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How to Handle Excess Contributions on HSA Tax Form 8889

Overview

Excess Contributions occur when you contribute more to your HSA than you were allowed. This compares your contribution limit for the year (which can vary on many factors) and the actual amount of money that came into your HSA, including such things as Employer Contributions, Qualified Funding Distributions, and Prior Year Contributions. That being said, if you find yourself in a situation facing Excess Contributions, you may find it a challenge come tax time when you are faced with Form 8889. Fear not, as this article will guide you through how to avoid taxes and penalties and get this IRS required tax form filed.

Include the Excess Amount in Contributions

Part I of Form 8889 is appropriately called “Contributions”. It details amounts contributed to your HSA, your contribution limit, and calculates the deductible amount that flows over to Form 1040. It will feel strange, but you want to include all amounts contributed to your HSA, even if they are in excess. Doing so accurately reflects the account activity, so that when your HSA custodian provides Form 5498-SA to the IRS, the amount contributed will match your Form 8889. Remember, there is no taxes and penalty for having excess contributions in your HSA, if you remove them (and any earnings) before your tax filing deadline. The point is it is OK to show excess contributions in the contribution section of Form 8889, the key is that you have to proactively take care of them.

Example: Excess Contributions on Form 8889 Part I – Contributions

In this example we contributed $4,850 (contribution, employer contribution, and funding distribution) to our HSA. However, our contribution limit was only $3350, leading to an excess contribution of $1,500. The key is that we have included all contributions that caused the excess contributions and lived to tell the tale.

An example of 2016 Form 8889 prepared by EasyForm8889.com

HSA_excess_contribution_form_8889_1

Notice the warning at the bottom that states:

“Caution: If line 2 is more than line 13, you may have to pay an additional tax (see instructions).

Our Line 2 ($4,350) is indeed greater than Line 13 ($2,850), so we are at risk of paying excess tax. However, per the instructions, if we remove the excess contribution and any earnings on it before the tax deadline, we owe no taxes or penalty:

HSA_Excess_Contribution_instructions

To rectify this scenario, we would need to log into our Health Savings Account and request a distribution that specifically states it is a removal of an excess contribution for 2016 (see next section). You must specify this so that they don’t code it as a regular distribution for qualified medical expenses. In the above example this would be for $1,500 coming back out of the HSA. We will account for that removal in the next section.

Include the Excess Amount in Distributions

Part II of Form 8889 is called “Distributions” and details money that came out of your HSA. Similar to the logic stated in Part I, we need to be transparent about the excess contribution to avoid the ire of the IRS (and taxes and penalty). We will do this by 1) counting the removed excess contribution as a distribution and 2) calling it out as a distribution due to excess contribution. Again, you need to remove excess contributions (and any earnings) from your HSA before the tax filing deadline, and doing so creates a distribution from your HSA.

To actually remove the excess contribution, you need to go to the website of your HSA custodian and create a distribution for the excess contribution. When you do this (important), there should be a box stating “I am removing an excess contribution from my HSA”. This differentiates the distribution from one being used for qualified medical expenses, and informs your HSA custodian how to code the distribution on Form 1099-SA. If you correct the excess contribution before tax year end, this distribution will be reported on that year’s Form 1099-SA. If you do this in the following year (say, Jan-April 15th, before tax day), your HSA custodian may or may not send you a 1099-SA for the distribution before tax day. If they don’t, you need to keep that distribution of excess contributions in mind for filing taxes.

