How do i correct an HSA contribution on my taxes?

Question

In March of 2021 I deposited $8000 into my HSA account but am now being told by my custodian that it went toward my 2021 contribution, not the 2020 as I intended, which follows the same pattern I have established over the past few years.

They say it's too late to redirect it as a contribution for the 2020 tax year because it was deposited in March of 2021. However, I claimed that $8000 as an HSA contribution when I filed my 2020 taxes.

Would the IRS allow me to correct this deposit with the custodian to show it being contributed in 2020, or do I have to amend my taxes to show no contribution for 2020?

I can't use it for 2021 because my husband goes on Medicare in May and I in December, so after prorating our eligible HSA contributions, we will have contributed a few thousand in excess.

To make matters worse our HSA custodian, per our request, processed ANOTHER $8000, which basically has nowhere to go (our intention was to have it go toward our 2021 contribution) and would create a situation where it would be very much in excess of the allowable contribution. This custodian also states they cannot stop the deposit nor put a freeze on my account to refuse the incoming deposit.

Any advice? Thank you!

Answer 1

A lot of things to unpack here...

2020 contribution issue

The IRS has Pub 969 that details a lot of things with regards to HSA contributions. Among other things it says that you're allowed to make contributions up to April 2021, and you made your contribution in March 2021. You should be OK.

The fact that the custodian didn't attribute it to the right year is annoying and may prompt questions from the IRS, but while annoying - doesn't have to be your problem. You did nothing wrong, their response is incorrect. You can refer them to the Pub 969 that says this:

When To Contribute

You can make contributions to your HSA for 2020 until April 15, 2021. If you fail to be an eligible individual during 2020, you can still make contributions until April 15, 2021, for the months you were an eligible individual.

You deposited it within the allowed time period, and you reported it properly on your 2020 tax return.

The IRS will have trouble matching your tax returns to your custodian's reports and may issue a threatening letter with questions - you'll deal with it if and when you get it and will respond with the explanation that you presented here and proper documentation to support it and you'll be fine. You may want to pay for a couple of hours of CPA's/EA's time to help you there.

2021 contribution issue

For the additional $8000 you've contributed in 2021 - you'll have an "excess contribution" issue. Once you can calculate how much you were allowed to contribute, considering the medicare coverage, you can ask the custodian refund you the rest.

Here's what Pub 969 has to say on that:

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.

If you don't withdraw the excess according to this terms, you'll be liable for 6% excise tax yearly until you do.

Answer 2

I have been in a similar situation myself.

In general, if you want to make a prior year contribution, your custodian needs you to explicitly tell them that the contribution is a prior year contribution, so they can report it as you intend. They are not allowed to accept contributions over the maximum for a year, so if they accept your contribution in March 2021 and consider it a 2021 contribution (they have no way of knowing it was supposed to be for 2020 if you don’t tell them), they will think you are (nearly) maxed out for 2021 and won’t allow you to contribute more in 2021. It is too late for them to change their records, because they have already reported the 2020 contributions to the IRS in April of 2021.

You didn’t know this, so you considered this a 2020 contribution and claimed it as such on your 2020 tax return.

You could amend your 2020 return, removing the claimed contribution. This would result in more tax due. If you went this route, you would need to remove most of that March 2021 contribution from your HSA (along with any earning that resulted) using an Excess Contribution Withdrawal, due to the fact that you are not eligible for most of 2021.

However, I suggest that you do what I did in your situation: Leave your old tax returns alone and consider your contribution to be in the tax year you intended, even if the bank doesn’t. In the rare event that you get audited, you can tell the auditor that you intended that contribution to be for 2020, and that your tax return is correct if the contribution is applied as intended.

For your latest $8000 contribution (you mentioned “our IRA custodian,” but I’m assuming you meant that this was also going into your HSA), you’ll need to remove this using an Excess Contribution Withdrawal. It doesn’t matter whether they consider that contribution to be for 2021 or 2022; you just need to tell your custodian that it is an excess contribution and they will send it back to you along with anything it has earned.