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Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 8:51 am
by Tatupu
I made the mistake of contributing $530 too much to my 2020 HSA through payroll deduction. I planned to ask HSA Bank to return the excess contribution but HSA Bank will not calculate the earnings on the excess payment. Does anybody know how I could calculate the earnings so that the earnings can be removed too in addition to the $530 excess contribution? Or suggest another alternative to resolving this excess contribution issue?

Not sure that it helps complete the picture but I contribute $5300 through payroll deduction and my HDHP pass through is $1800 ($150/monthly), bringing me up to the $7100 family total for 2020.

Thanks!

Tatupu

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 9:02 am
by fabdog
Sorry, I'm confused.

You indicate you over contributed by $530 to your 2020 HSA (but we are still in 2020) and then show us your contributions between employer and employee of $7100 for 2020, which is the 2020 family limit if you have family coverage all year.

So is it your 2019 HSA that is over contributed? If so, and you are trying to fix that now, it's surprising your custodian won't calculate the earnings for you. If they insist they won't, it's the same procedure for calculating earnings on excess IRA contributions

https://www.investopedia.com/articles/r ... 042804.asp

But I'm still not clear that you have an over contribution?

Mike

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 10:37 am
by MP123
If it's 2020 that you're worried about it might be easiest to just reduce your contributions (or those made on your behalf) for the rest of the year so you don't go over the limit. The limit only counts at year end, there are no interim overages.

Or are you saying that you've already gone over the total limit for the year?

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 10:51 am
by aristotelian
Doesn't HSA Bank work through TD? I think TD should be able to calculate the earnings for you. Could be negative this year.

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 12:00 pm
by seawolf21
I wouldn’t lose sleep over it. As long as excess is withdrawn, the associated earnings wouldn’t really matter.

IRS is not going to know what the associated earnings are. The custodian calculating it wrong or refusing to calculate it is their responsibility. You did your part by removing the excess contribution.

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 12:09 pm
by fabdog
I wouldn’t lose sleep over it. As long as excess is withdrawn, the associated earnings wouldn’t really matter.
That's certainly one approach... but the Regulations are clear... from Pub 969



Excess contributions.

You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in box 1 of Form W-2, you must report the excess as "Other income" on your tax return.

Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.

You withdraw any income earned on the withdrawn contributions and include the earnings in "Other income" on your tax return for the year you withdraw the contributions and earnings.

Whether the IRS will know or not is not the issue...

Mike

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 6:25 pm
by Tatupu
fabdog wrote: Tue Jul 14, 2020 9:02 am Sorry, I'm confused.

You indicate you over contributed by $530 to your 2020 HSA (but we are still in 2020) and then show us your contributions between employer and employee of $7100 for 2020, which is the 2020 family limit if you have family coverage all year.

So is it your 2019 HSA that is over contributed? If so, and you are trying to fix that now, it's surprising your custodian won't calculate the earnings for you. If they insist they won't, it's the same procedure for calculating earnings on excess IRA contributions

https://www.investopedia.com/articles/r ... 042804.asp

But I'm still not clear that you have an over contribution?

Mike
Sorry, let me clarify. I will exceed the 2020 limit if I do nothing to rectify the issue. I had planned to personally contribute $5300 which, added to the $1800 pass through by the plan, would take me to the $7100 limit. However, I erred and already contributed $5830. I cannot turn off the $150 monthly pass through that goes directly to the HSA from my provider. Those contributions will continue to be made monthly until the end of the year. So if I do nothing, I will be $530 over the $7100 limit for 2020. I’m trying to remove that extra $530 contribution I erroneously made.

Thanks and sorry for the confusion.

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 6:48 pm
by TropikThunder
Tatupu wrote: Tue Jul 14, 2020 6:25 pm
fabdog wrote: Tue Jul 14, 2020 9:02 am Sorry, I'm confused.

You indicate you over contributed by $530 to your 2020 HSA (but we are still in 2020) and then show us your contributions between employer and employee of $7100 for 2020, which is the 2020 family limit if you have family coverage all year.

So is it your 2019 HSA that is over contributed? If so, and you are trying to fix that now, it's surprising your custodian won't calculate the earnings for you. If they insist they won't, it's the same procedure for calculating earnings on excess IRA contributions

https://www.investopedia.com/articles/r ... 042804.asp

But I'm still not clear that you have an over contribution?

