This question was submitted by HSA Edge reader Sue. Feel free to send in your question today to evan@hsaedge.com.
I made a contribution on 12/29/16 of $3,000, however, I was not HSA eligible in 2016. How can that be corrected to reflect the correct tax year of 2017? The trustee could not correct it. Should my CPA refile 2016 taxes to report the correction?
Excess Contributions
HSA excess contributions occur when an amount greater than the account owner’s contribution limit is contributed to the HSA. It sounds like you made an excess contribution in 2016 as you were not HSA eligible. While you would like to move that contribution for 2017, it is currently September of 2018, so that tax year is likely closed.
Generally, the remedy for excess contributions is for the account owner to remove the excess contribution from the account before taxes are filed taxes for that year. This can be done on Form 8889, see “Correcting HSA Excess Contribution on Form 8889“. I don’t believe the custodian can fix it for you. That would involve them saying, “This contribution wasn’t for 2016 it was for 2017”. I don’t believe they can roll a contribution forward like that. The only time they can do that is to reclassify a contribution as a prior year contribution, as in, “This 2018 contribution was made before my tax deadline (contribution cut off) and I want it to reclassify it as a 2017 prior year contribution”.
To avoid headaches, remove Excess Contributions in the year they occur.
In your case, since that excess contribution removal did not happen, you may have misstated your 2016 tax returns if you did not pay taxes on that HSA contribution. Said another way, you likely took the HSA deduction on $3,000 when your contribution limit was $0 as you were not HSA eligible. This means you underpaid taxes on that $3,000 of income in 2016.
Leaving Excess Contributions in your HSA
The IRS imposes a penalty for leaving excess contributions in your HSA. This is called the excise penalty and amounts to 6% of the excess contribution per year it remains in the account. Per Form 969:
Generally, you must pay a 6% excise tax on excess contributions (see Form 5329). The excise tax applies to each tax year the excess contribution remains in the account.
So besides having tax deduction headaches, the IRS throws in a yearly penalty on the amount of the excess contribution.
Correcting Prior Year Excess Contributions
Correcting prior year HSA excess contributions involves moving the contribution from when it was excessive to when it was allowed. However, this tricky because it affects tax forms and involves both 1) correcting tax deduction (i.e. paying taxes) and 2) paying the 6% excise penalty in prior years. The procedure is to go back to the source, pay any taxes on the excess contribution, pay any penalties up until contribution is allowed, and then take the contribution in the allowable year. You will receive the HSA deduction when you remake the contribution, so that at least offsets paying the taxes in the prior year.
Correcting prior year HSA excess contributions involves moving the contribution from when it was excessive to when it was allowed.
In summary, I believe the way to correct your situation is to:
- Restate 2016 income tax form to remove HSA deduction
- Pay 6% excise tax on excess amount in HSA in 2016
- Pay 6% excise tax on excess amount in HSA in 2017
- Take deduction for contribution in 2018 for amount already in HSA, assuming you still have HSA coverage.
[Note that if you filed an extension for 2017 you may still be able to make the HSA contribution for that year and avoid #3 above.]
Deduct Excess Contribution in a later year
Form 969 also allows you to deduct the excess contribution in a later year. This means that you made an excess contribution in a prior year, did not take the tax deduction then, left it in your account, and later use that amount as a valid contribution in a later year. You thus receive the tax deduction for that year. This option is utilized in step #4 of the solution above. Form 969 states:
You may be able to deduct excess contribution for previous years that are still in your HSA. The excess contribution amount you can deduct for the current year is the lessor of 1) Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year and 2) the total excess contributions in your HSA at the beginning of the year.
Note: if you need help excess contributions this year, please consider using my service EasyForm8889.com to help complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.
