Removal of HSA Excess Contributions

[Robert87]

In 2016 and 2017 we had contributed over the HSA limit and in 2017 removed the excess amount for both 2016 and 2017.  Since then we have contributed the max each year.  The problem is the excess amount from 2016 continues to propagate into each tax return requiring us to pay the 6% tax however we have already removed the excess 2016 amount from our HSA. I have read that we should have let the 2016 excess stay in the account and then contribute the limit minus the amount of the excess, but we have already withdrew the excess.  I am not concerned about the prior years that we paid tax on the excess from 2016 even though we removed it from our HSA.  How can we fix our taxes so that the 2016 excess no longer shows up on our 2019 tax return (since the excess amount has been removed already) and we can file our 2019 tax return without the 6% tax on the 2016 excess HSA contributions? 

[BillM223]

When you saw the question in the HSA interview, "Did you overfund your HSA last year?", how did you answer?

If you withdraw the excess contributions in a timely manner (before the due date of the return), then you answer "NO".

Why? Because the question really wants to know "Did you CARRY OVER any excess contributions?"

If you withdrew the excess in a timely manner, then you "cured" the excess and so should answer "NO".

If you answer Yes by mistake, then your next year's HSA contributions are also going to be in excess if you contributed the full amount.

If you indeed answered yes by mistake every year and entered the amount of the excess, then you should consider consider amending 2016, 2017, and 2018 to remove those penalties.

[Robert87]

We did contribute excess in 2016 and also in 2017 and completed the returns for 2016 and 2017 accurately.  In 2018 the excess contributions for 2016 and 2017 were completely withdrawn from the HSA account.  This is different than what was stated in the response.  I did try to amend the 2018 return however there were no changes made to the return.

So again is there a way to document that the excess contributions for 2016 and 2017 were withdrawn in 2018 while we contributed equal to the limit allowable in 2018 and 2019?  We want to remove the annual 6% tax applied to the excess contribution amount.

[VictoriaD75]

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.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

Pub 969 Tax-Favored Health Plans

Under the Deductions & Credits section, you will come to a screen that says Did you overfund your HSA in 2017? (while amending your 2018 return). Answer Yes. You will be asked to enter the excess contribution information in the screens that follow.

[Robert87]

I am using TurboTax Deluxe version.  My response to your comments are below in blue...

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. 
  • This was not the case for us as the money was contributed in 2016 and 2017 and withdrawn in 2018
• 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.
  • This was done in 2018 

Under the Deductions & Credits section, you will come to a screen that says Did you overfund your HSA in 2017? (while amending your 2018 return). Answer Yes. You will be asked to enter the excess contribution information in the screens that follow.

• Under the Deductions & Credits section TurboTax asks "Who made the excess HSA contribution?" and I selected "Both of us"
• then asks "How much should we allocate to each of you?" and then entered the excess amount for each of us.  
• there is a "Note: If you already withdrew your excess contribution you still need to include it here.  We'll ask about withdrawn contributions next.  Be sure to allocate the excess contribution to the person who has withdrawn the excess contribution." entered the amount that was withdrawn from each of our HSA.
• Hit "Continue" and the next page is "Enter Last Year's Excess Contribution.  Enter the amount from line 48 on your 2017 Form 5329."  Entered the amounts for my wife and I.
• Hit "Continue" and the next page is "You may want to withdraw money from your HSAs.  It looks like you and your wife have an excess contribution of the amount entered on the prior page.  These amounts are being taxed an extra 6%.  But anything withdrawn between January 1 and April 15, 2019 avoid this additional tax."
• Then asks "What about the withdrawal I entered on my 1099-SA?" and has 3 options
  • "OK, we will make/have made the full excess contribution withdraw by April 15, 2019"
  • "We will make/have made some of the excess contribution withdraw by April 15, 2019"
  • "No, we're not going to make this withdrawal"
  • I have tried selecting the first option for full amount but when I return it shows that the second option was selected.  If I select the second option it show the second option.

Still not seeing a way to remove the excess contributions from 2016 and 2017 so no longer taxed the 6% penalty even though these excess contributions were removed in 2018.  How can these excess contributions be removed from my 2019 taxes so that we no longer have to pay the 6% penalty?

[BillM223]

You initially stated "in 2017 removed the excess amount for both 2016 and 2017. " Now you appear to be saying "in 2018 removed the excess amount for both 2016 and 2017. " Which is it?

OK, you made excess contributions in 2016, right? (let's take this one year at a one) You discovered this as you were doing your 2016 tax return in early 2017, right?

When you were told by TurboTax that for your 2016 tax return, you had made an excess contribution, TurboTax asked you how much of the excess you would withdraw by the due date of the return (April 18, 2017).