Example: Excess Contributions on Form 8889 Part II – Distributions

Reporting this activity on Form 8889 is relatively easy, as there is a mechanism in Line 14 that handles excess contributions for us. Back to our example of a $1,500 excess contribution that was removed, our Form 8889 ends up looking like this:

An example of 2016 Form 8889 prepared by EasyForm8889.com

HSA_excess_contribution_form_8889_2

Line 14 has 3 parts that we use to detail our distributions. We include the excess contributions removed in this total amount, and call out the amounts that were removed due to excess in 14b. The breakdown of line 14 is below:

Line 14a – The total amount of distributions for the year, including those for excess contributions and their earnings
Line 14b – Distributions that were for excess contributions and their earnings
Line 14c – A calculation of distributions that should have been spent on qualified medical expenses

As you can see, excess contributions avoid taxes here because they are excluded from Line 14c. If any amounts in 14c are not spent on qualified medical expenses, they are taxed and penalized. We stated that $300 that we normally distributed was spent on qualified medical expenses, by tracking our receipts in a tool like TrackHSA.com. The takeaway from the above logic is that the IRS does not expect you to spend excess contributions on QME, and does not tax or penalize you on these distributions if they are handled properly.

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Note: if you want step by step instructions for your Excess Contributions on Form 8899, or just want to get it right the first time, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation may be.

How to File Form 8889 For Your Old HSA Funds When You No Longer Have HSA Coverage

This was a reader question submitted by HSA Edge reader Beata. If you have a question get in touch and we’ll try to help. Email us at evan@hsaedge.com any time.

I was no longer under the High Deductible Plan with my new employer in 2017, however I had some left over funds in my HSA account from my previous employer. No contributions were made in 2016.

I used up all the funds in 2016 for qualified medical expenses. Do I skip parts I and III on the form and just fill out part II about the distributions?

Overview

This is a pretty common scenario that occurs as life goes by and people change insurance coverage. Frequently, people who previously had and contributed to an HSA eventually change coverage to a non-HSA eligible plan, due to a job change, insurance change, or life event. One of the great benefits of Health Savings Accounts is that the money remains yours forever, even if your coverage changes. This contrasts with other health plans like FSA’s where there is a “use it or lose it” clause on the plan, forcing you to predetermine a contribution amount and spend it in the year. Thus, the good news is you still have your HSA funds to spend on qualified medical expenses, but how do you file HSA tax Form 8889?

If You Spent Funds, You Need to File Form 8889

First things first, you definitely need to file Form 8889 if this situation applies to you. Even if you had the HSA plan 10 years ago, and are no longer contributing to the account, as long as you are spending funds from the HSA the government wants to know about it. The hard and fast rule is if money is going into or out of your Health Savings Account, you need to file Form 8889 for the tax year in which that spending occurred. This form is due by your tax filing deadline, and can be extended if extension is filed. It will be best just to file it with your regular taxes.

Note that if you don’t contribute to or withdraw from an HSA in a given year, you likely do not need to file Form 8889 for that year.

What follows is a summary discussion of filing Form 8889 if you no longer have HSA coverage but spent old HSA funds this year. More detailed information can be found about How to File Form 8889.

Part I – Contributions

Form 8889 consists of 3 parts, and the first one should be fairly straightforward. It’s main focus is determining your contribution limit and the amount you (and others) contributed during the year. Since the topic of this post is that you no longer have HSA coverage (but have funds in an HSA account), you will neither have 1) a contribution limit or 2) (allowable) HSA contributions. As such, this section will be all $0’s, which logically follows that your deductible amount (Line 13) will also be $0 and flow over as such to Form 1040.

Part II – Distributions

The second part of Form 8889 details the funds that exited your HSA, and this is where you will have to do some work. Line 14a and 15 are the main tasks here, and they are asking “How much exited your HSA” and, “How much did you spend on Qualified Medical Expenses?”. Ideally, both of these amounts should be the same: any money I withdraw from my HSA should be spent appropriately. If that is the case, you will face no taxes and penalties, but as you can see in subsequent lines 16 and 17b, any delta between those numbers will be taxed and penalized.

This 2016 Form 8889 was prepared by EasyForm8889.com.

Form_8889_Part_2_HSA_Distributions

Part III – Taxes & Penalties

Part 3 of Form 8889 involves a calculation of various taxes and penalties you might owe. These can arise from failure to comply with the Testing Periods set forth in the Last Month Rule and Qualified Funding Distributions. Hopefully, these do not apply to you if you are simply spending remaining funds from an old HSA. If so, this section will be blank and you can just add $0’s there as well.

