Question

Should I enter 0 when asked for last year's excess HSA contribution if I am correcting an excess contribution from 2019?

Forum|Forum|5 years ago
April 20, 2021
2 replies
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In 2019, I had an excess HSA contribution in the amount of $X. I did not withdraw this distribution prior to filing my 2019 taxes, so I paid the 6% excise tax. I am now trying to correct my error by requesting a distribution of excess HSA contributions from my HSA provider.

a) I am told that I can request to withdraw $X for 2019, even though the 2019 tax year has passed. If I go this route, then how do I report this in turbotax? When asked to enter the amount from line 48 of my 2019 From 5329, which is the excess contribution from 2019, if put $X, then turbotax does not understand that I corrected things and still shows a 6% excise tax. Should I put $0 here then? I was informed by my HSA provider that the type 2 1099-SA will not be produced until after the tax deadline is over.

b) I was told that I am unable to correct for the 2019 excess contribution since 2019 tax season has passed. If this is the case, I can correct for the same amount, $X, in my 2020 HSA account. I have already maxed out my 2020 HSA account, so in order to roll over my excess 2019 contributions to count in 2020, I will have to withdraw $X from 2020. Again, how do I report this in turbotax? When asked to enter the amount from line 48 of my 2019 From 5329, which is the excess contribution from 2019, should I put $0, or $X? My W2 currently shows the max contribution was reached in 2020, so I don't know how turbo tax will recognize that the 2019 excess contribution is counting towards 2020. I was informed by my HSA provider that the type 2 1099-SA will not be produced until after the tax deadline is over.

c) Can I correct my excess contribution for 2019 by requesting to withdraw $X for 2019 from my HSA provider, even though the 2019 tax year has passed (i.e. option a)? Or must I request to withdraw $X for 2020 (i.e. option b)?

TurboTax Premier Online

O

Opus 17

Employee

This is somewhat complicated but I will try to explain the order in which things should be happening.

It’s too late to remove the excess 2019 contribution as a 2019 excess. What you can do is apply the 2019 excess toward your normal 2020 limit. Then, if you over contribute for 2020, you now have a 2020 excess. It works like this:

Suppose you had a family HDHP, so your 2019 limit was $7000, but you contributed $8000. You have a $1000 excess contribution, and since you did not remove it, you paid the 6% penalty and you paid income tax on the extra $1000 as part of your 2019 return. Now for 2020, that $1000 excess counts as your first 2020 contribution. Then, you contributed the full amount for 2020 which was $7100. That means your total 2020 contributions were $8100, which is another $1000 excess. If you remove that $1000 excess before May 17 as a “return of excess contribution“, you will avoid any additional penalties. That would make your actual 2020 contribution equal to $6100, but you include the 2019 excess as a 2020 contribution so on the tax forms, you end up showing a 2020 contribution of $7100 which is within the limit.

So you are technically removing an excess 2020 contribution, not the excess 2019 contribution. Does that make sense?

The 1099 form can’t be corrected, because you contributed whatever you contributed in 2020. But the return of excess will be reported on your eventual form 5498 and when the IRS puts all the paperwork and all the numbers together, it will make sense to them and they will see what you did and that you have avoided future penalties. When you withdraw the excess 2020 contribution, you must also withdraw the earnings on that contribution. The HSA bank knows this, and as long as you request them to process a return of excess, they will send you the earnings as well. The earnings will be reported as income on your 2021 tax return since they will have been paid you in the 2021 calendar year.

W

wag1Author

Thank you so much for your help! It sounds like I need to do option (b) then, which is to reduce my 2020 contributions (since I maxed out already) by the amount of excess in 2019 such that it rolls over to 2020. However, I still do not understand how I report this in turbotax. You mentioned that "the return of excess will be reported on your eventual form 5498 and when the IRS puts all the paperwork and all the numbers together, it will make sense to them and they will see what you did and that you have avoided future penalties." My understanding is that I shouldn't have a penalty for 2020 taxes if I withdraw the excess in 2019 from 2020. How do I help turbotax understand that I have done this? The only way I can think to do this is that when asked to enter the amount from line 48 of my 2019 From 5329, which is the excess contribution from 2019, I should put $0. If I don't put $0, then turbotax thinks the excess is still in my HSA for 2020 tax season and I get penalized with the 6% excise tax.

B

BillM223

"I am told that I can request to withdraw $X for 2019, even though the 2019 tax year has passed. If I go this route, then how do I report this in turbotax?"

Be careful of your terminology. As you and Opus note above, you can no longer "withdraw the excess" for tax year 2019, so don't even use the phrase in conjunction with the tax year 2019 amount.

Instead, now you have two ways to fix the excess for 2019:

1. As Opus noted, your excess from 2019 rolls over (if you didn't withdraw it in time) to tax year 2020. If you do not reduce your regular 2020 HSA contributions, then this will cause an excess for tax year 2020. HOWEVER, this is not an excess that you can withdraw for 2020 - it is still the 2019 excess.