Mike
Sorry, let me clarify. I will exceed the 2020 limit if I do nothing to rectify the issue. I had planned to personally contribute $5300 which, added to the $1800 pass through by the plan, would take me to the $7100 limit. However, I erred and already contributed $5830. I cannot turn off the $150 monthly pass through that goes directly to the HSA from my provider. Those contributions will continue to be made monthly until the end of the year. So if I do nothing, I will be $530 over the $7100 limit for 2020. I’m trying to remove that extra $530 contribution I erroneously made.

Thanks and sorry for the confusion.
I believe HSA Bank's reluctance to help is because to them it's not an excess contribution since the remaining pass through contributions have not been made yet. It will be but isn't yet. Their excess withdrawal form even includes the option to "(a)pply my excess contribution as my current year’s contribution" suggesting the form (to HSA Bank) is for after the year is completed. Once the final contribution is made on your behalf in December and you are actually over the cap, they will pretty much have to process the withdrawal properly.

Since you can't stop the pass through contributions, and HSA Bank won't cooperate until you are actually over the limit, an alternative fix would be to let the contributions stay in the HSA for 2020, pay the excise tax for excess, and under-contribute for 2021 by the same $530 (from the part of the contribution you make yourself). You won't be able to deduct the over-contribution, but the excise tax will only be 6% ($31.80) and will only be a one-time charge if you fix it next year by under-contributing. Since some custodians charge a $25 fee to send back the excess, the 6% tax becomes even more of a bargain.

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 8:13 pm
by sycamore
I once over-contributed to my HSA by $30 or something. Never noticed it until I filed my taxes and TurboTax indicated I had to pay the excise tax of a couple bucks. Didn't bother to try to fix it. I dutifully have kept paying it for quite a few years now. Oh well, my contribution to cut the national debt...

Re: Fixing Excess HSA Contribution

Posted: Tue Jul 14, 2020 9:10 pm
by Spirit Rider
Does HSA Bank charge a fee to remove excess contributions? Will you have earnings in your HSA?

Many HSA custodians charge $20 - $25 to remove excess contributions. When you remove excess contributions you must also remove earnings on those excess contributions. Those earnings are subject to ordinary income taxes at your marginal rate.

Leaving the excess contributions in the HSA will:
  • Require filing a 2020 Form 5329 and paying an excise tax on the $530 * 6% = $31.80.
  • Require reducing your 2021 HSA contributions by $530 under your contribution limit.
  • Require filing a 2021 Form 5329 to report the available contribution space and not excise tax due.
It is quite possible that leaving the excess contribution in the HSA and paying the excise tax will cost less that removing the excess contributions and earnings. Plus you get to keep the earnings in the plan.

Re: Fixing Excess HSA Contribution

Posted: Sun Jul 19, 2020 12:36 am
by Tatupu
I will look into whether there are any HSA Bank fees associated with removing excess contributions and decide how to best proceed.

Thank you everybody for the helpful responses.

Re: Fixing Excess HSA Contribution

Posted: Sun Jul 19, 2020 9:31 am
by seawolf21
fabdog wrote: Tue Jul 14, 2020 12:09 pm
I wouldn’t lose sleep over it. As long as excess is withdrawn, the associated earnings wouldn’t really matter.
That's certainly one approach... but the Regulations are clear... from Pub 969

Completely aware of regs having gone thru that but from a practical perspective, there is no way IRS will know what the “correct“ earnings are as they don’t know what investments were and that is why they are having custodian report earnings/losses. I could have all-in into a bankrupt company in which case I have 100% losses or I can have brought in TSLA at IPO. In this case, custodian is abrogating their reporting responsibility.

Only thing IRS know is there is an excess contribution. If custodian report $0 earnings so be it and if not having a 100% accurate return bugs you, then document that you made good faith attempts with custodian and informed them they didn’t provide correct earnings/losses.

