Proper filings for withdrawal of excess HSA contribution

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
amoureux1
Posts: 2
Joined: Tue Nov 06, 2018 3:20 pm

Proper filings for withdrawal of excess HSA contribution

Post by amoureux1 » Tue Nov 06, 2018 3:34 pm

I'm very confused about what to do after reading numerous posts. Any suggestions are appreciated.

In 2017 I made a $6000 family HSA contribution that was not allowed due to not having a qualifying health plan. I only realized this about 2 weeks ago. At the time I made the contribution in 2017 I deducted the full amount of the contribution from my reported 2017 income.

For 2019 I am once again enrolling my family in a qualifying health plan.

What is the best way to correct this mistake and what are the appropriate tax forms to file, and for which years?

Here are some options I was weighing but can't understand which, if any, might be correct:

A. I withdraw the $6000 contribution today as a withdrawal of excess contribution. I file an amended 2017 return which eliminates the deduction I took for the contribution and requires a payment with penalty and interest for 2017. With the amended return I file a 2017 form 5329 to also pay a 6% excise tax on the $6000. The $6000 I withdraw today does not count as income this year and I owe no further penalty on that amount.

B. I file an amended 2017 return which eliminates the deduction I took for the contribution and requires a payment with penalty and interest for 2017. With the amended return I file a 2017 form 5329 to also pay a 6% excise tax on the $6000. I leave the $6000 from 2017 in the HSA account and apply that to my 2019 HSA contribution.

C. I withdraw the $6000 contribution today as a withdrawal of excess contribution. I count the $6000 as ordinary income in 2018 and pay a 10% penalty for early withdrawal. I also file a 5329 for 2018 to pay the 6% excise tax due for end-of-year 2017. I make no amendments to my 2017 return and pay no excise tax for end of 2018.

Thanks very much. I read a number of the other posts on this topic but walked away confused every time as to whether or not 2017 returns have to be amended, and taxes & penalties paid for underpayment. It's going to end up being a lot of taxes and penalties.

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Proper filings for withdrawal of excess HSA contribution

Post by Spirit Rider » Tue Nov 06, 2018 5:45 pm

The options you have for this $6000 in excess contributions is covered in IRS Publication 969, page 7, Excess contributions. and Deducting an excess contribution in a later year., page 8, Distributions From an HSA.
  • 2017: $6000 excess contribution
    • You can only remove excess contributions if done by your tax filing deadline including extensions. For the 2017 tax year, you just missed this on October 15, 2018.
    • Your only option at this point is to file an amended 2017 return including Form 5329 to pay a 6% excise tax penalty, i.e. $6000 * 6% = $360. The $6000 remains in the account and there is no other taxes or penalties.
  • 2018: From your description, I assume you were also not an HSA eligible individual.
    • Your best option is to also file a 2018 Form 5329 with your 2018 return to pay a 6% excise tax penalty, i.e. $6000 * 6% = $360. The $6000 remains in the account and there is no other taxes or penalties.
    • Your only other option is to take a non-qualified HSA withdrawal. This will be subject to ordinary income taxes and a 20% excise tax (not 10%) on the excess contribution and earnings.
  • 2019: Eligible for HSA family contribution $7000.
    • If you selected the best option from above, make sure to only make a $7000 - $6000 = $1000 contribution to your HSA, leaving $6000 in available contribution space. File a 2019 Form 5329 with your 2019 return to reconcile your excess contribution balance, leaving no balance subject to the 6% excise tax penalty.
Whew, you are done.

amoureux1
Posts: 2
Joined: Tue Nov 06, 2018 3:20 pm

Re: Proper filings for withdrawal of excess HSA contribution

Post by amoureux1 » Wed Nov 07, 2018 4:08 pm

Thank you so much. That was a really clear explanation.

One point to clarify:

When I amend 2017, I have to put back into gross income the $6000 contribution I deducted, correct? So I would also pay taxes on that $6000 and probably some late payment penalty?

And then in 2019 I fully deduct the excess contribution + the partial contribution from gross income?

Thank you.

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Proper filings for withdrawal of excess HSA contribution

Post by Spirit Rider » Wed Nov 07, 2018 4:42 pm

Two good points.

Correct for 2017. The excess contribution is not deductible (I missed that in my explanation), but the earnings are not taxable.

Correct for 2019. The 2017 excess contribution applied to 2019 contribution space is deductible (I also missed that in my explanation).

Essentially, you pay the 6% excise tax for the privilege of deferring the deduction from 2017 -> 2019, while retaining the earnings.

Post Reply