2. You request a distribution from your HSA for the amount of the excess in 2019. This will be sent to you on a 1099-SA (possibly on the same 1099-SA as your distributions for qualified medical expenses). When you enter it though, you indicate that some or all of it was not for qualified medical expenses.

For #1, you can try to wipe out the 2019 excess in 2021 by sharply reducing your HSA contributions. If you can't apply it all to 2021 (because you have already made too much in contributions), then roll over the remaining part to 2022, and be disciplined in your regular HSA contributions to use it up in 2022.

Note that if you try to withdraw what you think is the 2020 excess, TurboTax will catch you and tell you that while you have $X excess for 2020, $Y is from 2019 and cannot be withdrawn.

For #2, when you enter the 1099-SA and indicate some (or all) are not for qualified medical expenses, then the amount that was not for qualified medical expenses (presumably the original 2019 excess) will be added to Other Income by TurboTax, and TurboTax will add a 20% penalty. At this point, the 2019 excess will be finished.

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W

wag1Author

Here is what my HSA provider said:

“In order to remove any contributions from a prior tax year, you should complete the Distribution of Excess HSA Contribution Form. You'll enter the tax year as 2019, and the total amount of excess contributions made to the tax year. Since you have already maxed your contributions for tax year 2020 and 2021, you could choose to have the funds distributed from your HSA to correct the excess contribution.”

The above sounds a lot like option 2 that you outlined. I would prefer to do option 1 since it avoids the 20% penalty. However, since my 2020 contributions have already been maxed, I would need to withdraw the excess contribution from 2020 in the amount of $X, where X is the excess contribution from 2019. Since my 2019 excess contribution automatically rolls over towards 2020, this would ensure that my HSA does not have excess contributions for 2020. However, I would still pay the 6% excise tax for the 2019 excess contribution. Why is this, if reducing my 2020 contributions such that X + 2020 contributions = the max contributions ($3550)?

Let’s say that I do what is outlined above and pay the 6% excise tax on the excess 2019 contributions when filing my 2020 taxes. Then, when I file my 2021 taxes, since 2020 will not have had an excess, will I officially have this cleaned up?

Additionally, they said:

“there is type 2 1099-SA produced for situations like this. They are produced after the tax deadline is over. While you will still want to file the accurate numbers, the forms will be sent you you and the IRS on your behalf.”

Does filing the accurate numbers mean I enter a 1099-SA into turbo tax as if I received it when filing my 2020 taxes, or do I wait until filing taxes for 2021 once I have the actual 1099-SA?

B

BillM223

"The above sounds a lot like option 2 that you outlined."

Yes, it is.

"I would need to withdraw the excess contribution from 2020 in the amount of $X, where X is the excess contribution from 2019"

As I explained above, TurboTax will not let you do this. It's easy to think of the 2019 excess rolling over and causing an excess in 2020 which you could withdraw, but you can't. Even if TurboTax tells you that you have an excess in 2020 (I am assuming it is saying this), when you tell TurboTax how much you will withdraw, it will stop you from withdrawing the amount of the excess caused by 2019. Try it, you'll see.

"Why is this, if reducing my 2020 contributions such that X + 2020 contributions = the max contributions ($3550)?"

The law lets you withdraw excess contributions up until the due date of the return (as extended). If you just carried over the excess to the next year, then withdrew the excess the following year by that year's due date, that would defeat the clear intent of the law - this is why you can't withdraw 2019's excess in 2021.

"Then, when I file my 2021 taxes, since 2020 will not have had an excess, will I officially have this cleaned up?"

2020 will say it has an excess, but in fact, you did not over contribute in 2020, but in 2019. So, in a way, you are right that 2020 did not have per se an excess, but the 2019 excess is carrying forward.

So in 2021, when you sharply reduce your HSA contributions (probably to nearly zero), then, yes, the 2019 excess that has been carried over twice will be applied against the 2021 HSA contribution limit, and the carryover will be gone.

However, have you already been contributing in 2021? Or were you able to stop in time?

"there is type 2 1099-SA produced for situations like this. They are produced after the tax deadline is over."

There is only one type of 1099-SA; what they meant is that it would have a distribution code of "2". If I am following your situation correctly, I don't think you will be able to withdraw any excess for 2020, so you won't get a 1099-SA for option 2. And if all goes well, in 2021, you will be able to charge all of the 2019 excess off against the 2021 HSA contribution limit, which means that there won't be a an excess to withdraw in 2021 anyway.

And normally, when you withdraw the excess in a timely manner, you don't need a 1099-SA for the current year, because TurboTax automatically adds the amount of the excess (whether or not you withdraw it) to Other Income, and the following year when the 1099-SA is sent reporting the earnings on the excess, this is entered for that following year.

You normally don't get a corrected 1099-SA unless you made a "mistaken distribution", which is not the case here.

Now, have I thoroughly garbled up everything?

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