so critical to have 14b filled in that we should invent paperwork. It would be best for you to document what has happened and why you did what you did (and that the HSA custodian declined to send you a 1099-SA for the withdrawal of the excess). 

So long as the $814 shows up as Other Income, you have ensured that you are paying tax on the correct amount of income, so you should be OK if anyone ever asks.