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How to address non-qualifying HSA contribution due to last-minute rule failure

Forum|Forum|7 years ago
June 6, 2019
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Contributed max amount to my HSA in 2017 based on the last-minute rule (LMR). However, had only 2mo HDHP coverage in 2018, thus failing the LMR. Now I need to report majority of 2017 contribution as income. Do I need to remove this amount from my HSA? If so, how do I proceed?

TurboTax Deluxe Windows

Best answer by BillM223

When you enter the questions relating to 2017, TurboTax will correctly and automatically handle the re-calculation of what your 2017 annual HSA contribution limit should have been and count the computed 2017 "excess" as income in 2018 as well as add a 10% penalty.

You do not withdraw the now-excess 2017 contributions, because any amount you were eligible to contribute under the last month rule does not become a true excess contribution simply because you fail to satisfy the testing period.

You only owe income tax on the "excess" amount and a 10% recapture tax (on your 2018 tax return in this case) on the amount that you contributed that was in excess of the amount that you would have been eligible to contribute were it not for the last-month rule. No need to withdraw anything from your HSA.

B

BillM223Answer

When you enter the questions relating to 2017, TurboTax will correctly and automatically handle the re-calculation of what your 2017 annual HSA contribution limit should have been and count the computed 2017 "excess" as income in 2018 as well as add a 10% penalty.

You do not withdraw the now-excess 2017 contributions, because any amount you were eligible to contribute under the last month rule does not become a true excess contribution simply because you fail to satisfy the testing period.

You only owe income tax on the "excess" amount and a 10% recapture tax (on your 2018 tax return in this case) on the amount that you contributed that was in excess of the amount that you would have been eligible to contribute were it not for the last-month rule. No need to withdraw anything from your HSA.

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