I qualified for and fully contributed to an HSA for the last 5 years or so before retirement. I retired on 11/1/2020, but set up my HSA (and 401k) contributions to max out by my retirement date - including the additional “55 in a given year” amount. I didn’t realize at the time (though it makes perfect sense in hindsight) that I would not be eligible to contribute the max HSA amount in 2020, because you have to hold the qualified, high-deductible insurance plan for each of the 12 months. Otherwise, your max HSA contribution is pro-rated based on the number of months you held such a plan.
While doing my 2020 taxes in TurboTax, it alerted me to the overcontribution issue and advised me to withdraw the $1350 overcontribution by the 4/15/21 tax filing deadline. I did so, and TurboTax included the $1350 as taxable income for 2020.
This seemed to be the logical end of it until I received a 1099-SA from Fidelity (holder of my HSA) showing the $1350 withdrawal coded as a “Normal distribution” instead of an “Excess contribution”. This started my antennae wiggling, so I called Fidelity to ask how to get this corrected. The very polite and friendly representative eventually advised me that 1) I should have filled out a “Return of Excess Contribution” form back in 4/2021 instead of just transferring the money from my HSA to my checking account, and 2) The only way they could change the coding on the 1099-SA (which is reported to the IRS) would be if I filled out a “Return of Mistaken Distribution” form and returned the money to the HSA. However, this comes with the complication that I can no longer remove the overcontributed funds in a timely, non-penalty way since the deadline for doing so (for money contributed in 2020) has passed - even though I technically DID do it (on 4/5/21) and have already paid taxes on it with my 2020 tax return.
So, I guess I’m asking if anyone knows of a relatively simple way to address this way over-complicated situation (of my own doing). The one “positive” is that I had never gotten around to investing the money in my HSA after a change in HSA custodians six months or so before I retired, so any “Earnings” involved is just interest on cash and is therefore pretty insignificant. As I understand it, this is the only thing missing from the way I did it; i.e. if I’d filled out the “Return of Excess Contribution” form in the first place, it would have calculated a few cents of “Earnings” on the over-contribution.
When you took the money back out of your HSA, attempting to remove your excess contribution, did you pay taxes on that amount on your 2020 income tax?
If you did, I’d try asking Fidelity again - see if there is a way that this can be solved with just paperwork, rather than putting money back into the account, just to pull it out again. (Especially if the earnings on the over-contribution was less than $1.)
Worst case, I think the penalty is $81 (6% of $1350).
So you’d file amended return for 2020 if needed, and (maybe?) withdraw it now to avoid penalty for 2021 tax year. And if your income went down significantly from 2020 to 2021, maybe you come out ahead because you dropped on your top tax bracket from 2020 to 2021.
(probably not - but worst case, it’s a $81 lesson to check with the company professionals when moving money in/out of tax advantaged accounts.)
I’m not a professional - so take this with a huge grain of salt.
And if it makes you feel better, your post will hopefully make it so I don’t make the same mistake when I retire.
When you took the money back out of your HSA, attempting to remove your excess contribution, did you pay taxes on that amount on your 2020 income tax?
Indeed. I specifically withdrew the overcontribution amount before the 2020 tax year deadline in order to include it in my 2020 income.
Especially if the earnings on the over-contribution was less than $1
I just calculated the “Earnings” on my overcontribution - a whopping 63 cents!
And if it makes you feel better, your post will hopefully make it so I don’t make the same mistake when I retire.
And I hope that anyone reading this can take away a little piece of forewarning. It was such an easy trap to fall into!
Good luck
Thanks! I’m going to contact Fidelity again tomorrow to see if, as you said, there’s any way to correct this with just paperwork. If not, I hate to say it, but I’m leaning toward ignoring the distribution code on the 1099-SA since I essentially did everything right other than informing Fidelity of the type of distribution (i.e. removal of overcontribution rather than normal distribution).
I’m going to contact Fidelity again tomorrow to see if, as you said, there’s any way to correct this with just paperwork.
Well, for posterity, I’ll close out this thread. I contacted Fidelity with my sob story and how the only “missing” element in all this was the 63 cents in earnings. After leaving me on hold for a bit, the Fidelity rep came back with some good news! I’m to fill out the “Return of Excess Contribution” form and provide a “Letter of Instruction” to indicate my intent with the original withdrawal. I’ll also be sure to make it perfectly clear they are not to actually remove any additional money from the account. He said that Fidelity would then be able to issue a Corrected 1099-SA. Hurray for Fidelity customer service!
Draggon
(and hold times to reach an actual human was less than 5 minutes both times I contacted them)
I contacted Fidelity with my sob story and how the only “missing” element in all this was the 63 cents in earnings. After leaving me on hold for a bit, the Fidelity rep came back with some good news! I’m to fill out the “Return of Excess Contribution” form and provide a “Letter of Instruction” to indicate my intent with the original withdrawal. I’ll also be sure to make it perfectly clear they are not to actually remove any additional money from the account. He said that Fidelity would then be able to issue a Corrected 1099-SA.
Received my Corrected 1099-SA from Fidelity yesterday. Yay!
