Overcontribution to HSA for 2020

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Topic Author
TresBelle65
Posts: 280
Joined: Sun Apr 12, 2015 2:44 pm

Overcontribution to HSA for 2020

Post by TresBelle65 »

I am at my max contributions for 2020, when my own for the year, along with, the insurer's prior contributions and contribution for November are all factored in. Unfortunately, when the insurer makes their December contribution, that will put me over the max by about $75. :(

I stopped my payroll contributions when I noticed this happening, so there will be no more of those for 2020.

Boo- what can I do now before the tax year has ended to correct this?

thank you.
Spirit Rider
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Re: Overcontribution to HSA for 2020

Post by Spirit Rider »

You can remove the taxable excess contribution and earnings after it happens, but most HSA custodians charge a $20 - $25 fee to do so.

Or you can simply leave it in the HSA account, file Form 5329 reporting the excess contribution on your 2020 tax return, pay an $75 * 6% = $4.50 excise tax, reduce 2021's HSA contribution by $75 and file a 2021 Form 5329 to reconcile the carryover excess HSA contribution balance with the available HSA contribution space.

Modern tax software makes the latter relatively easy to do.
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wander
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Re: Overcontribution to HSA for 2020

Post by wander »

TresBelle65 wrote: Sat Oct 17, 2020 6:42 am I am at my max contributions for 2020, when my own for the year, along with, the insurer's prior contributions and contribution for November are all factored in. Unfortunately, when the insurer makes their December contribution, that will put me over the max by about $75. :(

I stopped my payroll contributions when I noticed this happening, so there will be no more of those for 2020.

Boo- what can I do now before the tax year has ended to correct this?

thank you.
My insurance deposited last year December check in this year January. If I know the passthrough amount is $900 a year, then I will just contribute the difference ($3550 - $900 for 2020). In your case, just call the the firm that is handling your HSA, they will sort it out for you; or just tell them the exact amount you overcontributed, they should know what to do.
aristotelian
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Re: Overcontribution to HSA for 2020

Post by aristotelian »

I am dealing with similar situation now. I called Fidelity, filled out a form, and have a check on the way for the overcontribution plus earning. As far as I can tell there is no fee for this. I believe I will owe tax plus 10% penalty which stings but it's a good problem to have because the funds are all contributions from my employer and insurance company. I can't do the excise tax option because I anticipate the same problem next year.
Topic Author
TresBelle65
Posts: 280
Joined: Sun Apr 12, 2015 2:44 pm

Re: Overcontribution to HSA for 2020

Post by TresBelle65 »

I believe I will owe tax plus 10% penalty which stings but it's a good problem to have because the funds are all contributions from my employer....

Is the tax and 10% penalty calculated on the overage amount?

so in case, on a $75 overage, a $7.50 penalty and tax would be based on my current income bracket?

Thank you.
Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Overcontribution to HSA for 2020

Post by Spirit Rider »

There is no 10% tax penalty for the return of excess contributions and earnings.

If the excess contributions are from employee contributions by salary reduction or employer contributions they will be subject to ordinary income tax in the tax year of contribution, because they were not included in your W-2 Box 1.

If the excess contribution is from direct contribution to the HSA account, you simply do not deduct that amount on your tax return.

In both cases, any earnings on the excess contributions will be subject to ordinary income tax in the year of return.

Nobody seems to have read my previous response, the very first one in the thread. The best likely option for you is to not ask for a return of the excess contributions and earnings:
  • Most HSA custodians will charge a $20 - $25 fee to return excess contributions and earnings.
  • The excess contributions and earnings will be taxable.
  • Leaving the $75 (and the earnings) in the account will only cost you a $4.50 excise tax.
bberris
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Re: Overcontribution to HSA for 2020

Post by bberris »

Spirit Rider wrote: Sat Oct 17, 2020 7:05 am You can remove the taxable excess contribution and earnings after it happens, but most HSA custodians charge a $20 - $25 fee to do so.

Or you can simply leave it in the HSA account, file Form 5329 reporting the excess contribution on your 2020 tax return, pay an $75 * 6% = $4.50 excise tax, reduce 2021's HSA contribution by $75 and file a 2021 Form 5329 to reconcile the carryover excess HSA contribution balance with the available HSA contribution space.

Modern tax software makes the latter relatively easy to do.
Can an overcontribution take one back from the ACA cliff?
aristotelian
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Re: Overcontribution to HSA for 2020

Post by aristotelian »

Spirit Rider wrote: Sat Oct 17, 2020 4:47 pm There is no 10% tax penalty for the return of excess contributions and earnings.

