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02-22-2018 10:04 AM - edited 02-22-2018 10:05 AM
Hi, I am curious how to handle my excess HSA contribution. I changed employers in mid-2017 to one that does not have a high deductible plan, but I had already contributed my maximum amount to my existing HSA. I discovered this issue prior to filing my taxes, and have read the rules and posts here regarding how to calculate my pro-rated limit, withdraw the excess amount plus earnings, record the earnings as Other Income, etc.
However, my HSA provider allows me to withdraw excess contributions in two different ways:
(1) Treat it as an excess contribution. This generates a 1099-SA for tax year 2018 with a code of 2 (excess withdrawal).
(2) Treat it as a mistaken one-time (employee only) contribution. This generates a corrected 5498-SA for tax year 2017, showing a lower contribution. No new 1099-SA is created.
Here's the catch: I personally contributed the entire excess amount in ONE deposit (I had extra cash at the time) before I changed jobs. If I undo that single deposit, I solve the problem. Does that circumstance allow me to use Option (2) and avoid having to report this as an excess contribution and pay taxes on the earnings?
If No, meaning I am forced to do Option (1), for which year do I report the withdrawal and earnings, is it for tax year 2017 or 2018? It sounds like I wouldn't get the 1099-SA until the end of 2018. Also, for Option (1), what time frame do I use for estimating earnings on the amount - is it (Withdrawal date - Contribution date), 2017 only, or something else?
02-22-2018 06:13 PM
"Does that circumstance allow me to use Option (2) and avoid having to report this as an excess contribution and pay taxes on the earnings?"
Mistaken contribution would definitely be the best option, hands down. Then you would simply ignore your one-time after tax contribution (do not list contribution or withdrawal on your tax return, like it never happened). Earnings, if any, would be reported for 2018 (the year you received it from the HSA). The HSA administrator would send you a tax form showing earnings after 12/31/18. The earnings would likely be simple interest shown on a 1099-INT.
02-22-2018 09:38 PM
Thank you for the response! I agree that treating the contribution as though it never happened would ideally be the best choice. However, I just had a conversation with my HSA provider (custodian). They clarified that "Option 2" is meant for corrections that do not involve excess contributions...for example, say I simply meant to contribute $300, not $500.
They advised me *not* to take Option 2 in my situation, as much as I'd want to. They will calculate my earnings on the amount, and automatically include that in my refund. I will record these earnings in 2019 on my 2018 return. It stinks that I have to withdraw and report that as well, but it sounds like all custodians are required to do this.
I also found out that the IRS gets info for Form 1095-C, which I received from my new and old employers. This form shows the dates of my eligibility for HSA contributions. So with this knowledge, plus my 5498-SA that shows how much I contributed, I think the IRS pretty much knows what's going on.
Thanks again for the advice, which I would definitely follow were it not for the IRS being so smart.
btw, new user to this site...love the valuable info and feedback here!
02-23-2018 06:54 AM
I don't see any distinction. It does not matter whether your after tax deposit put you over the limit or not. The way it gets reported is exactly the same. You ignore the contribution on Form 8889, line 2 and show the earnings, if any, next year. Even option 1 would be reported the same way except they would issue a 1099-SA and not a 1099-INT.
03-01-2018 07:29 PM - edited 03-01-2018 07:45 PM
According to the tax rules, the earnings withdrawn on the excess contributions will be reported on box 2 of Form 1099-SA. If the policy of the HSA account is where the HSA withdrawal for option 2 is only for mistaken contribution amounts and not for excess contributions, then for option 1 treatment, when the funds are withdrawn from the HSA for excess contributions, according to the instructions for Form 1099-SA, you would be receiving a 1099-SA form with the dollar amount on box 1 for the amount withdrawn along with box 3 that should show a code 2 for "excess contributions." Also, on box 5, the checkbox for HSA will also be checked off. If the HSA custodian informed you that they are going to make this withdrawal sometime much later in 2018, you will be receiving a 2018 Form 1099-SA showing the information that I just went over and you will report that on the 2018 tax return.
Tax Research Specialist