Re: Fixing Excess HSA Contribution

Posted: Sun Jul 19, 2020 9:35 am
by Helo80
seawolf21 wrote: Sun Jul 19, 2020 9:31 am
fabdog wrote: Tue Jul 14, 2020 12:09 pm
I wouldn’t lose sleep over it. As long as excess is withdrawn, the associated earnings wouldn’t really matter.
That's certainly one approach... but the Regulations are clear... from Pub 969

Completely aware of regs having gone thru that but from a practical perspective, there is no way IRS will know what the “correct“ earnings are as they don’t know what investments were and that is why they are having custodian report earnings/losses.


Agreed. Getting down to the granularity of knowing what your earnings are in your HSA is something the IRS may calculate on widespread tax fraud, but I mean the juice needs to be worth the squeeze. Of course, I'm not a lawyer or tax accountant and ignorance of the law is no excuse, but worrying yourself silly with what our tax code has evolved into... At some point, we all have probably submitted fraudulent returns then. What happens if you're constantly buying/selling securities in your HSA account and have turned it into a mini day-trading account? Oh boy, that can get complicated quickly.

I mean, if I get $50 to deliver a washer/dryer from Home Depot for a neighbor and I don't report that.... I've committed tax fraud, right?

Re: Fixing Excess HSA Contribution

Posted: Thu Sep 03, 2020 9:29 pm
by venus_06
I had a similar question with a slight twist that I was hoping someone could give some advice on:
I make HSA contributions through my employer and due to some unexpected events I switched to a non-HDHP plan midyear in 2020. It just occurred to me that I should calculate my allowed contributions for the months I was HSA eligible, and turns out that I have ~$400 in excess contributions. I read about how to fix this, but the twist is that I did a trustee-to-trustee transfer on most of the balance from my employer HSA custodian (let's call it Custodian A) to Fidelity HSA. Had I not done this, I think I could just go directly to custodian A and complete their form for removing excess contribution through employer. Since the funds are now in Fidelity, does this mean I need to transfer the excess amount back to custodian A so I can complete the process there? I wasn't sure if I could withdraw the funds from Fidelity - they don't know which year the funds are from and how they came about, it was just simply a trustee to trustee transfer and they received a check from custodian A. Would Fidelity even be able to issue Form 5498-SA since technically I didn't contribute anything through them? Has anyone encountered something similar before and have advice on how best to proceed?

I will spare the long story of why I transferred the HSA funds to Fidelity, but there were some issues with custodian A. I'm now regretting this as I feel I was penny wise and pound foolish to try and "save" on some fees :oops:

Re: Fixing Excess HSA Contribution

Posted: Thu Sep 03, 2020 10:02 pm
by BuddyJet
I also over contributed a few years back. I did a rough calculation of the earnings for the period of over contributing and added a safety margin and kept a copy of the calculation with the refund paperwork.

As a practical matter, OP’s earnings on the roughly $500 over contribution probably isn’t over $25 so the tax is trivial even if you estimate high. If the IRS audits, you can show a good faith effort to compute when the custodian refused. If anything, you should get a trivial refund since the estimation was high

Re: Fixing Excess HSA Contribution

Posted: Thu Sep 03, 2020 10:09 pm
by TropikThunder
venus_06 wrote: Thu Sep 03, 2020 9:29 pm I had a similar question with a slight twist that I was hoping someone could give some advice on:
I make HSA contributions through my employer and due to some unexpected events I switched to a non-HDHP plan midyear in 2020. It just occurred to me that I should calculate my allowed contributions for the months I was HSA eligible, and turns out that I have ~$400 in excess contributions. I read about how to fix this, but the twist is that I did a trustee-to-trustee transfer on most of the balance from my employer HSA custodian (let's call it Custodian A) to Fidelity HSA. Had I not done this, I think I could just go directly to custodian A and complete their form for removing excess contribution through employer. Since the funds are now in Fidelity, does this mean I need to transfer the excess amount back to custodian A so I can complete the process there? I wasn't sure if I could withdraw the funds from Fidelity - they don't know which year the funds are from and how they came about, it was just simply a trustee to trustee transfer and they received a check from custodian A. Would Fidelity even be able to issue Form 5498-SA since technically I didn't contribute anything through them? Has anyone encountered something similar before and have advice on how best to proceed?

