Overfunded HSA - Received Corrected W2 before filing

[irunalot]

Last year (2021), I accidently overfunded my HSA because we were on my wife's health insurance for the first 6 months and then mine in the second half of 2021.  TurboTax caught the overfunding and recommended I withdraw the amount overfunded.  I withdrew the amount in March 2022 through the HSA administrator - no taxes were paid on the overfunded amount that I withdrew.  This would have been fine because TurboTax would have corrected the amount of taxes owed.  But then, I received a corrected W2 from my employer that shows the reduced (correct) HSA contribution.  When I enter the corrected W2 information in TurboTax, everything looks good except that I haven't paid taxes on the amount I withdrew!  I'm sure this will catch up with me.  Do I wait for a 1099-SA that will show the amount of excess withdrawn?  Will that be the document that I will use to pay the appropriate taxes?  Will I pay the taxes when I file in 2023?  Thanks much!

[MinhT1]

If you received a corrected form W-2 with the correct contribution then your wages reported in box 1 in the corrected form W-2 has been increased by the amount of overcontribution, and you will have paid tax on the withdrawn amount when you report the corrected W-2 in your return.

[irunalot]

Not exactly... my corrected W2 only has two numbers in boxes 12W:

   -  Previously Reported $xxxx.xx

   -  Correct Information $yyyy.yy

Other than my name, SS# and other personal information, there is no other information reported because they were all considered "correct."

I did some research.  It seems I will receive a 1099-SA in February 2023 that will show the amount withdrawn along with earnings on that amount.  It will be reported as withdrawn in 2022 for excess contributions that were made in 2021.  Since the amount was withdrawn in 2022, the taxes will be paid when I file my 2022 taxes in 2023.  TurboTax will treat the withdrawal as ordinary income and tax it accordingly.

I'm pretty sure that's how it'll play out.  I wish my employer hadn't sent me a corrected W2 and I could have just paid the taxes on the withdrawal this year when I file.  I'll have to make a memo to file so I remember all this next year.  Many thanks for the reply!

[BillM223]

Minh has a good point here. When your employer first created your W-2 with its entry for code W in box 12, the code W amount should have been removed from Wages in box 1, 3, and 5. You can't tell this by just looking at your W-2, you have to ask your payroll people. 

This means that if they created the W-2 correctly initially, then they can't change only the code W amount without also changing the Wages in boxes 1, 3, and 5. I suspect your "corrected" W-2 is still wrong.

In this case (where you over contribute to your HSA), the employer does not issue a corrected W-2, because it wasn't your employer's mistake.

It would have been better to not ask your employer to correct the W-2. TurboTax would have announced in the HSA interview that you had excess contributions, it would have asked you if you wanted to withdraw the excess by the due date, TurboTax would have added the excess automatically to Other Income on line 8 on Schedule 1 (1040), and you would have contacted your HSA custodian to request the "withdrawal of excess contributions". And that would have been the end of it.

As it is, you must have a sit-down with your payroll people and ask them to either undo the change they did, or to correct the W-2 to change Wages in boxes 1, 3, and 5 to include the code W amounts. This latter request will also require that you amend your 2021 return, IF you have already filed it (I can't tell it you have).

NOTE: you have until the due date of the return AS EXTENDED to as for the withdrawal of the excess. That means that if you start running into a time crunch to get all this done by April18th, you can file an extension (form 4868) and the new deadline to file your return and withdraw the excess will be October 17, 2022. Of course, if you owe the IRS money, you are expected to pay it by April 18th. And, also of course, if you file and extension, you don't have to wait until October to get your business done - you can do it as soon as you can.

[irunalot]

All valid points made and much appreciated.  Here's why I think it'll play out like I mentioned:

• I removed the excess contribution in March.  Had my employer ignored the removal and not issue a corrected W2 (preferred), TurboTax would have treated the excess contribution removal as ordinary income and I would have paid taxes when I file next week.
• Instead, my employer provided a corrected W2 with only boxes 12W (original and corrected) shown.  This means the income (the amount of excess withdrawn) does not show up anywhere in 2021 because boxes 1, 3, 5 were not increased on the corrected W2.  Therefore, taxes on the excess will not be paid when I file next week.
• The excess was withdrawn in 2022.  Since the 2021 W2-C did not capture the increase in boxes 1, 3, 5, the withdraw becomes a taxable event for 2022.  The HSA administrator will issue a 1099-SA that will stipulate a withdraw due to excess contributions.  That will be taxable for the 2022 tax year and payable when I file in 2023.  I may owe a penalty - not sure on that one.  

