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Visitor III

2016 Excess contribution (dist code :2) reporting in 2017 taxes

Hello

 I had excess contribution of $135 for tax year 2016 but was withdrawn as distribution after  April 17 ,2017. In my case we visited a medical office associated with my employer - they mistakenly charged us (it is supposed to be free charge up to $1000 dollars per family) and refunded the $135 (which amounted to the excess contribution). The amount is listed as distribution code 2 in my 1099-SA.

I read the pub 969 from IRS but could not figure out if I should pay the 6% excise tax or if I should characterize this as a normal distribution that is not used for medical expenses (20% tax + ordinary income).

Currently TT has calculated 6% excise which is about $8 (which goes on line 59 of form 1040).  Will I have to pay the 6% excise tax every year until this about is in the HSA account - in my case I just have to pay it in the 2017 taxes and I should be done right (since the amount was withdrawn on May 5 2017).

anything else I should do or am I done taking care of this excess contribution ? thanks much !

FYI - I don't have medicare but have a HDHP via employer for the family.

5 Comments
TurboTax Specialist

2016 Excess contribution (dist code :2) reporting in 2017 taxes

Correct. The 6% tax is accessed for each year that the excess remains, so if you have removed it then there should be no penalty tax going forward.

Visitor III

2016 Excess contribution (dist code :2) reporting in 2017 taxes

Thanks Paula

 

But the excess contribution withdrawal for 2016 that was withdrawn after 4/17/2017. I guess the amount rolls over into 2017 contributions (2017 HSA family contribution was maxed out at $6750  without the excess contribution from 2016 rolling over)
 
I am assuming the 6% excise tax will have to be paid on the lesser of {total value of HSA on Dec 31,2017 or HSA rollover excess contribution = $ 135 )
 
TT calculates the 6% excise tax on $135 as $8. I am presuming it would only be payable for 2017 taxes and not be applicable for 2018 since the excess amount is withdrawn in the 2017 tax year.
TurboTax Specialist

2016 Excess contribution (dist code :2) reporting in 2017 taxes

I am trying to understand how your situation is an "excess HSA contribution". Did you or your employer contribute dollars to your HSA in 2016? Was that amount in excess of the annual limit ($3350 or $6750 in 2016 - done from memory)? If not, you probably did not have an excess contribution.

 

What it sounds like is that you had a "mistaken distribution", that is, you took money out of the HSA which you did not mean to (because you weren't supposed to pay for it anyway). In this case, the proper procedure would have been to contact the HSA administrator, report a mistaken distribution, fill out a form, and send the check (from wherever you got it - the medical office?) to the HSA administrator. That would have been the end of it.

 

However, now you have asked for the return of excess contributions (when I don't think there were any), and worse, did not do it until several weeks after the due date of the return. Did you file an extension for 2016? If you did, then you would have had until October 2017 to withdraw the excess...except that there was no excess.

 

What to do now? You did receive a check for $135, right? And you sent it to the HSA which you thought made for an excess contribution, right? I suggest that you call the HSA and say that there was a misunderstanding (at least on your part) and that that check should have been part of a mistaken distribution, not a contribution at all.

 

While they probably can't/won't go back and fix the 2016 paperowrk, you may discover that this is what they thought all along, which would solve your problem.

 

You asked for the $135 to be sent to you, right? And it was sent in May, 2017, right? And you got the 1099-SA for this in early 2018, right? Was the distribution code for this '1' or '2'? Furthermore, was this $135 lumped in with other distributions that you made for qualified medical expenses in 2017?

 

Before I go any farther, let me step back and see if this describes your situation...

Visitor III

2016 Excess contribution (dist code :2) reporting in 2017 taxes

Hello Calpin

Yes 2016 total contribution for the family HSA was in excess of $6750 - the total contribution amount was $6885 ($135 excess which was withdrawn in May 2017). 

 

For tax year 2017 the contribution to the family HSA was maxed out as well - $6750

 

I received 2 separate 1099-SA. One with dist code 1 and other with dist code 2 (excess contribution) for the $135 and $0.18 as the earnings of the excess contribution.

 

does this answer your questions regarding my situation ?

TurboTax Specialist

2016 Excess contribution (dist code :2) reporting in 2017 taxes

Apparently, your HSA administrator accepted your withdrawal of excess contribution as an actual “return of excess contributions” made by the deadline (perhaps they thought that you had extended your 2016 return). This is shown by the 1099-SA received in early 2017 with the distribution code of ‘2’.

 

If so, then you should have told TurboTax on your 2016 return that you would withdraw the entire excess by the due date of the return. If you did, then there was no 6% penalty, because that penalty is assessed only on the carryover of excess contributions to a new year, not when the excess is withdrawn. So did you tell TurboTax that you would withdraw the excess or not? You must have told your HSA administrator that you wanted to withdraw an excess contribution or else you would not have received a 1099-SA with a code of ‘2’.

 

And on your 2017 tax return, when TurboTax asks you if you “overfunded” your HSA in 2016, you should answer “no”, because withdrawing the excess in a timely manner (as the HSA administrator apparently recognizes) cuts off the ‘overfunding’. The question should actually be “Did you carryover any excess from 2016 to 2017?”

 

Well, your situation still isn’t 100% clear to me, but if you

(1) told the HSA administrator that the $135 was a contribution instead of a mistaken distribution,

(2) filed your 2016 return showing an excess of $135,

(3) did not tell TurboTax that you were withdrawing this amount by the due date and were assessed the 6% penalty, and

(4) told the HSA administrator that you wanted to withdraw the excess and they actually let you even after the original due date of the return,

 

Then just enter the 1099-SA with the code of ‘2’ to your 2017 tax return and be done with it. Oh, and like I said, answer “No” when you are asked on the 2017 tax return if you ‘overfunded’ your HSA in 2016.

 

You will have paid $8 more than you should have to my mind, but it’s a cheap lesson to learn that when you get in these situations, to ask a tax professional (not your HSA administrator) about what you should do now, not a year later.