"The Pension Specialists" Blog

Email Guidance – Excess HSA Contribution

Q-1 We have a customer who made an excess contribution into his HSA account for 2018. The excess contribution was in the amount of $1,175. The customer only has $270.03 in his account so we can't have him withdraw the excess contribution. How do we handle that? Do we, simply send his 5498-SA and let him consult with a tax professional on how this will affect him or is there something else we should do?

A-1 The IRS has not furnished sufficient helpful guidance on the topic of excess HSA contributions. The bank should consider the approaches discussed below and then settle on its administrative approach. What is to be done when the HSA owner informs the HSA custodian that he or she has made an excess HSA contribution?

It is not clear to me if the contribution was made in 2018 for tax year 2018 or was made in 2019 for tax year 2018. For discussion. Purposes I am assuming it was made in 2018 for tax year 2018.

The bank is to prepare the 2018 Form 5498-SA and box 2 will be completed to report the total contribution amount made in 2018, including the excess amount of $1,175.

The HSA owner is responsible to complete the 2018 Form 8889 (and Form 5329) and explain that he made an excess contribution and whether or not it has been corrected by withdrawing the excess.

A person who has a normal HSA distribution will receive a Form 1099-SA with a reason code 1 for a normal distribution. A person who withdraws an excess HSA contribution will receive a Form 1099-SA with a reason code 2.

The bank should consider three approaches:

Approach #1. Have the person withdraw the $270.03 and then inform him that some of the 2018 distributions ($879.97) which were processed as normal HSA distributions were really the withdrawal of excess contributions and he/she or the tax accountant will need to explain to the IRS. Under this approach the bank does not modify the 2018 Form 1099-SA.

Approach #2. Will HSA contributions be made in 2019? One possible approach, the person makes a sufficient 2019 contribution and then withdraws the $1,150 (plus earnings) before 4/15/19.The bank will prepare the 2019 Form ·indicating the excess of $1,150 was withdrawn in 2019.

Approach #3. Have the person withdraw the $270.03 and also inform him that the bank is going to change the 2018 1099-SA which was prepared as follows. The bank will prepare two 2018 1099-SA forms. One form wil report $879.97 ($1,150- $270.03) as the withdrawal of an excess and the remainder as a normal distribution.

The bank would report the withdrawal of the $270.03 on the 2019 Form 1099-SA.

In order to get the 2018 1099-SA for the $879.97 the bank would change the transaction code for certain distributions from normal to excess. If the 2018 Form 1099-SA has already been mailed, a corrected form would need to be prepared with respect to the "normal" amount and a new Form 1099-SA would need to be prepared for the excess amount withdrawn in 2018.

CWF believes a person who has made an excess contribution and then withdraws such funds cannot complete their tax return to show the distribution was normal because it was not. The person was withdrawing an excess contribution.The IRS needs to furnish more helpful guidance.