Excess HSA contribution--calculation of Net Investment Income

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Topic Author
28fe6
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Joined: Wed Jan 03, 2018 9:01 am

Excess HSA contribution--calculation of Net Investment Income

Post by 28fe6 »

I front-loaded my HSA in 2019, then I quit and went to an employer with no eligible HDHP. Thus, I have an excess HSA contribution. Also, upon changing jobs I immediately rolled the HSA to Fidelity to avoid the very high fees of my previous employer's custodian.

Now I have to fix it on my 2019 taxes. Calculating the amount of excess is easy--it's just pro rated by the number of whole months that I had an eligible HDHP. However, calculating the investment income requires an official IRS calculation method. I can't find the details anywhere on the actual calculation to use.
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FIREchief
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by FIREchief »

28fe6 wrote: Tue Feb 25, 2020 8:15 pm I front-loaded my HSA in 2019, then I quit and went to an employer with no eligible HDHP. Thus, I have an excess HSA contribution. Also, upon changing jobs I immediately rolled the HSA to Fidelity to avoid the very high fees of my previous employer's custodian.

Now I have to fix it on my 2019 taxes. Calculating the amount of excess is easy--it's just pro rated by the number of whole months that I had an eligible HDHP. However, calculating the investment income requires an official IRS calculation method. I can't find the details anywhere on the actual calculation to use.
Are you planning to withdraw the excess contributions by April 15? I understand this may not make it simple, since you changed custodians. Has the previous custodian provided you with an 1099-SA reflecting the roll over? If you withdraw the excess contributions from Fidelity they "may" have a means to recover the necessary data from your previous custodian, since excess earning withdrawals are not that uncommon. If you had retained the funds at a single custodian, they would have calculated and reported the excess earnings.

On a related note, we may need to distinguish between "net investment income" and "earnings on excess contributions." I had assumed that any returned earnings on excess HSA contributions would be considered to be "other modifications to investment income" on IRS form 8960, however TurboTax seems to feel otherwise. It may be that earnings on excess contributions do not constitute "investment income" in the eyes of the IRS.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Topic Author
28fe6
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by 28fe6 »

I have to withdraw the excess by April 15th or else pay 6% penalty.

I did not get a 1099-SA from my previous custodian. I tried and gave up because they are extremely difficult to work with. TurboTax said I don't need a 1099-SA if there were no distributions, so I thought I was off the hook. But I think I don't have a choice now. I probably need a 1099-SA from the previous custodian, then also need to work closely with Fidelity to make sure the excess contribution and the earnings on the excess is reported correctly on the 1099-SA that Fidelity will give me. I would still like to know the formula.
lstone19
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by lstone19 »

Did you do a 60-day rollover or a custodian-to-custodian transfer? If the latter, I do not believe you will receive a 1099-SA.

I did have to do an excess withdrawal a few years ago and saw the form for calculating the income part of it but I won’t have access to that file for a few days.
rivercrosser
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by rivercrosser »

Did you try to get the previous place you had it to calculate the income on your excess contribution? I just went on medicare in February so I was only eligible for January to put in my HSA. The company I had retired from 3 years ago put $500.00 in mine the end of January so I went ahead and removed the $121.00 excess. They automatically added the little interest income it had made to the check they sent me. Mine is at Optum. Call them up and ask them to calculate it for you. If not get your old statements and try to figure how much income you had on the excess.
lstone19
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by lstone19 »

Try the form at https://www.tworiver.bank/ContentDocume ... ntId=55671 as it looks like the same calculation my custodian used a few years ago. I think using it you can calculate it yourself. Maybe since you moved the funds, you need to tell Fidelity how much additional to withdraw as earnings. Have you tried asking them what to do?

EDIT: Fidelity’s Return of Excess Contribution form even lists where in the IRS regulations the method is described (IRS Notice 2000-39 and IRS FInal Regulation 1.408-11) and tells you to include a signed letter of instruction if you want to calculate it yourself.
Last edited by lstone19 on Tue Feb 25, 2020 9:12 pm, edited 1 time in total.
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FIREchief
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by FIREchief »

28fe6 wrote: Tue Feb 25, 2020 8:31 pm I have to withdraw the excess by April 15th or else pay 6% penalty.

