HSA Excess not Populating Correctly for TX YEAR 2021. IRS says form 5329 is MANDATORY.

[JayKepps]

Platform: TurboTax Home & Business for DESKTOP

Bkgrnd:   My HSA was overfunded by about $100.

                  W-2 Box 12b accurately shows my contribution as $4700 (code W)

                  Turbo does not detect the overfunding in the W2 section.

                  I follow prompts and enter everything correctly in the HSA section.

                  Turbo sees the overfund am't & correctly tells me to withdraw the excess before the April deadline.

                  The amount I owe correctly increases because Turbo has entered this info into form 8889.

PROBLEM:  

Turbo is not populating form 5329 which is mandated by the IRS.  And even if I can figure out how to populate it myself, I will then be taxed AGAIN on the amount already being reported on 8889.  IRS instructions specifically say: 

"YOU  MUST  FILE FORM 5329 IF .... 

The contributions for 2021 to your traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, or ABLE accounts exceed your maximum contribution limit"

What is the proper way to rectify this excess contribution?  

I withdrew it (PLUS a little extra) in January of 2022.

BONUS QUESTION FOR THE BRAVE:  Advice abounds on the internet saying my employer needs to revise Box 1 of my W2.  But if they do, then Turbo will tax me yet again on my now higher amount.

[Mike9241]

you should have come across a question of the excess withdrawn after the end of the year

to which you would enter check that the excess withdrawn. this will show up on schedule 1 line 8e - no need for corrected w-2 it's correct

any income withdrawn must be reported as misc income in the year of withdrawal

form 5329 instructions HSA section

You can withdraw some or all of the
excess contributions for 2021 and they will
be treated as not having been contributed
if:
• You make the withdrawal by the due
date, including extensions, of your 2021
return; and
• You withdraw any income earned on
the withdrawn contributions and include
the earnings in gross income for the year
in which you receive the withdrawn
contributions and earnings

you should have come across a question about withdrawing the excess HSA by 4/18/2022 which you should answer yes because you already did it.  the penalty goes away as does the 5329 because withdrawing the excess eliminates the excess which eliminates the penalty.

the excess withdrawn (but not the income) will show up on schedule 1 line 8e - no need for a corrected w-2 it's correct

here's why. if the employer contributed the $100 box 1 on your  w-2 is not affected but the withdrawal shows up on schedule 1 as additional income 

if you made all the contributions - box 1 of your w-2 should have been reduced by $4,700 (in fact your employer should never have allowed it but that's a different story) your wages are understated by $100 reporting the 100 on schediule1 corrects the underreported wages.

WHAT YOY MAY HAVE DONE WRONG. you should have contacted the administrator to request the withdrawal of the excess contribution plus earning thereon. they would calculate the earnings and send you the money. if your guesstimate of the earnings is too high, you withdrew too much which is subject to a 20% penalty - nonqualified distribution. there's no way to correct this.

if you withdrew too little, the excess remaining is subject to a 6 % penalty but you do have until 4/18/2022 to fix this.

[BillM223]

W-2 Box 12b accurately shows my contribution as $4700 (code W) - good.

Turbo does not detect the overfunding in the W2 section.-  since you haven't entered your HDHP information yet, there is no way that TurboTax can detect excess contributions at this point.

 I follow prompts and enter everything correctly in the HSA section. - good.

Turbo sees the overfund am't & correctly tells me to withdraw the excess before the April deadline. - good.

The amount I owe correctly increases because Turbo has entered this info into form 8889. -  actually, the amount you owe increases because TurboTax added the excess to Other Income on line 8 on Schedule 1 (1040).

"PROBLEM:  

Turbo is not populating form 5329 which is mandated by the IRS."

No, the 5329 is not mandated by the IRS.

You needed to keep reading on the same page (page 😎 in Pub 969:

"You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.

• You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings."

You did bullet one when you said you would withdraw the excess. I like to call it "cured" the excess. So, no excise tax for you, so no 5329.

Please do not try to add form 5329. You don't need it.

"BONUS QUESTION FOR THE BRAVE:  Advice abounds on the internet saying my employer needs to revise Box 1 of my W2.  But if they do, then Turbo will tax me yet again on my now higher amount."

That's bad advice. Your employer didn't make the mistake (unless they had reason to know that the code W amount would be an excess, and they usually don't). Enter the W-2 exactly as is, and let TurboTax handle adding the excess back to Income on Schedule 1 (1040) and completing your 8889.

