In order to keep my insurance coverage through my husband's employer I was forced to sign up for my employer's High Deductible Health Plan. My employer knew I was keeping my other coverage but told me I could open an HSA account. I had no idea I was not really eligible for the HSA account until a few days ago. I have not made any withdrawals. How do I get rid of the HSA account without any penalties? Do I give the contributions from my employer back to them and if so, will I be taxed on the amount? The bank that holds the HSA has no idea what to do either.
The IRS Form 8889 instructions provide for a way to handle "excess contributions" and "excess employer contributions":
... you can withdraw some or all of the excess employer contributions for 2017 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 2017 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- You do not claim an exclusion from income for the amount of the withdrawn contributions; and
- You also withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
It goes on to say that you can still correct such a mistake up to 6 months after filing your tax return, if you follow its instructions and file an amended tax return.
It looks like you should report the excess contributions you withdrew from the HSA in Part II, Line 14a ("Total distributions you received in 2017 from all HSAs") and Line 14b ("Distributions included on line 14a that you rolled over to another HSA. Also include any excess contributions (and the earnings on those excess contributions) included on line 14a that were withdrawn by the due date of your return") but you should not report them as contributions in Part I because they are being treated as if they had not been contributed.
Note, however, that I'm not 100% sure if this procedure applies to your situation.