However, if you recently ended insurance and in the prior year 1) utilized the Last Month Rule to increase your contribution or 2) utilized a Qualified Funding Distribution from a IRA/Roth IRA, you could be in trouble. Both of these contain a Testing Period that stipulates continued HSA eligibility conditional with their use, in an effort to prevent tax abuse. If you fail to maintain coverage for the specific Testing Period, your contribution is considered “excessive” and will be taxed and penalized for the tax year in question. It is best to fully understand these rules before engaging them, and if you are facing a penalty, thoroughly review how they are calculated or use a service like EasyForm8889.com.

2016 HSA Form 8889 – Instructions and Example

As tax season for 2016 falls upon us, the IRS has released the 2016 version of Form 8889, the official form for HSA tax reporting. Notably, as of January 15th, the 2016 HSA Form 8889 instructions have not been released. However, you should be able to get by with the 2015 instructions – just keeping in mind that a few contribution maximums have changed.

I have created the following video to walk through changes and an example for 2016’s Form 8889. Check it out, otherwise, the transcription of the information is below.

Watch on Youtube: HSA Last Month Rule and Testing Period

In the following article we will cover:

Changes to 2016 Form 8889
2016 HSA Contribution Limits
2016 HDHP Definitions
2016 Form 8889 instructions and example

Changes to 2016 Form 8889 tax form

For those of you who have filed HSA taxes before, you won’t notice much change in the 2016 version of Form 8889. Obviously the tax year of the form has incremented, so just verify you have the correct form which says “2016” in the upper right hand corner. The main difference reflects the maximum contribution limit increase for family coverage, from $6,650 to $6,750. This is indicated on Line 3 which is used to determine your contribution limit. It is assumed that when the IRS updates the 2016 instructions, they will include this update in the calculations for more complicated (e.g. partial year coverage) situations, which are explained there.

2016 Form 8889 Family Contribution Amount

Pretty minor, but you will also notice year updates throughout the form. For example, you see this in “Part II – HSA Distributions” section, where in Line 14a they state that we are concerned about distributions occurring in tax year 2016:

2016 Form 8889 distribution section year change

There were also some changes to HDHP definitions in 2016 so read on if those apply to you.

Changes to 2016 Form 8889 instructions

At this point the 2016 Form 8889 instructions have not been released, but we will check for changes in methodology once they are available.

2016 HSA Contribution Limits

For family coverage, the maximum contribution limit increased by $100 to $6,750 in 2016. The IRS defines the maximum amounts that may be contributed to a Health Savings Account each year. Per IRS Publication 969, the 2016 HSA contribution limits are:

The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you became an eligible individual, and the date you cease to be an eligible individual…for 2016, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage you can contribute up to $6,750.

Here are HSA contribution limits for years 2014, 2015, 2016, and now 2017 since it has been released:

	2014	2015	2016	2017
Self-Only HSA Contribution Limit	$3,300	$3,350	$3,350	$3,400
Family HSA Contribution Limit	$6,550	$6,650	$6,750	$6,750
55+ Additional Contribution Limit	+$1,000	+$1,000	+$1,000	+$1,000

So the cap or maximum contribution amount to your HSA is $3,350 for self-only coverage and $6,750 for family coverage in 2016. Note that this does not include the additional 55+ catch up contribution of $1,000 allowed to properly aged HSA holders. Thus, if you are over 55 on or before the end of 2016, you can contribute $4,350 for self-only coverage or $7,750 for family coverage.

