Messed up my HSA for 2022, what to do?

[Mazmouse]

Hello everyone,

Looking for some advice on fixing an overcontribution to my HSA. I got married in March 2022 and added my wife to my high deductible health insurance plan that month. My wife was a resident of Massachusetts before then and moved to the midwest. Previously my wife had "Masshealth" the states insurance plan for Medicaid. We knew we were getting married so she never renewed her health insurance that year but apparently you are auto-renewed unless you call them and un-enroll early on. We didn't realize this until I went to file our taxes and got rejected for not having a 1095-A form filled out.

Due to my wife being enrolled in Masshealth it created two problems:
1) Over contribution to HSA
2) I had to find and plug in the 1095-A to my health insurance.

First issue - Over contribution:

I roll my HSA money from my employer HSA to a fidelity HSA for better investing options. I over contributed 3041.67 that calendar year. My understand is that I need to take that money out of the Fidelity HSA and declare it as income. When I'm in the tax software do I put this income as unreported W2 income or as other income and state the reason "Withdrawal from HSA due to over contribution." My W2 shows the full HSA amount contributed. I imagine I don't edit that value in my W2 in my tax form?

Second Issue - the 1095-A and the cost:

I don't know if we can go back and unenroll in Masshealth but something tells me the damage is done. Due to my income, it seems that I have to repay the entire cost of the health insurance premiums ($3600) and it ate into my return. We called Masshealth and they said that nothing could be done on their end. Any advice on what to do in this situation?

This was a costly mistake. The $3600 premium plus the additional tax on the HSA over contribution $1200

Thanks

[jfoxcpacfp]

Get the overcontribution out by 4/18/23 and that should take care of a big part of the problem. As for Masshealth, that doesn’t surprise me in the least. MA is one of the most tax-unfriendly states in the Union, including CA and NJ. Sorry your question was overlooked until now. Maybe others will have some advice with this bump.

[Mazmouse]

Thanks for the bump.

I've managed to get fidelity to get the overcontribution out. Out of the $3041.67 I got $2837.23 ($204.44 loss). I called fidelity to get a 1099-SA but they said they won't give me a 1099-SA until 2024.

I'm really confused on how to file this in my taxes this year.

I contacted my employer and told them that I made an overcontribution that I withdrew and wanted a corrected W2. They said they wouldn't issue another W2-c because the withdrawal of the overcontribution was made in 2023.

I use TaxHawk to do my taxes and the question comes up:

"Did you take an HSA distribution in 2022?" Do I say yes to this and fill out the $3041.67 or do I wait to answer this question when I do my 2023 taxes next year?
If I proceeded to and said I took a $3041.67 distribution, the next question is "Amount Rolled to Another HSA: Did you roll over any distributions to another HSA, or withdraw excess contributions and earnings during 2022?" I said "No".

Then I proceed and it says " Do you have a penalty exception? $3,042 of Your HSA distributions will be subject to the 20% early withdrawal penalty unless an exception applies. The additional 20% tax does not apply to distributions made after the account beneficiary dies, becomes disabled, or turns age 65.
If part or all of your distribution of $3,042 qualifies for one of the exceptions to the early withdrawal penalty, then enter the amount of the distribution that is NOT subject to the 20% penalty." Amount NOT Subject to 20% Penalty: $3042.

This seems to make my taxes look "right" but again, I didn't take a distribution in 2022 I took it in 2023.

The other option is I could answer no to this question and put the $3042 as "Miscellaneous/other income" and say that it was withdrawal of an excess contribution in the description.

Thanks for any help, fixing this overcontribution has been a nightmare because its not obviously clear and I can't find much information online on how to do it.

[Bmac]

The $3402 should be taxable as other income. But I don’t believe that you need to pay a penalty since you removed before the filing deadline and you have no earning on the over contribution.

[mrbn]

I'm pretty sure you would've been alright. IRS Publication 969 specifically addresses this. If you are on HDHP insurance that covers you and at least one other family member, you qualify for a family HSA, it doesn't matter what other types of coverage your family members have, as long as you don't have other coverage.

Pub. 969 regarding how coverage affects HSA eligibility "If you (and your spouse, if you have family coverage) have HDHP coverage, you can’t generally have any other health coverage. However, you can still be an eligible individual even if your spouse has non-HDHP coverage, provided you aren’t covered by that plan."