HSA Contribution Help Needed (Form 8889)

[TickTock]

Had the tax meeting with the CPA earlier today - the old CPA, who we've been using for ~25 years, retired last year and sold the business to someone new. The old CPA is very knowledgeable and forthright; I trust him. I conditionally trust the new CPA since the old one trusted to sell her the business, but... it looks like she doesn't understand HSA contribution rules and I'm not completely sure I have them completely right either. So here's the situation:

1. DW and I went from my employee healthcare plan to a qualified HDHP on April 1, 2024.
2. We made the family contribution of $8,300 and individual catch-up contributions of $1,000 each. Catch-up contributions went to our separate HSA accounts.
3. There is no qualifying HDHP plan in our area for 2025, so we can't use the "last-month rule".

My understanding of the rules is that we can only contribute 9/12*8300 = $6,225 as a family plus 9/12*1000 = $750 each as individual catch-up contributions for a total of $7,725.

Is that correct?

And how is that entered correctly on Form 8889?

 

[SevenUp]

Your numbers look correct. Have you read Instructions for Form 8889 (2024) and tried filling the forms (one for each of you) by hand?

Those instructions also include options for handling your overcontribution.

 

[MTB4me]

TurboTax handled my HSA situation just fine. Switched from a HDHP after 11 months to a non-HDHP plan in December. That’s when my COBRA ran out from my previous employer and I had to switch to Washington State’s ACA plan. I had contributed to my HSA assuming that I could find a reasonably priced HDHP in the WA ACA, but wasn’t successful. TurboTax asked the right questions and then recommended that I withdraw 1/12 of my HSA contribution before April 15. As far as I can tell, it properly filled out the associated forms. Received my federal refund last week, so all’s good.

 

[TickTock]

Your numbers look correct. Have you read Instructions for Form 8889 (2024) and tried filling the forms (one for each of you) by hand?

Those instructions also include options for handling your overcontribution.

Thanks! Turns out that was the crux of the matter - the CPA filled out one 8889 for DW and I combined, instead of one form for each of us. I was confused because I didn't see a way to add in the spouse additional contribution. So one form for me with $6,225 on lines 3 and 6 and $750 on line 7. A second for DW with $0 on line 6 and $750 on line 7.

 

[audreyh1]

Oops, CPA didn’t know that each had an HSA account and each needed to file a form?

 

[TickTock]

TurboTax asked the right questions and then recommended that I withdraw 1/12 of my HSA contribution before April 15. As far as I can tell, it properly filled out the associated forms. Received my federal refund last week, so all’s good.

Thanks! I'll withdraw the overcontributions before April 15.

Follow-up question: IRS publication 969 says

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
• You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

Did TurboTax provide any guidance on withdrawing income earned on the withdrawn contributions, or was it just a straight 1/12 withdrawal?

 

[TickTock]

Oops, CPA didn’t know that each had an HSA account and each needed to file a form?

CPA knew each had an HSA, didn't know that each needed to file a form, and also didn't know that HSA contributions are subtracted from AGI.

She did enter it correctly into her tax software, so it did show up on the 1040. I had to look at it and show her where it was...

 

[audreyh1]

CPA knew each had an HSA, didn't know that each needed to file a form, and also didn't know that HSA contributions are subtracted from AGI.

She did enter it correctly into her tax software, so it did show up on the 1040. I had to look at it and show her where it was...

Jeez! This can’t be an experienced person!

 

[SecondCor521]

Thanks! I'll withdraw the overcontributions before April 15.

Follow-up question: IRS publication 969 says

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
• You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

Did TurboTax provide any guidance on withdrawing income earned on the withdrawn contributions, or was it just a straight 1/12 withdrawal?

I don't know the answer about TurboTax.

But in terms of the question, the proper procedure is to contact the HSA custodian and request a return of excess contribution plus or minus related earnings. The HSA custodian will be able to calculate the adjustment properly for you according to the IRS rules.

When you do get the reimbursement, put the adjusted number (plus or minus earnings) on your tax return as Other income (I'd use Schedule 1 line 8z).

If you were contributing to your HSA through work, then those excess contributions escaped FICA taxation on the way into the HSA which is not recouped when being added back as Other income. This seems to be a very minor tax loophole that Congress probably didn't bother to close since it's not worth the added complexity to anyone to bother addressing.

 

[MTB4me]

Thanks! I'll withdraw the overcontributions before April 15.

Follow-up question: IRS publication 969 says

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
• You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

Did TurboTax provide any guidance on withdrawing income earned on the withdrawn contributions, or was it just a straight 1/12 withdrawal?

Well, Fidelity made it easy for me. They have a page specifically for requesting the return of excess contributions. I filled it out online and they returned 1/12 of my 2024 HSA contribution to my brokerage account, including the associated earnings (my HSA account is in a Fidelity money market fund). Easy-peasy.

 

[TickTock]

Thanks, SecondCor521 and MTB4me!

Our HSAs are in Fidelity. I found their location for withdrawing excess HSA contributions and the earnings calculation was done by Fidelity as part of filling out the form. Done!

​

 

[audreyh1]

Good to know even though we’re both over 65 and thus not contributing any more.

 

[tizod]

In 4 months I turn 65 and will go on Medicare and wife the next month. For 2024 I am wondering should I max my HSA contribution, as now I know I can can only prorate into 2025. I only have about 9K left in the HSA, and wonder with Medicare if bumping that to $17K makes sense. My Healthequity HSA invesment opportunities stink so I basically make naught there.

 

[SevenUp]

In 4 months I turn 65 and will go on Medicare and wife the next month. For 2024 I am wondering should I max my HSA contribution, as now I know I can can only prorate into 2025. I only have about 9K left in the HSA, and wonder with Medicare if bumping that to $17K makes sense. My Healthequity HSA invesment opportunities stink so I basically make naught there.

You can't contribute the full annual limit to HSAs in the year you start Medicare. E.g., if you turn 65 in July (and not the first of the month) then you may contribute only 6/12 of the maximum. Similarly, your wife would be limited to 7/12 of the maximum. See Form 8889 for the details.

 

[audreyh1]

In 4 months I turn 65 and will go on Medicare and wife the next month. For 2024 I am wondering should I max my HSA contribution, as now I know I can can only prorate into 2025. I only have about 9K left in the HSA, and wonder with Medicare if bumping that to $17K makes sense. My Healthequity HSA invesment opportunities stink so I basically make naught there.

It sure is nice getting the tax deduction and being able to pay for qualified medical expenses tax-free. You can roll your HSA over to another company that has good investment choices if that is what you want. A lot of people moved to Fidelity Investments as their HSA accounts are no-fees and have great investment choices.

Personally I would still max out to $17K and then spend it down.