Excess HSA contribution

[Bill Tubbs]

Client was having money put into her HSA most of last year via payroll, and her employer was also making contributions to her HSA. Late in the year she found out she was only eligible to make HSA contributions for Jan - Mar. So, she was only eligible to contribute 3/12th of the $6250 family amount, or $1562.50 -- but she made contributions of about $4000. She has been trying to deal with the HSA custodian and the Human Resource department at her employer to try to get the excess contribution withdrawn, but has gotten nowhere (basically they are just pointing fingers at each other). So, she is plenty frustrated with them and we are trying to determine if we can just resolve this on the tax return. [There were also excess contributions made in 2013, and she won't be HSA-eligible at all in 2013, but that's a separate problem. Since she is ineligible to make contributions 2013, we can't just pay the 6% excess tax and treat the 2012 excess as 2013.]

From what I've seen in the instructions to Form 8889, if the excess contributions for 2012 (plus interest) are removed by the due date (including extension) of the 2013 return, then there is no 6% excess tax on Form 5329. The instructions don't say in what form this distribution must be in -- can it just be that the client makes sure they draw out that amount, no different than if it was money they were using for medical? Or, must a specific form be processed by the HSA trustee (which this ain't going to happen -- see above)? Then how would this get reported? Since the W-2 already has the total $4000 subtracted from box 1, $2500 (amount rounded) would need to be added back on 2012 Form 1040 Line 21, right? Then on the 2013 Form 8889 the $2500 would be reported on both lines 14a and 14b, thus resulting in no tax impact on the 2013 return. The only other thing here would be for us to calculate what the interest earned on the excess contributions would be to make sure that amount also gets withdrawn and report that amount as Other Income in 2013 -- since it was just in an interest-bearing account, that shouldn't be too tough to determine. If we don't need a specific form processed by the HSA trustee to get the excess contributions distributed out, we would certianly go this route.

Any critiques or suggestions would be greatly appreciated!

Bill

[Bill Tubbs]

Bump

Client was having money put into her HSA most of last year via payroll, and her employer was also making contributions to her HSA. Late in the year she found out she was only eligible to make HSA contributions for Jan - Mar. So, she was only eligible to contribute 3/12th of the $6250 family amount, or $1562.50 -- but she made contributions of about $4000. She has been trying to deal with the HSA custodian and the Human Resource department at her employer to try to get the excess contribution withdrawn, but has gotten nowhere (basically they are just pointing fingers at each other). So, she is plenty frustrated with them and we are trying to determine if we can just resolve this on the tax return. [There were also excess contributions made in 2013, and she won't be HSA-eligible at all in 2013, but that's a separate problem. Since she is ineligible to make contributions 2013, we can't just pay the 6% excess tax and treat the 2012 excess as 2013.]

From what I've seen in the instructions to Form 8889, if the excess contributions for 2012 (plus interest) are removed by the due date (including extension) of the 2013 return, then there is no 6% excess tax on Form 5329. The instructions don't say in what form this distribution must be in -- can it just be that the client makes sure they draw out that amount, no different than if it was money they were using for medical? Or, must a specific form be processed by the HSA trustee (which this ain't going to happen -- see above)? Then how would this get reported? Since the W-2 already has the total $4000 subtracted from box 1, $2500 (amount rounded) would need to be added back on 2012 Form 1040 Line 21, right? Then on the 2013 Form 8889 the $2500 would be reported on both lines 14a and 14b, thus resulting in no tax impact on the 2013 return. The only other thing here would be for us to calculate what the interest earned on the excess contributions would be to make sure that amount also gets withdrawn and report that amount as Other Income in 2013 -- since it was just in an interest-bearing account, that shouldn't be too tough to determine. If we don't need a specific form processed by the HSA trustee to get the excess contributions distributed out, we would certianly go this route.

Any critiques or suggestions would be greatly appreciated!

Bill

Anyone have experience with excess contributions?

[Burke]

Yes, but the custodian withdrew the excess by the due date (last year) of the tax return and refunded amt to TP. I would have her call the custodian back and read them the riot act, tell them she is going to put an explanation on her tax return reporting that they would not do this per IRS instructions, and see what they say. Her HR dept has no control over this, except to intervene in her behalf. If she withdraws $$$ as if for medical expenses, she will get a 1099 next year, but I guess if all else fails, you can deal with it then.

[Bill Tubbs]

Yes, but the custodian withdrew the excess by the due date (last year) of the tax return and refunded amt to TP. I would have her call the custodian back and read them the riot act, tell them she is going to put an explanation on her tax return reporting that they would not do this per IRS instructions, and see what they say. Her HR dept has no control over this, except to intervene in her behalf.

Client is at a road-block. The form she got from the custodian says that if the contribution was done via her employer, the employer must initiate the withdrawl (and an HR Manager at a different firm, whom I highly respect for her knowledge of tax-related matters, agrees with this), but the employer is stubborn.

If she withdraws $$$ as if for medical expenses, she will get a 1099 next year, but I guess if all else fails, you can deal with it then.

Would you agree with my interpretation of how to handle it then?

[Burke]

Would you agree with my interpretation of how to handle it then?

Re-read your post regarding 2013, and I don't know any other way to do it under the circumstances. As long as everything comes out on the tax return the way it would have if it were done correctly, I don't see how the IRS could argue about it, since there would be no change in the tax liability.

[Bill Tubbs]

Thanks

Re-read your post regarding 2013, and I don't know any other way to do it under the circumstances. As long as everything comes out on the tax return the way it would have if it were done correctly, I don't see how the IRS could argue about it, since there would be no change in the tax liability.

Client called me back yesterday saying they were just leaving an IRS center -- they had stopped there to get their method of reporting this. Apparently I took a bit too long getting back to them (hey, it's crazy time!). They'll be stopping in this morning so it'll be interesting if that agent's method matches my thoughts. [There's another route that involves reporting it as an excess contribution and paying 6% penalty, so I hope the agent didn't go that route.]