If the excess contributions are from employee contributions by salary reduction or employer contributions they will be subject to ordinary income tax in the tax year of contribution, because they were not included in your W-2 Box 1.

If the excess contribution is from direct contribution to the HSA account, you simply do not deduct that amount on your tax return.

In both cases, any earnings on the excess contributions will be subject to ordinary income tax in the year of return.

Nobody seems to have read my previous response, the very first one in the thread. The best likely option for you is to not ask for a return of the excess contributions and earnings:
  • Most HSA custodians will charge a $20 - $25 fee to return excess contributions and earnings.
  • The excess contributions and earnings will be taxable.
  • Leaving the $75 (and the earnings) in the account will only cost you a $4.50 excise tax.
Agreed. The possible cases where that might not work:
-You are not going to be HSA eligible next year
-You expect to have the same issue next year
Spirit Rider
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Re: Overcontribution to HSA for 2020

Post by Spirit Rider »

aristotelian wrote: Sun Oct 18, 2020 6:42 am Agreed. The possible cases where that might not work:
-You are not going to be HSA eligible next year
-You expect to have the same issue next year
Good point on the first one. On the second one, how would someone possibly have the same issue next year. The year hasn't even begun yet. Surely someone can figure out how to reduce their own contributions.
aristotelian
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Re: Overcontribution to HSA for 2020

Post by aristotelian »

Spirit Rider wrote: Sun Oct 18, 2020 9:01 am
aristotelian wrote: Sun Oct 18, 2020 6:42 am Agreed. The possible cases where that might not work:
-You are not going to be HSA eligible next year
-You expect to have the same issue next year
Good point on the first one. On the second one, how would someone possibly have the same issue next year. The year hasn't even begun yet. Surely someone can figure out how to reduce their own contributions.
I have this situation because my employer contributes close to the max and then I get extra contributions from my insurance company for meeting Fitbit goals. I had $895 overcontribution this year and expect over $1k next year! Admittedly, extremely rare situation.
hmw
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Re: Overcontribution to HSA for 2020

Post by hmw »

aristotelian wrote: Sat Oct 17, 2020 7:38 am I am dealing with similar situation now. I called Fidelity, filled out a form, and have a check on the way for the overcontribution plus earning. As far as I can tell there is no fee for this. I believe I will owe tax plus 10% penalty which stings but it's a good problem to have because the funds are all contributions from my employer and insurance company. I can't do the excise tax option because I anticipate the same problem next year.
I am in a somewhat similar situation. I have over contributed approximately $1400 for 2020. Will not have HSA contribution room next year due to change of employment. I have my HSA account at Fidelity as well. Does Fidelity send a check to you and you will pay the tax owed in April 2021 when you file your taxes?

Thanks
aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Overcontribution to HSA for 2020

Post by aristotelian »

hmw wrote: Sun Oct 18, 2020 1:22 pm
aristotelian wrote: Sat Oct 17, 2020 7:38 am I am dealing with similar situation now. I called Fidelity, filled out a form, and have a check on the way for the overcontribution plus earning. As far as I can tell there is no fee for this. I believe I will owe tax plus 10% penalty which stings but it's a good problem to have because the funds are all contributions from my employer and insurance company. I can't do the excise tax option because I anticipate the same problem next year.
I am in a somewhat similar situation. I have over contributed approximately $1400 for 2020. Will not have HSA contribution room next year due to change of employment. I have my HSA account at Fidelity as well. Does Fidelity send a check to you and you will pay the tax owed in April 2021 when you file your taxes?

Thanks
Correct, that is exactly how it works. I think the above was incorrect on the tax. It would just be income tax, no penalty.
Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Overcontribution to HSA for 2020

Post by Spirit Rider »

There is no HSA 10% penalty on excess contributions.

The only time an HSA 10% penalty applies is on a testing period failure under the last month rule or IRA funding distribution.
Topic Author
TresBelle65
Posts: 280
Joined: Sun Apr 12, 2015 2:44 pm

Re: Overcontribution to HSA for 2020

Post by TresBelle65 »

I appreciated your feedback. I did read your response. Even with an MBA (but minimum accounting classes, lol) I find the rules and policies to be somewhat confusing and then there is the issue of terminology (sometimes illogical to me).

Keeps tax professionals in business, right? lol.

Thanks!
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