Accidental HSA Contribution to Previous Year

Question

Never previously being eligible for an HSA, I switched to a new health care plan with an HSA effective at the start of 2019. I made a couple of contributions at the beginning of the year. Some time recently, long after taxes were filed (where I didn't report any 2018 contributions since I didn't intentionally make any), I noticed that one of the contributions I made somehow went to tax year 2018. There's no way I would have intentionally made a contribution to the previous year (where I wasn't HSA eligible), and I'm surprised the provider even allowed it to happen.

Moving forward, I realize that there may be a tax penalty, and I'm wondering what I need to do in order to correct or minimize the situation.

Do I need to:

• Take any action immediately? Can I do anything to revert it or is it too late?

• Report it when filing 2019 taxes

• Do nothing/wait

Edit: I called the HSA's support line. They said it should show up as resolved by the end of the week. I'll edit this again if it works out.

Answer 1

Presumably your 2018 tax return has no mention of the HSA contribution that was mistakenly associated with 2018, and your taxable income was not reduced by that amount. Also, presumably the sum of all of your 2019 contributions plus the errant 2018 contribution is still under the HSA contribution limit for 2019. If both of those statements are true, from a high level view, my guess would be the IRS would take the position of "no harm, no foul", as your tax liability would not be affected by this mistake.

You still should contact your HSA provider and request that they correct the 2018 contribution to count towards 2019, and then you should report the new corrected amount of 2019 HSA contributions (and all distributions) when you file your 2019 return.

Answer 2

I'm surprised the provider even allowed [ineligible contribution] to happen.

How would they know? Unless both the old and new health plans and the HSA are managed by your employer -- which is reasonably common but by no means universal or required -- the HSA trustee has no way of knowing whether you were eligible to contribute for the prior year, and if so how much. They don't know for the current year either, except for the highest possible limit (2019 family 12 months $7000, possibly plus extra $1000), and every plan I have used or looked at (not through an employer) has had in their terms and conditions that you the accountholder (aka taxpayer) are responsible for correctly determining your contribution limit and enforcing it.

1. If they accepted a contribution as prior-year in the permitted period (Jan. 1 to April 15), they were required to furnish you a 5498-SA (or an updated one) for that year by May 31 this year, and also file it with IRS. Did they? That should have given you an opportunity to fix this earlier and probably cheaper.

2. If they didn't actually file the 5498-SA for this, they might still be able to change the designation to 2018 as you want (even though I don't think they're supposed to) and then, assuming your total contributions were okay, you're golden. You might as well ask.

3. Normally, you can correct an excess contribution up to "the due date, including extensions" by withdrawing the excess amount, plus any earnings attributable to it. Then for tax purposes the contribution was not made at all (and thus not deducted or excluded), and the earnings are ordinary income in the year withdrawn. The trustee will have a specific procedure (form(s) or webpage(s)) for this, different from the normal procedure to take a distribution to pay for qualified expenses (or unqualified expenses without the tax benefit), because it must be accounted and reported differently. Pub 969 isn't specific whether "including extensions" are only those you actually got, or those you could have gotten, but for IRA, which is similar in many but not all respects, pub 950A is clear that a similar provision is always April 15 plus 6 months = Oct. 15 even if you actually filed at the normal time. However, you've now missed even Oct. 15.

4. Thus, if you can't get them to fix it per 2, you must report this as an excess contribution on form 5329 for 2018 and pay 6% excise tax; in principle this tax was due April 15 so you owe penalty and interest for paying it late, but AFAICS those will be only a few dollars, which they might not bother billing and collecting. 5329 is normally attached to your 1040 (virtually so when e-filing), or filed standalone if you aren't required to and don't choose to file 1040. Here it should have been attached but wasn't, and it's not clear to me if you must file it with a 1040X (amended return) that doesn't actually change anything on your 1040, or can file standalone; to be safe I'd go with the former.

   Having done that, you can now treat the excess-for-2018-carried-forward as deductible in 2019, as long as when combined with the other contributions it doesn't exceed your limit, which I assume you already arranged because you intended it to be a 2019 contribution in the first place.

Good luck.