I have an HSA but over contributed to the account. I cannot take the extra out because there is no extra.?

Question

You can contribute $2900 + $900 for being over age 55. I went over that limit ($3800) but cannot take any money out of the account because there is no extra; expeneses are equal to contributions. How do I handle this on my federal income taxes? Claim the extra as "other income"; or what approach can you take. One suggestion was to reduce the contribution for next year and that would have an affect. Any ideas. Thanks for your help.

Answer 1

1.  Plan on contributing less in 2008 so that this is a one time event.

2.  Be aware that you will get dinged 6% excise tax on the excess contribution for each year it's in there.  (That's why you want to limit this to one year.)

3.  Since the account balance is zero, you can't ask for the money to be pulled out.  

4.  Be aware that if you did this through a cafe plan, you mut add the excess to income.  If you funded this by writing a check (after tax money), you simply don't get a deduction above the limit.

Answer 2

Excess contributions to an HSA are not deductible, and if they are already withdrawn in the year they were contributed,  there is no penalty , or any other tax effect.  You only deduct the maximum amount, and if all of the funds were withdrawn for qualified medical expenses, you do not have to add them back to income.  There would be no need to reduce your contribution next year.

Answer 3

How you handle this is explained in the Instructions for Form 8889 available at irs.gov.

As long as you withdraw the excess contributions by the due date of your return (which you have), and you do not take a deduction for the excess contributions, then the excess contributions are treated as if they had never been made.

If your excess contributions had earnings, you need to withdraw the earnings and include that amount as "other income" on your tax return.

If the excess contributions were from after-tax money, only the earnings are included as "other income."  If the excess contributions were from pre-tax money from your employer, both the excess contributions and earnings are included as "other income" on the tax return.

You will show $3,800 only as your contribution on Form 8889 and include any "other income" on Line 21 of Form 1040 as indicated above.

The above applies only to the case when all the excess contributions and earnings have been withdrawn by the due date of the tax return.  If you had not withdrawn the excess contributions by the due date of the return, the situation is quite different.