HSA Overpayment

[Mamagraham1]

I am working our taxes and as I was filling out the HSA portion it told me that we had overpaid by $416.  I guess this was due to my husband losing his job as it calculated what we should have had contributed for the 4 months of last year we had an HDHP.  So it is telling me that we need to withdraw that amount before May 17th to avoid the 6% tax.  We have used all but about $40 so I am trying to figure out how to make sure we are not dinged for the extra tax.  Any help is much appreciated.

Thank you! 

[BillM223]

My question to you is, "will you be under another HDHP policy at some point in 2021?"

If the answer is No or Probably Not, then there is nothing you can do except withdraw as much of the excess as you can (the $40), and carry over the remaining $376 to 2021. Yes, this will be dinged 6%.

This amount will carry over year after year until you can qualify to make HDHP contributions again. At that point, you will reduce your HSA contributions so that the $376 can be "charged off" against that year's annual HSA contribution limit.

What happens if you never get another HDHP plan? When the amount in your HSA drops to zero, the 6% penalty drops to zero.

If the answer is Yes, then you can contribute $376 to your HSA under the 2021 limit, yet ask that it be withdrawn as the 2020 excess. 

[Mamagraham1]

My husband now has a new HDHP and a new HSA that he is contributing to under the individual rate as only he is covered by an HDHP right now.  So next year on our taxes will we just deduct that excess amount?

[BillM223]

Let me be sure: did your husband have the HSA in early 2020? And now in 2021, he has another HSA?

So he has not closed out his old HSA, right? Then he can contribute as part of his 2021 annual contribution the $376 to his OLD HSA, then immediately turn around and withdraw the rest of the excess amount before May 17th, so there will be no 6% penalty at all. 

Note that since he has two HSAs, there is only one limit for the two of them - that is, you can't contribute $3,550 to one HSA and another $3,550 to another HSA, because you have in essence a single "virtual HSA".

This means that the $376 contribution will count against your 2021 limit, so be sure not to overcontribute for 2021.

Yes, you can try to carryover the excess amount and use it up in 2021, but that won't avoid the 6% penalty. 

[Mamagraham1]

I am still unsure how we can have an overpayment as we did not contribute more than we were allowed.  My husband did lose his job in April so we quit contributing and so did his employer.  We have spent all but the last bit of $50.04 on qualified expenses.  Now I need to withdraw that amount and close the old account.  Since we are doing that and have spent the rest on qualified expenses won't that count for having withdrawn the overpayment amount by the time taxes are due on May 17th?  I checked that box on the tax form, is that not correct?

[Mamagraham1]

Ok so just to be clear.  We can deposit $367 into my husband's old HSA to add it to the $50 that is still there and then withdraw it for an eligible expense then it will clear the excess amount?  Then close that account and make sure he reduces his contribution for this year in his new account by $367 so that we don't go over the $3550?  Am I understanding that correctly?    

[BillM223]

Yep, that's it. There are many situations that the IRS has not directly addressed, but since there is the concept of a "virtual HSA" (my term, not the IRS's), this will simplify things. Otherwise, you would have to be explaining why you made a contribution to the new HSA but withdrawing the excess from the old HSA.

Note: the HSAs and the HDHP are not tied together. That is, now that your spouse is under a new HDHP policy, it would have been OK to just keep using the old HSA and not make a new one. But employers often prefer to help you create one because they will be the ones will be sending money to it. And, yes, once you have recalculated everything so that you have it down to the dollar and emptied the old HSA, you can then close the old HSA and just use the new one.

[Mamagraham1]

Thank you for your help.  I just looked at our old HSA and it says when you make a deposit you need to specify for what tax year it is for so I am confused on that as it won't it look like we are contributing to the old one that said it was overfunded already?  I am sorry to ask so many questions, I just want to make sure to do this correctly.  🙂  So I will write a check out of my checking account to deposit in the old HSA, then turn around and remove it all and close the account, then have my husband make sure to subtract $367 from his current year contributions to his HSA?  Am I understanding that all correctly or do I need to do something differently?

[BillM223]

"you need to specify for what tax year it is for"

Yes, you have to specify 2021, because you have already exceeded the limit for 2020.

However, time is not linear in the world of HSAs. For example, if you incurred a medical expense in the past that you paid with after-tax dollars, but you incurred this expense AFTER your first HSA was created, then you can reimburse yourself from the HSA now for that expense, even if you did the original payment 5 years ago. 

[Mamagraham1]

So even though I use 2021 as the year it will still count as a withdrawal of the "overpayment"?

[BillM223]

I believe it will, although I can't be positive that your HSA custodian won't object to it for some reason.

But the net effect is the same. You are losing the ability to contribute and deduct the $367 (or whatever it is) for 2021 so you are still being "penalized" in a sense, it's just an opportunity cost instead of an actually penalty.

Listen, if the old HSA custodian objects (I don't think they will), then you will just carryover the excess, pay the 6%, and then under contribute to the HSAs by $367 (or whatever) so that the carryover will be used up. 

But I think it will be worthwhile to give this method a try.

[Mamagraham1]

Thank you for your help!

[Mamagraham1]

Another quick question.  Could we instead remove the amount from his current HSA, take the remainder from the old HSA to equal the full amount and then have him reduce his contribution by the $367?

[BillM223]

The problem as I see it is that you are going to ask the old HSA custodian to send you a check (that's what "withdraw the excess" means) for the total of $400 and some odd dollars, but unless you get the money in there somehow first, the custodian will rightfully ask you, "What money?"

I want the paperwork at his old HSA to be clear and consistent. My concern is that it wouldn't make sense to take excess contributions from your new HSA when, in fact, you never made any excess contributions to that HSA. Besides, the new HSA didn't exist in 2020, so how can you be taking excess 2020 contributions from it?

No, just make the 2021 contribution to the old HSA, see if you can withdraw the excess, and close the HSA out, and declare victory.