I will spare the long story of why I transferred the HSA funds to Fidelity, but there were some issues with custodian A. I'm now regretting this as I feel I was penny wise and pound foolish to try and "save" on some fees :oops:
I think you read the forest but missed the trees: just follow the steps outlined by SpiritRider and I above. Leave it there, pay the excise tax one time, and under-contribute next year to even things out. $24 in taxes. Once. Probably cheaper than Custodian A's charge to remove excess contributions, assuming you could move it back and do so. They're not really going to be motivated to help out a former customer.

Re: Fixing Excess HSA Contribution

Posted: Thu Sep 03, 2020 10:22 pm
by venus_06
TropikThunder wrote: Thu Sep 03, 2020 10:09 pm
I think you read the forest but missed the trees: just follow the steps outlined by SpiritRider and I above. Leave it there, pay the excise tax one time, and under-contribute next year to even things out. $24 in taxes. Once. Probably cheaper than Custodian A's charge to remove excess contributions, assuming you could move it back and do so. They're not really going to be motivated to help out a former customer.
Unfortunately I most likely won’t be in an HDHP plan next year. I thought if one didn’t fix the excess contribution the 6% penalty applies every year, so I was hoping to just get it resolved (even if it ends up costing more than $24) and not having to worry about it again.

Re: Fixing Excess HSA Contribution

Posted: Fri Sep 04, 2020 1:50 am
by TropikThunder
venus_06 wrote: Thu Sep 03, 2020 10:22 pm
TropikThunder wrote: Thu Sep 03, 2020 10:09 pm
I think you read the forest but missed the trees: just follow the steps outlined by SpiritRider and I above. Leave it there, pay the excise tax one time, and under-contribute next year to even things out. $24 in taxes. Once. Probably cheaper than Custodian A's charge to remove excess contributions, assuming you could move it back and do so. They're not really going to be motivated to help out a former customer.
Unfortunately I most likely won’t be in an HDHP plan next year. I thought if one didn’t fix the excess contribution the 6% penalty applies every year, so I was hoping to just get it resolved (even if it ends up costing more than $24) and not having to worry about it again.
Ah I missed that part. If it ends up that you're eligible for part of 2021, perhaps that will be enough pro-rated to cover the $400 but I can see why you'd rather withdraw it now.

Re: Fixing Excess HSA Contribution

Posted: Fri Sep 04, 2020 7:10 am
by aristotelian
Tatupu wrote: Sun Jul 19, 2020 12:36 am I will look into whether there are any HSA Bank fees associated with removing excess contributions and decide how to best proceed.

Thank you everybody for the helpful responses.
OP, did you see my question above? Have you tried rectifying through TD? I am assuming you are using their investment platform through HSA Bank. TD would be the one to calculate earnings.

If you are just holding the funds at HSA Bank, the earnings should be negligible.

Re: Fixing Excess HSA Contribution

Posted: Fri Sep 04, 2020 9:19 am
by lstone19
See my post (viewtopic.php?p=5045232#p5045232) from earlier this year regarding how to calculate earnings yourself.

Re: Fixing Excess HSA Contribution

Posted: Thu Feb 04, 2021 2:25 pm
by deltaneutral83
If I have an over contribution of a trivial amount ($15) and use HSA Bank/TDA for tax year 2020, can I just under contribute by $15 this tax year, 2021, and pay the 6% on the $15 this year on my 2020 taxes? And then I'm done? Seems like a lot less work than contacting HSA Bank to remove the over contribution? I will have HSA for all of 2021 as well so no issues there.

Re: Fixing Excess HSA Contribution

Posted: Thu Feb 04, 2021 2:41 pm
by Spirit Rider
Yes, the steps are:
  • Do nothing with the HSA/custodian. This is purely between you and the IRS. The excess contribution and earnings remain in the plan.
  • If the excess contribution was by salary reduction, report it for 2020 as other income.
  • File a 2020 Form 5329 reporting the 2020 excess $15 HSA contribution and paying the 6% excise tax.
  • Contribute less than your maximum 2021 HSA contribution by the excess contribution.
  • File a 2021 Form 5329 reconciling the excess contribution balance with available HSA contribution space.
That's it.

Re: Fixing Excess HSA Contribution

Posted: Thu Feb 04, 2021 2:48 pm
by seawolf21