This is definitely unchartered waters for me.   If anyone has additional comments/suggestions, glad to hear them out.  I still have a week before I file.

And again, I sincerely appreciate the postings; hope this discussion helps others as much as it has helped me.

[irunalot]

This played out exactly as I had stated.  I received a 1099-SA that indicated a withdraw for excess contributions in calendar year 2022.  This will be filed with my taxes in a couple of months and that's when I'll pay taxes on the excess.  The last open question is whether I pay a penalty or not.  TurboTax will likely figure that out for me.  Thanks again for the support earlier this year!

[Sk98]

Hi,

I'm kinda in a similar situation with hsa excess contribution.  I need your suggestions here as you have corrected yours (I believe).

1. I figured out about my 2024 hsa excess contribution only a couple of weeks back and contacted my hsa custodian and submitted the excess contribution disbursement form. Now the check is issued for my over contribution and my 1099-SA will be provided by Feb of 2026. In your case, you mentioned about W2c. Was it provided by your employer directly or you contacted them to provide one? Since I have only few days left for  the tax deadline, I am thinking of my filing with my current W2.

2. If I proceed forward with my W2, how would I report this excess contribution in my tax returns? Right now, it is showing as 6% penalty.

Yours response is much appreciated. 

[irunalot]

Wow!  I vaguely remember this but it definitely happened to me.

Looking back at my notes, I work for a very large corporation with centralized benefits and I had contacted my employer to advise them of the mistake and to ask how to get the money backed out.  They gave me the correct information to get the money backed out but then they jumped the gun and issued a corrected W2.  That's what through the whole event out of kilter.  They should not have issued the corrected W2 and all would have been handled correctly by TT.  So for your first question, I didn't ask for a corrected W2, BUT my conversation with my employer benefits team prompted them to issue one anyway.

The penalty question is more tricky.  I recall having to skirt around it and TT helped in that regard.  I looked back at my tax returns from those 2 years and there's no penalty.  I just can't recall how it was handled.

One other note - I signed up for Audit Defense both years just in case.  It helped me sleep better 🙂

All the best...

[BillM223]

Sk98

You should not ask for a corrected W-2 unless the employer actually made a mistake. You don't mention that your employer did.

If indeed you made an excess contribution to your HSA, TurboTax will take care of most of the details - please do NOT try to make entries on the forms yourself.

First, you will start the HSA interview (Deductions & Credits->Medical->1099-SA, MSA, HSA). During the interview, you will be asked to enter/confirm your HSA contributions (note that any contributions reported with a code of W in box 12 on your W-2 are already carried to this section and must not be entered again). You will be asked to enter the type of  HDHP coverage and for which months you had it.

Then TurboTax will tell you if you had excess contributions. If your contributions were through your employer (the code W in box 12 on your W-2, whether from your employer or from you by means of payroll deduction), the excess will be automatically added back to Other Income (line 8f on Schedule 1 (1040)). TurboTax will give you the choice of withdrawing your excess (generally preferred if you have the cash) or carrying over the excess to 2025 to be applied as a "personal contribution" (line 2 form 8889).

If you reduce your 2025 contributions enough so that the carryover (if any) will fit under the 2025 contribution limit, then the carryover will be "used up" and done with. There will be no more penalties in this case.

If you tell TurboTax that you will withdraw the excess, you must do it before April 15th...unless you file an extension for the 1040 (form 4668), in which case both your return due date and your due date of the withdrawal date are extended until October 15th (of course, you can do either at any time before October 15th).

One more thing - you must tell your HSA custodian that you are requesting the "withdrawal of excess contributions" so that their paperwork will be correct and the 1099-SA that they send you will be correct. Normally, this 1099-SA is issued for the tax return for next year (your 2025 return, done in early 2026).

@Sk98 

[Sk98]

@BillM223 ,

Thanks for your response. One last question, reiterating from my earlier question. As I stated above, I withdrawn my 2024 excess HSA contribution a few days back.

• Will I still owe a 6% penalty this year? If no, how the excess contribution is handled in 2024 tax returns ?

[BillM223]

You are charged the 6% "excise tax" (the penalty) ONLY on any amount of the excess HSA contribution that you carry over to the next year. If you withdraw the entire amount of the excess when you do your return, then there is no carryover and no penalty.

NOTE: when you are asked on your 2025 return in early 2026 if you "overfunded" your prior year HSA, answer NO, because the question really wants to know if you carried over any excess. If you withdraw the entire excess, you "cured" the excess and can just say no.