Fuly funded 2020 HSA, then lost insurance

[GLJEANNE]

Has anyone run into this before, during a normal year?  I have a couple clients who normally fund their HSAs in full in January, but now they've lost their jobs and insurance.  At least one has low prospects of getting another job any time soon (non-essential industry). 

Is this just handled the same as excess IRA contribs would be?  At this point, I've told them both to leave it for the time being, in hopes that further COVID legislation might address it.

[jklcpa]

The excess contribution and any earnings can be withdrawn before the due date of the return. Page 5 of the instructions for From 8889 covers this.   Look at the section " Excess Contributions You Make".

[GLJEANNE]

Ok, so just like IRAs.  But I'll probably have them leave it for now, if they can afford it, and wait til the end of the year to withdraw it; hopefully they'll get new jobs and become eligible for it again.

[Max W]

Unless the clients are over 65, there is a 20% penalty for non-medical withdrawals.  HSA accounts are portable and can be used for self-employment.

On the other hand, it may not be there at the end of the year, or it may be frozen.  We are in totally uncharted waters now and another Lehman Bros type event could be even more devastating than before.

[jklcpa]

40 minutes ago, Max W said:

Unless the clients are over 65, there is a 20% penalty for non-medical withdrawals. 

No penalty if the withdraw is for the excess contribution and any earnings on it.  It's as if the excess was never in the account.  Total distributions including any excess and related earnings withdrawn would be entered on form 8889, line 14a.  Then the amount of the excess contribution and its earnings that were withdrawn would be reported on 14b,  distributions for qualified medical expenses on 15. Any earnings withdrawn are reported as "other income."

So we're all on the same page, below are instructions from Form 8889 that I referred to earlier.  The instructions for Form 5329, line 47 say the exact same thing too.

Quote

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 2019 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 2019 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 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 2019 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 2019 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.

Note.

If you timely filed your return without withdrawing the excess contributions, you can still make the withdrawal no later than 6 months after the due date of your tax return, excluding extensions. If you do, file an amended return with "Filed pursuant to section 301.9100-2" written at the top. Include an explanation of the withdrawal. Make all necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).

 

 

[Max W]

Judy, thanks for all your research.  I cringe every time I see form 8889.  I think it is the worst form in the entire arsenal for individual returns.