Form 8889 and taking a deduction for a prior year excess HSA contribution.

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Topic Author
uma
Posts: 19
Joined: Fri May 27, 2016 8:27 pm

Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by uma »

Hello forum,

Some background on my issue:
I've made excess contribution to my HSA for 2017 and 2018. I discovered the error - my wife had contributed to FSA through her employer in those years, but the FSA wasn't a limited purpose one. Then I amended my returns for those years, added the excess contribution back to my income and filed form 5329 and paid the penalty.
I've continued to maintain HDHP plan in the following years and didn't contribute anything to my HSA, except what my employer contributes every year - $500.

I filed my taxes for 2020 using H&R Block deluxe edition, after going through the HSA questionary in Federal/Adjustments, there is a question:
- Did you (or will you) add any extra money to your HSA? We know you already contributed $500 from your W-2.
I answered no, as I didn't contribute extra.
Yet, in Adjustments Summary it's showing $3050 adjustment ($3550(individual max) - $500(employer contribution)). I'm not sure why.

I also filled out form 5329 to calculate the excess penalty:
- Excess amount in HSA - $6850
- I'm allowed to contribute $3050 ($3550(individual max) - $500(employer contribution))
- Excess contribution tax - ($6850 - $3050) * 6% = $228

And finally, the problem:
Today, I received a letter from IRS stating that I miscalculated my taxes and they are adding back that $3050 to my income, so I have to pay taxes on it as well as some interest.

Questions for the forum:
- Am I not allowed to deduct $3050 in 2020 given that I never took a deduction on that money? Seems fair and reasonable to use this deduction and that's what H&R Block software did for me.
- If the above assumption is not correct, how do I make H&R block not to deduct this amount?
Last edited by uma on Thu Sep 23, 2021 6:27 pm, edited 1 time in total.
Topic Author
uma
Posts: 19
Joined: Fri May 27, 2016 8:27 pm

Re: Form 8889 and prior year excess HSA contribution.

Post by uma »

It seems like I can deduct the excess contribution, per this post - https://www.hsaedge.com/2018/09/19/corr ... rior-year/
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.
Should I have answered yes to the above?
- Did you (or will you) add any extra money to your HSA? We know you already contributed $500 from your W-2.
I'll play with the software to see where it takes me with various options.
Will also call IRS to discuss this with them.
Topic Author
uma
Posts: 19
Joined: Fri May 27, 2016 8:27 pm

Re: Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by uma »

Called the IRS and the representative couldn't tell me what the error was. But they are giving me more time to correct it. Maybe there is nothing to correct.

I read the instructions to Form 8889. The part applicable to my return is:
- Part I—HSA Contributions and Deductions
--Line 13 - Deducting an Excess Contribution in a Later Year
You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contributions you can deduct in the current year is the lesser of the following two amounts.

Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
The total excess contributions in your HSA at the beginning of the year.
Any excess contribution remaining at the end of the tax year is subject to the additional tax. See Form 5329.
So I was supposed to enter $3050 on line 13 of Form 8889 and that's what H&R Block did for me.
Not sure why the IRS did not accept the deduction.
User avatar
MP123
Posts: 4085
Joined: Thu Feb 16, 2017 2:32 pm

Re: Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by MP123 »

This is a little hard to follow but let's try.

It sounds like you made excess contributions in 2017 and 2018 and attempted to correct the issue. Did you actually remove the excess from the HSA?

It sounds like you've reamined ineligible to this date (because of the spousal FSA) but took a $3050 deduction anyway? What year is the IRS notice referring to? DId you actually make the contribution? Or are you trying to absorb the excess contribution from 2017 and 2018 that remains in the HSA? But you still aren't HSA eligible, right?
Topic Author
uma
Posts: 19
Joined: Fri May 27, 2016 8:27 pm

Re: Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by uma »

MP123 wrote: Fri Sep 24, 2021 11:46 am This is a little hard to follow but let's try.
Thank you for your response.
It's hard to follow indeed, as I was struggling trying to remember what I did earlier this year.

Here's what happened:

- In 2017 and 2018 I was ineligible to contribute to my HSA because my wife had an FSA (not limited purpose one). I contributed up to the individual maximum in those years (2017-2018) so I had $6850 in excess contribution. I was ineligible to contribute to HSA only in 2017 and 2018.
- I discovered the problem in 2019 and became eligible to contribute to an HSA, however I already contributed up to the individual max, so I was left with the same $6850 in excess contribution. I did amend my returns for 2017-2018, added the HSA deduction back to income, and filed form 5329 for each of those years (2017-2018 and 2019, since I still had an excess) and paid the 6% tax.
- In 2020 my employer contributed $500 for me, so I had $3050 left to contribute ($3550-$500), so when filing my taxes using H&R Block Deluxe, I took an HSA deduction of $3050 and reduced my excess contribution by this amount. I am left with $3800 in excess contribution ($6850 - $3050). I attached form 5329 for 2020 and paid 6% tax on the remaining excess ($3800 * 6% = $228).