How much of the excess did you tell TurboTax you would withdraw?

How much did you actually withdraw before the due date of the return?

Then, in early 2018 when you were doing your 2017 return, you saw the question in the HSA interview "Did you overfund your HSA last year?" What did you answer? If you withdrew all of the excess before the due date of the return, then you should have answered "NO" because the question is really asking if you carried over any excess, not did you have an excess that you "cured" by withdrawing it.

OK, let's stop here and answer these questions. Let's don't get ahead of ourselves and try to solve 2018-2020 if we are not sure what happened in 2016 and 2017.

[Robert87]

In 2016 had excess contributions and did not take any of the excess contributions out before the due date of the return.  The 2016 excess contributions are carried over on IRS Form 5329 line 48 in 2017 and 2018 and we paid the 6% penalty tax and is also being carried over in 2019 too which I would like to fix going forward.

In 2017 had excess contributions and my wife and I submitted requests to remove the 2016 and 2017 excess contributions prior to the due date of the return and in the 2017 TubroTax answered yes would return all of the 2017 excess contributions before the due date.  The HSA company however took too long to process the withdraw (~10 days) and the money was not actually removed until the day after the due date being April 18, 2018.  These withdrawn were all actually in our 2018 1099-SAs with distribution code 2.

Because we answered that we would withdraw the 2017 excess contributions by the due date the 2017 excess contribution amount is not carried over to 2018 or 2019.

Hope this clears up the details.

[BillM223]

I still don't understand something.

If you withdrew the excess for 2016 and 2017 in early 2018 and you got a 1099-SA showing this, this means that you no longer had a carryover to carry over to 2018 or 2019 tax years. So if you did not answer "yes" to the overfunding question for the 2019 return, how can TurboTax know to carry over the excess?

I also have concerns with your HSA custodian's policies. If you did not withdrew an excess contribution by the due date of the return, then it is too late.

The only ways you can fix this is to (1) reduce your contributions the following year so that the excess can be applied as a "personal" contribution while staying under the contribution limit. or (2) make a distribution that is not for qualified medical expenses. Since #2 requires that you pay tax on the distribution as well as pay a 20% penalty, #1 is definitely the less painful alternative.

However, it appears that while you requested the withdrawal in a timely fashion, your HSA custodian messed around and didn't get to it for ten days. I would take the stance that you did withdraw the amount in a timely fashion, and you will keep all the paperwork in your tax files.  

The 1099-SA for 2018 (instead of 2017) will present a problem to the IRS if they ever ask about this; just tell them that this was an error on the part of the HSA custodian.

You said, "the 2017 excess contribution amount is not carried over to 2018 or 2019."

OK, so why are you also saying "we paid the 6% penalty tax and is also being carried over in 2019 too which I would like to fix going forward." If it is not carried over, why are you being charged the 6% penalty?

[Robert87]

The issue is that on IRS Form 5329 line 42 asks states "Enter the excess contributions from line 48 of the prior year Form 5329.  IF zero, go to line 47".  In 2016 we had excess contributions, so in 2017 the 2016 excess was entered in the 2017 form by TurboTax.  In 2018 the 2016 excess was entered in the 2018 form by TurboTax. And in 2019 the 2016 excess was entered in the 2019 form by TurboTax.  This is the issue I am trying to resolve.

Because we stated that we would withdraw the 2017 excess by the due date the 2017 excess was not included in the following years.

[BillM223]

"In 2016 we had excess contributions, so in 2017 the 2016 excess was entered in the 2017 form by TurboTax.  In 2018 the 2016 excess was entered in the 2018 form by TurboTax. And in 2019 the 2016 excess was entered in the 2019 form by TurboTax.  "

I need to understand what you're saying.

I've asked you twice now, "How did you answer the question, 'Did you overfund your HSA last year?'" Did you say "Yes" every time and enter the amount?

Oh, wait, maybe I see what's happening. I think that when you said that you withdrew the 2016 and 2017 excess in 2018, that I misunderstood you. That, in fact TurboTax did NOT think that you withdrew the 2016 carryover, because that was too late.

In 2018, when you withdrew the excess from 2016 and 2017, perhaps the amount withdraw was only the 2017 amount. That is, TurboTax never let you withdraw the 2016 amount (because it was too late when you tried). So when you said that you withdrew 2016 ans 2017 at the same time, maybe you didn't withdraw 2016 in the eyes of TurboTax.

So TurboTax put the 2016 amount on the 5329, and just kept rolling it over because you never cut it off.

How do you cut it off? In the first year after the excess, you can reduce your other HSA contributions so that the carryover can be discharged against the subsequent year.

