Medicare and HSA Penalty

[lwilford2448]

I'm 66, working, with company insurance and HSA.   I signed up for SS Benefits not knowing it would auto-enroll me in Medicare A.    Issue:  HSA contributions NOT stopped 6mths prior.  OPTUM Bank(HSA) and employer are no help with handling.   I contributed $4250 and distributed $4357 in 2023.   Taking a 6% penalty will be way less $/time than hiring a tax advisor and trying to figure out withdraw/earnings/etc.   Where/how do I just take the penalty on my taxes and be done with it?  Thx. LRW

[BillM223]

If I understand your situation, you have nothing in your HSA to withdraw (or do you?). The IRS has not specifically addressed the situation that you are in - you are on Medicare, so can't contribute to your HSA, but don't have the dollars in the HSA to be able to withdraw the excess contribution - and you never will because you will never be able to contribute to your HSA again.

There is an ultimate solution: the 6% penalty is 6% of the smaller of your excess contributions still in your HSA OR the amount of money in your HSA on December 31 of the tax year. You see? Once your HSA balance goes to zero, so does the penalty. And TurboTax will ask in the interview specifically for the balance in your HSA at the end of the year.

OK, I made some assumptions about you. Tell me the rest of your situation (like how much remains in your HSA).

[lwilford2448]

Thx.   I DO have a HSA balance, 12/31/23, maybe $1K.  Stopped HSA contributions as soon as I found out SSA auto-enrolled me (2/1/24)...which matches my SS$/Medicare start.   Already HAVE W2 for 2023.   Can I just go fwd with taxes from here and pay the 6% penalty?    Will turbotax ask/decide how much that is during the process?   I just want to be done without chasing a withdraw/new W2 which is a beating from my company and may take months.  🙂   It's just not much total $$...pay the 6% would be easier.   I just don't want to miss something and paint a target on myself.   Does that make sense?

[BillM223 · Accepted solution]

"Can I just go fwd with taxes from here and pay the 6% penalty? " Give up on a corrected W-2; the W-2 is a reflection of what the company already did, so don't bother the company.

"Will turbotax ask/decide how much that is during the process?  " When TurboTax told you what the amount of the excess was, it should have asked you if you intended to withdraw the excess. If you say "no", then TurboTax will add a form 5329 and calculate the "excise tax" (that's what the 6% penalty is called). 

" I just don't want to miss something and paint a target on myself. " The IRS seldom complains when you pay taxes. Just bear in mind that so long as you carryover the excess (TurboTax will handle the excess carryover), you'll pay 6% on the balance in your HSA. So count on your fingers and decide when keeping the money in the HSA isn't worth it.

So two choices:

1. pay for qualified medical expenses to reduce the HSA balance (best choice)

2. OR since you are over 65 and eligible for Medicare, you can now treat the HSA as a funny IRA, that is, you can withdraw money from the HSA for any reason, and you will add it to income (just like an IRA), but you will NOT be penalized for making a distribution for reasons other than qualified medical expenses.