Correcting an excess contribution to a 2012 HSA

[KarenMM]

New client comes in with a copy of last year's tax return and an IRS letter. As I am preparing the amended return (for totally different issues, not involved here), I see the original return has an additional tax from form 5329 going back to 2012. The 2012 return shows the taxpayer and employer contributed $6999 when only $6250 for family was allowed. The taxpayer, doing his own return, just clicked through the software not realizing there was something wrong, and has been carrying this excess $749 each year.
Generally, I know that this defect can be cured by removing the excess and its earnings... but the 5329 form instructions do not make it clear how to do it years later.
The contributions are made through the employees paycheck/W2 annually; I am thinking that if I ask/tell the employee to tell the employer to contribute $749 LESS in 2016, this issue will go away? Or do I have to somehow calculate what has been earned on the 749 since 2012 also?
Your thoughts?

[KarenMM]

I found the answer in publication 969....

The answer was not in the 5329 instructions, but the Publication 969 instructions.... except that it does not mechanically describe how to do it - just that you "MAY be able to" .... any ideas?

[S T]

Lesser contribution in 2016 - I do not believe will fix the issue,

Just a thought, what about contacting the HSA company - I found that they --the administrators at HSA are a lot more helpful than trying to contact HR at the employer payroll level, which might be your next choice. Payroll for the year is already closed for 2012.

Probably through HSA a refund needs to be made - not sure -- HSA due to it being pre-tax also affects all of the associated payroll taxes - and now you are at year 3 or 4 - Not sure what cooperation your client will receive from payroll/HR. -- For $ 749 over collect that could be minor - just ned to find a way to correct and off the the Tax Filings without anymore taxable distributions

Sandy

[Rapid Robert]

Probably through HSA a refund needs to be made - not sure -- HSA due to it being pre-tax also affects all of the associated payroll taxes -

I'm pretty sure there is a free pass on Soc. Sec. and Medicare taxes even when excess contribution is withdrawn. Works same as dependent care benefits through payroll deduction. Even if taxpayer can't deduct them, still no payroll tax due.

[kathyc2]

For 2012 the excess of 749 should have been included in taxable income in addition to the 5329 tax. Since the W2 income was 749 less than it should have been adding it back to taxable income makes the FIT tax on it a wash.

For 2016 make a distribution for the earnings of the 749 and make sure the paperwork is filed that it will show in box 2. This amount will be taxable for 2016.

Make sure 2016 contributions are 749 less than the max. The 749 will then become a deduction for 2016 since it was taxable in 2012.

[New York Enrolled Agent]

Excess contributions to an HSA are subject to the 6% excise penalty tax as found in §4973. Look at Part VII of Form 5329. The penalty may be for more than one year.

[KarenMM]

Thanks folks -

Thanks to Kath , ST, and Robert - I thought this had to go through the company, but you folks gave me the specifics to get it done