But after that all you can do is make distribution from the HSA and tell TurboTax that this distribution was NOT for qualified medical expenses. You will be assessed income tax and a 20% penalty, but the 2016 carryover would be done with.

OK? What was the excess for 2016? Call your HSA custodian and ask for a distribution for that amount. When your 1099-SA comes early next year, be sure to tell TurboTax that part of the distribution was NOT for qualified medical expenses.

Does this make sense?

[Robert87]

Yes I want to know what do we need to do to cut off the 2016 excess contribution from showing up every year and needing to pay 6% penalty on that excess now that the 2016 excess contribution amount has been withdrawn from the HSA?

The 2016 excess contribution amount was $3349.  Was never asked by TurboTax if this amount was for qualified medical expenses.  Not seeing a way to remove this from my 2019 taxes so that we don't need to pay the 6% penalty even though the $3349 has been removed from the HSA.  And yes we did remove the interest earned as well.  And yes we did pay income tax on the withdrawn amount too.

Please help provide steps that we need to take to cut this off?

[BillM223]

Steps to cut off an excess contribution that can no longer be withdrawn.

1. Call your HSA custodian and request a distribution for the amount of the excess that is the long-term carryover. 

2. The custodian will send you a check for that amount, if there are funds in the HSA.

3. Next year, when you enter your 1099-SA (remember that all your regular distributions will also be in box 1), tell TurboTax that not all of the distribution was for qualified medical expenses, When TurboTax asks for an amount, give it the amount of this long-running excess.

4. TurboTax will add that amount to Other Income (line 8 Schedule 1 (1040)), and charge you a 20% penalty on top of that. HOWEVER, this will cut off the long-running carryover.

5. In the future, if you make an excess contribution, be sure to withdraw it before April 15th.

[Robert87]

Following the steps...

"1. Call your HSA custodian and request a distribution for the amount of the excess that is the long-term carryover" 

This step was completed in April 2018

"2. The custodian will send you a check for that amount, if there are funds in the HSA."

This step was completed and check received April 18, 2018 (the day after the 2017 tax deadline) for the 2016 and 2017 excess.  The 2016 excess still exists in our tax return, which is what we want to have removed.

"3. Next year, when you enter your 1099-SA (remember that all your regular distributions will also be in box 1), tell TurboTax that not all of the distribution was for qualified medical expenses, When TurboTax asks for an amount, give it the amount of this long-running excess."

The 2018 1099-SA had the excess funds (for 2016 and 2017) from step 2 included with distribution box 3 Distribution Code as 2 and was entered into 2018 TurboTax Deluxe.

"4. TurboTax will add that amount to Other Income (line 8 Schedule 1 (1040)), and charge you a 20% penalty on top of that. HOWEVER, this will cut off the long-running carryover."

TurboTax has Schedule 1 (1040) Lines 1-9b marked as reserved with it grayed out.

Now what are the next steps for us to remove the excess contributions from 2016?

[BillM223]

The act of taking a distribution and marking it as not for qualified medical expenses will cut off the long-running excess. I.e., steps 3 and 4.

Yes, it seems odd, but that's how it works.

Yes, in your case, you will probably have a large distribution on a 1099-SA, of which part will be equal to this long-running excess. When you tell TurboTax that part of the distribution was not for qualified medical expenses, this will cause the excess to be taken care of.

[Robert87]

Went back to the 2018 Tax Return in the 2018 Turbo Tax Deluxe and for step 3 Turbo Tax never asks if "all of the distribution was for qualified medical expenses", what Turbo Taxes states is "Enter Last Year's Excess Contribution. Enter the amount from line 48 on your 2017 Form 5329." (which is actual the excess amount from our 2016 contribution).  When the amount is entered the next screen in Turbo Tax is "You may want to withdraw money from your HSAs. It looks like you had an excess contribution of $xxx. This amount is being taxed an extra 6%. But anything withdrawn between January 1 and April 15, 2019 avoids this additional tax."  And as I stated in an earlier post that when we select "OK, we will make/have made the full $xxx excess contribution withdrawal by April 15, 2019."  Turbo Tax immediately post the following statement to the page "Unfortunately, some of your excess contribution is caused by a prior year excess contribution.  While it's too late to remove a prior year excess contribution, you can still remove the $xx contribution for 2018. (The excess in 2018 was already removed and the amount is included and removed no problem, but the 2016 excess amount is still there.

Turbo Tax never gets to step 4 to add that amount to Other Income (line 8 Schedule 1 (1040)), and charge you a 20% penalty.

So still need help on how to get Turbo Tax to allow us to remove the excess contibutions and pay the 20% penalty and remove this from keep coming up every year going forward.