Withdrawing HSA excess contributions?

Question

I just got married a couple of weeks ago. I have a self-coverage only HDHP through my employer, with an HSA funded by my employer ($3000 per year). My husband has a family-coverage HDHP through his employer, and self-funds his HSA ($6550 per year).

Now that we are married, I understand that we will face a penalty for excess contributions. I understand also that we can remove those excess contributions by the due date to avoid the penalty.

I called my HSA administrator to ask a few questions about how to do that, but I am confused. I have nearly depleted my HSA this year (all for medical expenses). The representative I spoke with stated that I could still withdraw my excess contributions even if my HSA is depleted.

How is that possible? I have spent the money already! If I choose to do this, what happens to this "money" that I withdraw? Where does it go (me, my employer, outer space)? What about the distributions that have been made already to my doctors, pharmacies, etc.? Will removing my excess contributions interfere with those payments in any way? She also mentioned that our excess contributions may be prorated over the length of time during which we were married for 2014. That would be just under 3 months. Does this mean I only need to withdraw approximately $750 (of money that isn't there anymore)?

Perhaps she misspoke or I did not make myself clear when asking my questions of her. Also, is it more prudent to pay the excise tax if the excess contributions are prorated or more prudent to withdraw the excess contributions?

Answer 1

Congratulations on getting married! As far as the IRS is concerned, you are a married couple for all of this year for tax purposes.

The 2014 HSA contribution limit for you and your husband together is $6550. This limit applies to both of you together, whether you file jointly or separately. So it looks like you and your husband have excess contributions this year. You'll need to withdraw some contributions, either in your account or your husband's account, to get under $6550 total for the year.

If you choose to take this money out of your account, since you have already spent this money out of your HSA, you won't actually receive a check from the withdrawal. Instead, the money that you have already spent will be recategorized from a normal HSA medical distribution to an excess contribution withdrawal. When you get your 1099-SA form from your HSA bank at tax time, the distributions will be coded as excess contributions distributions. In addition, the form will include the amount of any earnings (interest) that you received on your excess contributions.

At tax time, you'll need to examine your W-2 form from your employer closely. If the form does not include the amount that the employer HSA contribution in your taxable income, you'll need to add this amount as "Other income" on your taxes. You'll also need to include any earnings on the excess contributions reported on the 1099-SA.

Since your husband funds his own HSA and doesn't have any employer contributions to it, you might find it easier to withdraw the excess contributions from his HSA instead of yours. To do this, you need to tell his HSA bank that the withdrawal is an excess contribution withdrawal so that it gets reported correctly on his 1099-SA. There won't be any changes to his W-2, and the only "other income" he'll need to report is any earnings on the excess contributions from his 1099-SA.

The instructions for Form 8889, line 13 explain what to do in the event of an excess contribution (note: The text here is from the 2013 version of the instructions):

Line 13

If you or someone on your behalf (or your employer) contributed more to your HSA than is allowable, you may have to pay an additional tax on the excess contributions. Figure the excess contributions using the following instructions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the additional tax.

Excess Contributions You Make

To figure your excess contributions (including those made on your behalf), subtract your deductible contributions (line 13) from your actual contributions (line 2). However, you can withdraw some or all of your excess contributions for 2013 and they will be treated as if they had not been contributed if:

• You make the withdrawal by the due date, including extensions, of your 2013 tax return (but see the Note under Excess Employer Contributions, later),

• You do not claim a deduction for the amount of the withdrawn contributions, and

• You also 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.

Excess Employer Contributions

Excess employer contributions are the excess, if any, of your employer's contributions over your limitation on line 8. If you made a qualified HSA funding distribution (line 10) during the tax year, reduce your limitation (line 8) by that distribution before you determine whether you have excess employer contributions. If the excess was not included in income on Form W-2, you must report it as “Other income” on your tax return. However, you can withdraw some or all of the excess employer contributions for 2013 and they will be treated as if they had not been contributed if:

• You make the withdrawal by the due date, including extensions, of your 2013 tax return (but see the following Note),

• You do not claim an exclusion from income for the amount of the withdrawn contributions, and

• You also 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.

There are further instructions on what to do if you don't take care of this until a future year, but it is much better and easier if you take care of this before the end of this year, and handle it correctly on your tax return.

I believe that this is how it will all work; however, you'll want to confirm all of this with someone who knows what they are talking about and can look at your individual situation. Hopefully, this answer gives you enough information to be able to ask the right questions.