Yesterday, I received two notices from the IRS.
- First notice
We changed the amount of health savings account deduction on page 1 of your tax return. There was an error on Form 8889, Health Savings Accounts (HSAs). The error was in the :
-computation of the health savings account deduction and/or
-transfer of that amount to page 1 of your tax return.
https://www.irs.gov/pub/irs-pia/6209sec ... ecodes.pdf

In the first notice they removed the HSA deduction of $3050, added it back to income, calculated tax due on it, and assed interest.

- Second notice
Our records show you exceeded the maximum contribution to your Health Savings Account for the tax year ending on December 31, 2020 (Form 5329). This excess contribution is taxable.
In the second notice, they claim I didn't pay $228 in tax for the excess contribution.


I think, either I made a mistake or there is a bug in H&R block software, which triggered the IRS algorithms to detect an error in my return. But looking at the numbers they all make sense to me. I spent three hours on the phone with the IRS today and nobody could explain to me what my error was. They suggested to send them a letter with the explanation and they will be able to correct it themselves if they agree with it.
The reason I started this topic, is mostly to get a confirmation from the smart people on this forum if what I did for 2020 return in regards to my HSA, makes sense.

I'm going to write an explanation letter with the supporting documents and send them to the IRS.
I've also scheduled an appointment with H&R Block representative to go over this, since they provide this benefit to their customers, although I'm not holding my breath.

I've kicked myself so many times over this, but what's done is done. And now that I'm trying to fix the issue, I'm faced with yet another obstacle - tax reporting.
User avatar
MP123
Posts: 4085
Joined: Thu Feb 16, 2017 2:32 pm

Re: Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by MP123 »

uma wrote: Fri Sep 24, 2021 4:35 pm Here's what happened:

- In 2017 and 2018 I was ineligible to contribute to my HSA because my wife had an FSA (not limited purpose one). I contributed up to the individual maximum in those years (2017-2018) so I had $6850 in excess contribution. I was ineligible to contribute to HSA only in 2017 and 2018.
- I discovered the problem in 2019 and became eligible to contribute to an HSA, however I already contributed up to the individual max, so I was left with the same $6850 in excess contribution. I did amend my returns for 2017-2018, added the HSA deduction back to income, and filed form 5329 for each of those years (2017-2018 and 2019, since I still had an excess) and paid the 6% tax.
- In 2020 my employer contributed $500 for me, so I had $3050 left to contribute ($3550-$500), so when filing my taxes using H&R Block Deluxe, I took an HSA deduction of $3050 and reduced my excess contribution by this amount. I am left with $3800 in excess contribution ($6850 - $3050). I attached form 5329 for 2020 and paid 6% tax on the remaining excess ($3800 * 6% = $228).
This sounds like the right approach to me. Now that you are eligible you should be able to "contribute" the excess contributions from previous years to reduce the amount subject to excise tax on 5329. It's possible HRB isn't handling this correctly.

What did you report on 5329 line 43?

Also note the instructions for 8889 line 13: https://www.irs.gov/instructions/i8889# ... 1566119952
Deducting an Excess Contribution in a Later Year
You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contributions you can deduct in the current year is the lesser of the following two amounts.

Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
The total excess contributions in your HSA at the beginning of the year.
Any excess contribution remaining at the end of the tax year is subject to the additional tax. See Form 5329.
Topic Author
uma
Posts: 19
Joined: Fri May 27, 2016 8:27 pm

Re: Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by uma »

Thanks for your help.
MP123 wrote: Fri Sep 24, 2021 9:26 pm What did you report on 5329 line 43?
Form 5329 Line 43 is showing 3050 as amount
MP123 wrote: Fri Sep 24, 2021 9:26 pm Also note the instructions for 8889 line 13: https://www.irs.gov/instructions/i8889# ... 1566119952
Form 8889 Line 13 is also showing 3050 as amount
User avatar
MP123
Posts: 4085
Joined: Thu Feb 16, 2017 2:32 pm

Re: Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by MP123 »

uma wrote: Fri Sep 24, 2021 10:43 pm Thanks for your help.
MP123 wrote: Fri Sep 24, 2021 9:26 pm What did you report on 5329 line 43?
Form 5329 Line 43 is showing 3050 as amount
MP123 wrote: Fri Sep 24, 2021 9:26 pm Also note the instructions for 8889 line 13: https://www.irs.gov/instructions/i8889# ... 1566119952
Form 8889 Line 13 is also showing 3050 as amount
That would be correct in my non-expert opinion. I suppose the issue could be with IRS processing too. If you figure it out please update.
Topic Author
uma
Posts: 19
Joined: Fri May 27, 2016 8:27 pm

Re: Form 8889 and taking a deduction for a prior year excess HSA contribution.

Post by uma »

MP123 wrote: Sat Sep 25, 2021 1:43 pm That would be correct in my non-expert opinion. I suppose the issue could be with IRS processing too. If you figure it out please update.
Thank you. Of course, I will update this thread.
I need to do the same for this year's taxes.
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