Verifying proper procedure for 2023 excess HSA contribution across two HSA accounts

[KG31]

Hello and TIA for reading this. I'm just trying to verify the proper way to withdraw excess HSA contributions across two accounts. Reason for this hassle was that I forgot the HSA contribution limit pro-rata rule, and switched jobs/insurance away from an HDHP to PPO in December 2023 (edit: last HDHP coverage day was Nov 30). So my 2023 HSA limit for 11 months of HSA coverage is $3529.17 rather than the full $3850.

Amounts below are rounded for simplicity. I have two HSA accounts and plan to fill the reversal forms ASAP (prior to tax filing deadline).

Account "A":

-Payroll contributions from Jan-Nov 2023 job.

-My last payroll contribution for that job put me over the pro-rata limit by $20. Fortunately there is no fee for refund.

-My position of this account since inception has always been in cash with 0% interest rate.

-This provider DOES NOT calculate earnings on excess withdrawal on excess contribution reversal.

Account "B":

-Separate account with bulk of HSA assets, pretty much all invested.

-Again before realizing the pro-rata limit, I contributed $300 excess to this account direct from a checking account (post-tax money).

-This provider DOES calculate earnings on excess withdrawal when doing an excess contribution reversal.

Does the following sound right?

1. Fill out Excess Contribution Return form for Account/Provider A for $20. Because this account was all cash with no interest, my NIA is $0. I guess I got lucky here, since they don't calculate excess earnings.
2. Fill out Excess Contribution Return form for Account/Provider B for $300. My NIA calculation on this amount as of today comes out to be ~$20. So I would have to have $320 liquid (or more if later on) in this account for the refund.
3. Account A's excess $20 payroll contribution return becomes taxable income, correct? But is that taxable for the year 2023 or 2024?
4. Account B's NIA of $20 (or whatever it ends up being when Provider B completes the process), will be reportable as taxable income. Similarly, would that be income for tax year 2024 on a 1099-SA issued in 2024? 
5. Account B's base excess contribution return of $300 was made with after-tax dollars initially (not payroll deduction). Does it end up being subject to income tax on the 1099-SA that gets issued with it for 2024?

Anything I'm missing here? Thanks again!

[dmertz · Accepted solution]

"and switched jobs/insurance away from an HSA to PPO in December 2023."

If you were covered by the HSA-eligible HDHP on December 1, you were HSA-eligible for December and eligible for the full annual HSA contribution.   If your HDHP coverage ended before December 1 or your PPO coverage started on December 1, that would make you ineligible to contribute for December.

The fact that only $300 of the excess contribution was made to Account B makes it difficult to justify obtaining all of the return of excess contribution from only one of the accounts, so obtaining returns of excess contributions from both makes sense.  To address your specific questions:

1. Yes.
2. Yes.
3. Yes.
4. Yes, this ~$20 is reportable on the tax return for the year of the distribution, 2024.
5. The $300 is simply not deductible on your 2023 tax return.  The code-2 2024 Form 1099-SA from Account B will show only ~$20 taxable.

[KG31]

@dmertzThank you so much for confirming all of these details.

Yes, to clarify, my HDHP coverage ended on Nov 30, so I was only eligible to contribute for 11 months' worth of the limit.

And indeed re choice of where to withdraw from. I found a post somewhere in which someone seemingly knowledgeable cited IRS anti-cherry-picking rules that apply to excess contributions when the person has multiple accounts (same thing for IRAs, too), which is how I arrived at withdrawing the appropriate excess contribution from each account, rather than all of the excess from one or the other. For example, it sounds like it would not be proper to over-contribute to one HSA and then withdraw an equal amount from a different HSA, since they would likely have different associated rates of return.

[BillM223]

To expand slightly on dmertz's always excellent answer: you have two different examples of excess HSA contributions. In the first case, the $20 has to be added back to income, whereas in the second case, as dmertz says, the excess $300 is simply not reported as an adjustment on Schedule 1 (1040), line 13.

Note that TurboTax handles both of these cases automatically, so please do not attempt to report either item manually on your return.