Overfunded HSA - Received Corrected W2 before filing

Forum|Forum|4 years ago
April 3, 2022
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Last year (2021), I accidently overfunded my HSA because we were on my wife's health insurance for the first 6 months and then mine in the second half of 2021. TurboTax caught the overfunding and recommended I withdraw the amount overfunded. I withdrew the amount in March 2022 through the HSA administrator - no taxes were paid on the overfunded amount that I withdrew. This would have been fine because TurboTax would have corrected the amount of taxes owed. But then, I received a corrected W2 from my employer that shows the reduced (correct) HSA contribution. When I enter the corrected W2 information in TurboTax, everything looks good except that I haven't paid taxes on the amount I withdrew! I'm sure this will catch up with me. Do I wait for a 1099-SA that will show the amount of excess withdrawn? Will that be the document that I will use to pay the appropriate taxes? Will I pay the taxes when I file in 2023? Thanks much!

MinhT1

If you received a corrected form W-2 with the correct contribution then your wages reported in box 1 in the corrected form W-2 has been increased by the amount of overcontribution, and you will have paid tax on the withdrawn amount when you report the corrected W-2 in your return.

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irunalotAuthor

Not exactly... my corrected W2 only has two numbers in boxes 12W:

- Previously Reported $xxxx.xx

- Correct Information $yyyy.yy

Other than my name, SS# and other personal information, there is no other information reported because they were all considered "correct."

I did some research. It seems I will receive a 1099-SA in February 2023 that will show the amount withdrawn along with earnings on that amount. It will be reported as withdrawn in 2022 for excess contributions that were made in 2021. Since the amount was withdrawn in 2022, the taxes will be paid when I file my 2022 taxes in 2023. TurboTax will treat the withdrawal as ordinary income and tax it accordingly.

I'm pretty sure that's how it'll play out. I wish my employer hadn't sent me a corrected W2 and I could have just paid the taxes on the withdrawal this year when I file. I'll have to make a memo to file so I remember all this next year. Many thanks for the reply!

BillM223

Minh has a good point here. When your employer first created your W-2 with its entry for code W in box 12, the code W amount should have been removed from Wages in box 1, 3, and 5. You can't tell this by just looking at your W-2, you have to ask your payroll people.

This means that if they created the W-2 correctly initially, then they can't change only the code W amount without also changing the Wages in boxes 1, 3, and 5. I suspect your "corrected" W-2 is still wrong.

In this case (where you over contribute to your HSA), the employer does not issue a corrected W-2, because it wasn't your employer's mistake.

It would have been better to not ask your employer to correct the W-2. TurboTax would have announced in the HSA interview that you had excess contributions, it would have asked you if you wanted to withdraw the excess by the due date, TurboTax would have added the excess automatically to Other Income on line 8 on Schedule 1 (1040), and you would have contacted your HSA custodian to request the "withdrawal of excess contributions". And that would have been the end of it.

As it is, you must have a sit-down with your payroll people and ask them to either undo the change they did, or to correct the W-2 to change Wages in boxes 1, 3, and 5 to include the code W amounts. This latter request will also require that you amend your 2021 return, IF you have already filed it (I can't tell it you have).

NOTE: you have until the due date of the return AS EXTENDED to as for the withdrawal of the excess. That means that if you start running into a time crunch to get all this done by April18th, you can file an extension (form 4868) and the new deadline to file your return and withdraw the excess will be October 17, 2022. Of course, if you owe the IRS money, you are expected to pay it by April 18th. And, also of course, if you file and extension, you don't have to wait until October to get your business done - you can do it as soon as you can.

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