Since you have already withdrawn the excess, you are done with your HSA for this year.

NOTE: next year, TurboTax may ask you if you "overfunded" your HA last year. What TurboTax really wants to know is if you carry over any excess. Since you cured the excess this year, answer NO to this question next year.

[DvVan]

Advice from @BillM223 is comforting but inaccurate.  Nowhere in those IRS instructions does it say you DON'T need to file the 5329.    

The fact that no taxes are owed is a separate issue.  But I challenge anyone to find me IRS verbage that states "IF you have withdrawn your excess HSA contributions .... THEN you DON'T HAVE TO FILL OUT FORM 5329."

And the original poster is correct.  If you do fill out 5329 in accordance with the IRS instructions, you will get taxed again.   This needs to be properly addressed.

[JayKepps]

That's what I'm saying.  When reading the legal language  (read what is says, not what you WISH it says) , the IRS instructions for form 5329 are clear, with no caveats.   I will directly quote the IRS again. Read it carefully:

"YOU  MUST  FILE FORM 5329 IF .... 

The contributions for 2021 to your traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, or ABLE accounts exceed your maximum contribution limit"

When you look at my W2, my 2021 contributions exceed my limit.  Yes, they were withdrawn, but that was after Jan 1, so they excess withdrawal won't show up until next year's 1099-SA.   But importantly the contributions still happened.

I thank you all for your help and I hope someone can address this. Ultimately it's not the math, it's the legal language I'm worried about.

An older, but still relevant article can be found here:

https://pension-specialists.com/hottopics/5329May2016.htm

[dmertz]

Your employer is not to make any corrections to your W-2 with regard to you obtaining a return of excess contribution.

Since you did obtain a return of the excess before the due date of your tax return, you no longer have an excess HSA contribution for 2021 and therefore no Form 5329 Part VII is needed.

[rbmiller88]

I have the same issue with excess employer contributed HSA contributions, for tax year 2022.  There is a lot of conflicting information  on how to handle this, including from the various TT representatives I spoke to.  The TT app did not prompt me to tell me about the excess contributions and did not ask me if I had withdrawn the excess before the tax deadline.  Not surprising, TT did not include the return of excess contributions on 1040 schedule 1 line 8 e (or f).  Maybe I should delete my HSA entries and re-enter them to see if it catches it the second time.  I actually did withdraw the excess on 3/20/2023, before the deadline.  I too was thinking I needed to file a form 5329, but got conflicting information on that.  My first question is in what tax year should the return of excess contributions be reported as income on schedule 1 line 8, 2022 or 2023 which is the year in which I received the funds?  Second, should I submit a manually prepared form 5329 part VII as part of my 2022 return to report the excess contribution just to be safe?  Third, what does it mean to the IRS when they say that excess contributions withdrawn before the tax deadline are treated as if they did not happen, and what documentable proof of the correction of the excess withdraw will the IRS have on my 2022 return if I dont include form 5329 since the 1099-SA reflecting this will not show up until Jan/2024?  Form 8889 does not provide a method for showing the withdrawal of excess funds.  Form 5329 makes the most sense to me since it flags the over contribution to the IRS, but the instructions for the form line 47 do not say what tax year to report the withdrawal as income.   Here is the language from the IRS instructions, bullet point 2 Line 47: "You withdraw any income earned on the withdrawn contributions and include the earnings in gross income for the year in which you receive the withdrawn contributions and earnings."  That sounds like tax year 2023.  Its surprising that something relatively straight forward does not have a clearly documented procedure to follow and that there are so many different guesses on how this should be handled.  I'm considering hiring a tax accountant to confirm what is the right method for dealing with this situation, but worried I will get another different approach.  Thanks for replies, in advance.

[rbmiller88]

Interesting document.  Its very clear that form 5329 must be filed even if the excess contributions are returned prior to the tax deadline.  Interesting that it says that the excess contributions should be reported on form 8889 line 14b, which I was not aware of.  The thing the article does not address is the proper taxation of returned employer contributed pre-tax HSA funds, which I believe is to report them as other income on 1040 schedule 1 line 8f, and sounds like it should be for the same tax year as the excess contributions.  Thanks for shaing.

[dmertz]

"Its very clear that form 5329 must be filed even if the excess contributions are returned prior to the tax deadline."

False.  If the excess HSA contribution has been returned by the due date of the tax return, you have no excess HSA contribution subject to penalty on Form 5329 Part VII and no Form 5329 Part VII is to be filed with respect to this returned contribution.