I did not get a 1099-SA from my previous custodian. I tried and gave up because they are extremely difficult to work with. TurboTax said I don't need a 1099-SA if there were no distributions, so I thought I was off the hook. But I think I don't have a choice now. I probably need a 1099-SA from the previous custodian, then also need to work closely with Fidelity to make sure the excess contribution and the earnings on the excess is reported correctly on the 1099-SA that Fidelity will give me. I would still like to know the formula.
If you did a trustee to trustee transfer, you likely won't get a 1099-SA from the original custodian. When you withdraw the excess from Fidelity, that will generate a 1099-SA. I don't know if it will apply to tax year 2019 or tax year 2020. If Fidelity can't make it simple, I doubt anyone else can. I also had an excess contribution situation in 2019, but fortunately my HSA was at Fidelity throughout the process.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Topic Author
28fe6
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by 28fe6 »

Unfortunately it's not going well. The previous custodian is not helping and they are the only ones who can really provide the information.

According to the resource above, this is what needs to happen:

1. Calculate the net income attributable (NIA) to the excess (previous custodian needs to do this)
2. Remove the excess contribution amount and NIA (Total withdrawal amount from page 2) ( I can do this if I have information from step 1)
3. Use distribution code 2 when completing IRS Form 1099-SA (current custodian will do this)

If I had a 1099-SA from the previous custodian, it should list the excess contribution and earnings on excess. But the previous custodian is refusing to provide a 1099-SA because they say it's not required since there were no distributions except the rollover which doesn't require reporting.

I can't even calculate the NIA myself since step number 1 requires the previous custodian to help. Luckily there were only two contributions, and both on the same day in January 11, but I have no way to know the opening account balance on the day of the contributions.

I do have monthly statements. The best I could do I think:

--Take the Dec31 account statement balance as the "opening balance" for the purpose of the NIA calculation.
--calculate NIA as per the formula (contribution*total earnings)/opening balance
--Then I have to submit the over contribution, and NIA I calculated, to Fidelity and have Fidelity calculate another NIA for the rest of 2019.
--Then Fidelity can distribute the excess contribution, the NIA I calculated, and the NIA that Fidelity calculated, an issue me a 1099-SA.

Does this sound right? The question is whether Fidelity will accept my calculation or not.
lstone19
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by lstone19 »

Did you read the two IRS notices I referenced a couple of posts above? Reading them, it sounds like you can use the 12/31/18 statement (technically, it's talking about assets that aren't valued daily but if you don't have better data, that's probably good enough - the IRS is probably unlikely to get bent out of shape over what's probably no more than a couple of dollars).

So the previous custodian can't or won't even tell you what the 1/10 (day before the contribution) value was? As that is really the only thing you need from them I believe. Was the HSA invested in publicly traded funds such that you could recreate the value on your own from the number of shares and the 1/10 NAV?

I think you unnecessarily complicating it by thinking you need to do separate NIA calculations for the time held by the previous custodian and by Fidelity. All you need is the value just before the excess contribution, the amount of the excess contribution, and the value on the date of withdrawal. If you can provide Fidelity the first, in theory they can then calculate it (have you talked to Fidelity? They're pretty friendly as I found when I needed to talk to the HSA group yesterday on a completely separate matter). If they won't do it that way, calculate it as best you can (assume the value on the date you send them the form will be the value on the date of withdrawal - as I said, the difference should be small enough to be a don't care to the IRS. They aren't going to know your calculation was slightly off from the official method unless for some reason they decided to examine your return in more detail and start digging).
Topic Author
28fe6
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by 28fe6 »

I talked to Fidelity but they wanted me to get the NIA amount from the previous custodian, as if it were reported in 1099-SA box 2. I don't have it, so I will call Fidelity again and see how they want to handle it.

Previous custodian is not playing ball whatsoever. I spent almost 3 hours on the phone today trying to get somebody who could even understand what I was asking for, and I got nothing.
lstone19
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Re: Excess HSA contribution--calculation of Net Investment Income

Post by lstone19 »

28fe6 wrote: Tue Mar 03, 2020 4:16 pm I talked to Fidelity but they wanted me to get the NIA amount from the previous custodian, as if it were reported in 1099-SA box 2. I don't have it, so I will call Fidelity again and see how they want to handle it.

Previous custodian is not playing ball whatsoever. I spent almost 3 hours on the phone today trying to get somebody who could even understand what I was asking for, and I got nothing.
Well, you know how much was transferred to custodian so you really need is your best estimate of the value the day before the excess contribution. I suspect if ever became an issue, the IRS would accept any reasonable estimate.
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