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  • Overfunded HSA

    Hey everyone,

    First time posting here. I finished residency last July and have a HDHP through my employer as of September 2019 so I took advantage of the HSA's last month's rule and put in $3500 as I imagine I would keep working for them for all of 2020. However, situations change and my wife got offered a fantastic job at an academic center this July where the spousal insurance is too good to pass up. I used Lively for my HSA and have only contributed post-tax dollars.

    Questions:
    Am I able to withdraw the funds back (Haven't used all of them nor invested them) from the full $3500 to 3500/12 x 4 (Four months HDHP) from Lively back to my personal bank account and not face any penalties/confusion with the IRS come tax day? It just bothers me that this is my first tax season with a high income and I feel like I have already messed up.

    If the above isn't feasible, I'm open to other suggestions or just paying the penalty if thats easier

    Thanks!


  • #2
    Yes, you need to request a distribution of the overfunded amount by 4/15/20. Your 1099-SA should reflect the correct amount. If you do not request in time for it to be issued by 4/15, report the corrected figures.
    Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

    Comment


    • #3
      Testing period failures are tricky. They have their own unique treatment.

      The amount due to testing period failure is not an excess contribution. Do not remove any amounts > any unreimbursed qualified medical expenses. It will be a non-qualified distribution and subject to a 20% excise tax penalty. See IRS Publication 969, Page 8.

      If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income isn’t an excess contribution. If you withdraw any of those amounts, the amount is treated the same as any other distribution
      from an HSA, discussed later.


      This is reported as taxable ordinary income and subject to a 10% excise tax penalty on Form 8889. It is essentially a non-deductible contribution with tax-free earnings if used for qualified medical expenses. Also, if the contribution was by salary reduction, the 10% penalty is partially mitigated by the FICA deduction you received. See IRS Publication 969, Page 5.

      Testing period. If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2018, through December 31, 2019). If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are calculated on Form 8889, Part III.

      This really isn't such a horrible result. The effect is that you are paying a 2.35%, 8.55% or 10% tax for what will likely be tax-free earnings and distributions.
      Last edited by spiritrider; 01-19-2020, 04:10 PM.

      Comment


      • #4
        I'm in a similar situation, and must admit I'm a little perplexed after reading the various posts about this here.

        In summary: I changed jobs this year, and between my old and new jobs, I (and my employers) contributed $2,000 in excess to my HSA. I have never used my HSA money for healthcare, instead using it as a stealth IRA, investing all of the money. I am also using a HDHP with HSA this year.

        TurboTax tells me I can either withdraw the excess contribution, or keep it and pay a 6% tax on it.

        So, I guess my questions are:

        1. Does TurboTax know what it's talking about?
        2. If I leave the excess contribution would I have to reduce my HSA contribution in 2020?
        3. What would happen if I didn't reduce my HSA contribution in 2020 after leaving the excess contributions from 2019?

        Thanks!

        Comment


        • #5
          First, banish this term from your lexicon. A HSA is not any kind of IRA.

          You are either currently taking tax-free distributions for current qualified medical expenses or you are deferring those distributions to grow a LARGER HSA account for retirement. Even when an individual is >= age 65, they should almost never take taxable non-qualified distributions. Just because you can do something does not mean you should do something.
          1. Yes
          2. Yes
          3. Another 6% excise tax penalty

          Comment


          • #6
            Maybe I'm missing something, but if OP contributed only post tax dollars, then he hasn't overused the tax free space. He just needs to file within limits, right?

            Comment


            • #7
              Originally posted by tylerjw12 View Post
              Maybe I'm missing something, but if OP contributed only post tax dollars, then he hasn't overused the tax free space. He just needs to file within limits, right?
              If we are talking about the Original Post. There are are special rules for using the "last month rule". If you do not remain an eligible individual for the entire following year, it is a testing period failure and the amount contributed in excess of their pro-rated limits is subject to ordinary incomes taxes and an additional 10% tax

              If you are talking about the most recent situation, it is an excess contribution that must be removed with earnings for be subject to a 6% excise tax penalty.

              These are both spelled out in IRS Publication 969 and well provided for in tax software.

              Comment


              • #8
                Originally posted by spiritrider View Post
                First, banish this term from your lexicon. A HSA is not any kind of IRA.

                You are either currently taking tax-free distributions for current qualified medical expenses or you are deferring those distributions to grow a LARGER HSA account for retirement. Even when an individual is >= age 65, they should almost never take taxable non-qualified distributions. Just because you can do something does not mean you should do something.
                1. Yes
                2. Yes
                3. Another 6% excise tax penalty
                Don't be too harsh, spiritrider, I learned it from our master: https://www.whitecoatinvestor.com/re...e-stealth-ira/

                In all seriousness, I am deferring the qualified medical expenses, and am not planning on using it as regular retirement funds.

                Thanks for the clarification, though, and pointing me to the IRS publication. I am leaning towards keeping the excess contributions in and reducing my contribution for this year. I just have to make sure I remember to do so. If I understand the IRS publication correctly, this is the language that addresses this situation (specifically the first bullet point):

                Deducting an excess contribution in a later year.
                You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the following two amounts.
                • Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
                • The total excess contributions in your HSA at the beginning of the year.

                Comment


                • #9
                  WCI is well aware of my distaste for this misleading and counter-productive term for what should almost always be used as a retirement HSA. With allowance for late-term estate planning, but should never be a focus during the accumulation stage.

                  If your average earnings percentage on the on the excess contribution is >= 6% (maybe even a little less), you are better off paying the 6% excose tax penalty and leaving the excess contribution and earnings in the account. This is also true with lower excess contributions where the excise tax penalty is < the fee to remove the excess contribution and earnings.

                  Comment


                  • #10
                    Originally posted by spiritrider View Post
                    WCI is well aware of my distaste for this misleading and counter-productive term for what should almost always be used as a retirement HSA. With allowance for late-term estate planning, but should never be a focus during the accumulation stage.
                    Hey, spiritrider - WCI is very well aware of the clickbait value of a "stealth IRA". Google the term and you'll see that you're fighting a losing crusade. Toothpaste is out of the tube.
                    Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

                    Comment


                    • #11
                      I know I am tilting at windmills with the term, but at least if I get a few people to understand that except for estate planning it is a monumentally bad idea to take non-qualified HSA distributions just because there is no early withdrawal penalty >= age 65. Especially, when there is no early withdrawal penalty for all their other pre-tax retirement accounts.

                      This term causes many people to take taxable non-qualified HSA distributions >= age 65, when they could have taken pre-tax retirement distributions, just because they can. Not realizing they are giving up many years of tax-free earnings on future qualified distributions. A significant majority of people will run out HSA funds before a non-spouse beneficiary would inherit them.

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