[rbmiller88]

Hi Dmertz, thanks for the reply.  I understand what you are saying that by withdrawing the excess prior to the tax deadline that effectively the excess contribution did not happen.  I have heard that from a number of others.  However, how do I let the IRS know I have returned the excess HSA contribution before the tax deadline given that my W2's include the excess contributions?  I assume there has to be some way to document for the IRS that the excess was returned within the tax return for that same tax year.   I thought that the 5329 was there for that purpose.  Also, how and in what tax year do I report the added income that came from the return of excess contributions?

[rbmiller88]

PS, it seems to me that filing form 5329 with my 2022 return wouldnt hurt, and would at least let the IRS know that I reversed the excess contributions in time.  Worst case is the IRS ignores the form, right?  Thanks.

[dmertz]

Nothing you can put on a Form 5329 will inform the IRS that you obtained a timely return of excess contribution.

Filing Form 5329 just to show zeros on lines 47, 48 and 49 cannot be done by e-filing.  You would have to mail your tax return which could delay processing by 6 months.  Because you obtained a timely return of excess contribution, line 47 MUST have a zero on it.

The IRS will be aware of the return of excess contribution by the code-2 2023 Form 1099-SA that the HSA custodian will issue.  The IRS is well aware that the corrective distribution more often that not occurs after the end of the tax year (but before the due date of the tax return).

[rbmiller88]

So you are saying that I should go ahead and submit the 2022 return with the W2 that includes the excess HSA contributions and provide no documentation/forms indicating the return of the excess contribution (REC). Then in my tax year 2023 return, I should report the REC as reported on my 2023 1099-SA on form 8889 form lines 14a and 14b, and report the REC as other income. So you are saying I should trust the IRS to see the excess contributions for the tax year 2022, not raise an objection, and then later tie that to the return of the excess contributions reported on my return for tax year 2023. Have you actually successfully gone through this process yourself? I included the instructions related to excess contributions for 2022 forms 5329 and 8889 below for reference. I could see how what your saying could be correct if the IRS is able to connect the two tax year returns without jumping to the conclusion I made a mistake in my 2022 return, and waits for the 2023 return.

2022 Form 5329 Line 47:
Enter the excess of your contributions (made by you or on your behalf) to your HSAs for 2022 from Form 8889, line 2 (unless withdrawn—discussed next), over your contribution limit (Form 8889, line 12). Also include on line 47 any excess contributions your employer made. See the Instructions for Form 8889 for details. You can withdraw some or all of the excess contributions for 2022 and they will be treated as not having been contributed if:
- You make the withdrawal by the due date, including extensions, of your 2022 return; and
- You withdraw any income earned on the withdrawn contributions and include the earnings in gross income for the year in which you receive the withdrawn contributions and earnings.
Include the withdrawn contributions and related earnings on Form 8889, lines 14a and 14b.

2022 Form 8889:
Part II—HSA Distributions
Line 14a
Enter the total distributions you received in 2022 from all HSAs. Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn by other individuals that you have designated. These amounts should be shown in box 1 of Form 1099-SA.
Line 14b
Include on line 14b any distributions you received in 2022 that qualified as a rollover contribution to another HSA. See Rollovers, earlier. Also include any excess contributions (and the earnings on those excess contributions) included on line 14a that were withdrawn by the due date, including extensions, of your return. See the instructions for line 13, earlier.

[dmertz]

"So you are saying I should trust the IRS to see the excess contributions for the tax year 2022, not raise an objection, and then later tie that to the return of the excess contributions reported on my return for tax year 2023."

Yes.  The IRS largely reIies on self-reporting of excess contributions.  If the IRS does question the contribution under these circumstances, which I have never heard of happening, you can provide explanation then.

If you really want to provide an explanation with your tax return, the only way to do it is to prepare the explanation separately and mail it with your paper tax return (which adds risk and processing delays due to paper tax returns needing to be transcribed manually by the IRS).

[rbmiller88]

Ok, you are not the only one that has been providing that same advice.   I would be more comfortable if it were a little more explicitly stated in the IRS instructions.  Given you have had positive personal experience handling it this way, I will go ahead and file as is.  Given that I"m filing a paper return anyway, I will include a note indicating the return of excess contributions prior to the filing deadline.  Thanks for all your feedback.  I will try and post a follow up to this thread when I know how it works out.