2016 HDHP Definitions

To qualify as an HDHP, your health plan cannot exceed an out-of-pocket maximum limit established by the IRS. For 2016, the out-of-pocket max was increased for both self-only and family coverage. Self-only increased $100 to $6,550 while family increased $200 to $13,100. Plans with an out-of-pocket max that exceeds these amounts are not HSA eligible. The IRS defines what constitutes an HDHP (High Deductible Health Plan), which is a prerequisite for contributing to an HSA. Again, you can see the HDHP definitions in IRS Publication 969 for 2016. The HDHP definitions for 2014, 2015, 2016, and 2017 (because they are now available) are summarized below:

	2014	2015	2016	2017
Self-Only Min Deductible	$1,250	$1,300	$1,300	$1,300
Self-Only OOP Max	$6,350	$6,450	$6,550	$6,550
Family Min Deductible	$2,500	$2,600	$2,600	$2,600
Family OOP max	$12,700	$12,900	$13,100	$13,100

2016 HSA Form 8889 example

Let’s walk through an example of the 2016 Form 8889 to show how it works.

Let’s assume I am a 30 year old who had self-only, HSA eligible coverage from January – June of 2016 (6 months). On July 1st, I changed to a non-HSA eligible plan. I contributed $1000 to my HSA and my employer contributed $250. I distributed $500 from the HSA during the year, all of which I spent on qualified medical expenses.

Part I – Contributions and Deduction

Form 8889 starts off pretty simply on Line 1 by asking the type of insurance you had (mostly) during the year. For this example, it is self-only. Line 2 then goes on to ask how much you contributed to your HSA during the year. In our case this was $1000, which does not include employer contributions. Line 3 can be quite complicated, but in essence you need to list your contribution limit for the year. If you had self-only or family coverage all year, the amounts are provided for you. Otherwise, you need to prorate your coverage by month. In this case, we had self-only coverage for 6 months, so our contribution limit is $1,675 for 2016. Line 4 asks about Archer MSA’s (does not apply here) and Line 5 is a simple subtraction.

[Note: all 2016 tax forms were generated in minutes using EasyForm8889.com]

2016_Form_8889_part_1_contributions

We continue with Line 6, which for self-only filers is just Line 5, but family filers where both spouses have HSA’s have the option to distribute part of their contribution limit to each account. For some situations, Line 7 adds the $1,000 catch up contribution, but our example assumes the HSA holder is 30 years old so this does not apply. Line 8 is simple subtraction, and the $250 employer contribution comes into play on Line 9. If you contributed to your HSA from an IRA you would indicate that on Line 10, and Line 11 is simple addition. Line 12 is subtraction, and Line 13 does a comparison to calculate what your 2016 HSA deduction is, which makes its way to Form 1040. In our case, it is the $1,000 we contributed to the HSA.

Part II – Distributions

The second part of the 2016 Form 8889 deals with distributions, or amounts that came out of your HSA. We assume that we distributed $500 from the HSA, so that amount is shown on Line 14a. Line 14b lists rollover amounts and excess contributions removed, and Line 14c subtracts them out. The filer tracked his qualified medical expenses and receipts using TrackHSA.com this year, so he can easily prove all $500 were legit and puts that value in Line 15. A subtraction occurs on Line 16 to determine any amounts not spent on qualified medical expenses; luckily that is $0 for us. If you had an amount on Line 16, Line 17a gives you the chance to exclude this from taxation. Otherwise, that Line 16 amount is taxed 20% on Line 17b, which gets recorded on Form 1040.

2016_Form_8889_part_2_distributions

Part III – Penalties and Taxes

For most people, Part III will look a lot below: all zeroes. This is good, but it is possible that you have accrued some taxes and penalties. If in the prior tax year, you 1) used the Last Month Rule and proceeded to 2) fail its Testing Period, a difficult calculation awaits you on Line 18. You are going to have to go back, figure out how much you contributed in the prior year, redetermine what you could have contributed, and place the difference here. On a similar note, if you made a qualified funding distribution from your IRA but failed its Testing Period, you will have to enter the amount that failed in Line 19. Once that is done, Line 20 adds Line 18 and Line 19 and adds it back to income (where it is taxed) on Form 1040. Finally, for good measure, Line 21 assesses a 10% penalty against the amount on Line 20, which also makes its way to Form 1040.
2016_Form_8889_part_3_penalties

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Note: if you have an HSA, please consider trying my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, receipts, and reimbursements securely online in the cloud.