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  • HSA overcontributions

    Hi all,
    I was trying to search for old posts to see if anybody has had a similar experience regarding HSA overcontributions, and this seemed to be the most relevant, but I still have some questions since the scenarios are slightly different.

    I first became eligible for an HSA 7/1/2019. I contributed the full amount of $3500 that year instead of the prorated $1750. Gambling that I would again qualify for an HSA in 2020, I took advantage of the "testing period" in 2019. However, due to unexpected job changes, I ended up with new insurance that does not qualify for an HSA on 7/1/2020. With the employer contribution portion of the HSA, I did end up having some excess in 2020. But since I did not end up having an HSA for all of 2020, that also means that I overcontributed in 2019 since I failed the testing period.
    2019: excess of 1750
    2020: excess of ~650

    How do I fix things for the two different years?

    I think 2020 is a bit more straightforward since the tax filing deadline hasn't passed yet. I am going to remove my excess contributions and earnings. My understanding is the excess 650 gets counted as taxable income, but is it taxable income for 2020 or 2021? I believe I won't owe the 6% excise tax since I'm removing the excess before tax deadline, but will I owe 20% penalty on any part of that for nonqualified distribution, whether on the excess + earnings or the earnings alone? Are the forms that I need to file 2020 form 5329 for the excess contribution and 2020 form 8889 for non-qualified distribution of the earnings?

    What about for 2019? Since that tax filing deadline has already passed, what are my options now? I do not currently qualify for an HSA and don't foresee qualifying again in the near future, so I can't reduce the excess contribution by limiting future contributions. What can I do to prevent having to pay the 6% excise tax year after year? My understanding is that I will owe the 6% for 2019 and for 2020, but I just want to fix things so this doesn't go on indefinitely. Also, what actually gets taxed at that 6% rate? The 1750 excess + earnings? How do I calculate the prorated excess earnings? (The excess earnings for 2020 are being calculated by my HSA bank based on the date I started having excess contributions in 2020, but I don't think they will back-calculate 2019.) Are the forms that I need to file 2020 form 5329 and 2019 form 5329 and amend my 2019 tax return?

    Thank you so much!! The more I look at everything the more I'm confusing myself so would greatly appreciate any assistance you can provide!

  • #2
    It is not nearly as bad as you think, but you can make it worse.
    • The amount of 2019 ineligible HSA contributions due to a 2020 testing period failure are not excess contributions and should not be returned as such.
    • If returned as excess contributions and earnings, the entire amount is considered as a normal distribution even if the HSA custodian reports it as such.
    • The amount of this distribution exceeding unreimbursed qualified medical expenses would be a non-qualified distribution subject to the 20% penalty.
    • Not to mention, you would still have to properly account for the testing period failure.
    • Since the amount of 2019 ineligible HSA contributions due to a 2020 testing period failure is not an excess contribution. There is no need to file Form 5329 and pay a 6% excise tax.
    • This amount is simply reported on Form 8889 Part III and subject to a 10% additional tax. Both this amount and any associated earnings remain in the plan.
    • This amount, but not any earnings are taxable on your 2020 return.
    It really is very simple. Any tax software should property handle this:
    • Do not contact the HSA custodian. Nothing happens with the HSA account. This is solely between you and the IRS.
    • There is no excess contribution and no excise tax to be reported.
    • The tax software should fill in 2020 Form 8889 Part III, transfer the amount to Schedule 1 Line 8 and the 10% tax to Schedule 2 Line 8c.
    The 2020 ~$650 excess contribution should be treated as any other excess contribution.

    See, not so bad and it proably isn't a net 10% additional tax. You received at least a 1.45% FICA tax exemption if the HSA contribution was made by salary reduction.

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    • #3
      Wow spiritrider , thank you for the thorough explanation. This is so incredibly helpful and I really appreciate it!

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      • #4
        Originally posted by penj8688 View Post
        Wow spiritrider , thank you for the thorough explanation. This is so incredibly helpful and I really appreciate it!
        You really can’t go wrong withspiritrider (I know you hate for me to say this, SR, so chill, I’m not taking it back )
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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