HSA Error Question BWK 1954?

RJM | Mar 3, 2018 | 499 posts since 2011

I started on my taxes this year and I have another mistake.

This year I got a 1099-SA that shows a $9500 distribution.

Last year, I asked my credit union if I could buy a CD within my HSA and they said yes. So I did. Totaling $9500.

Apparently I made a mistake when buying the CDs. I took the money from the HSA but I apparently did not designate that the NEW small CDs were within the HSA. I think one was a 12-18 month and the other was a 5 year.

Is this mistake correctable? How?

The credit union is closed on saturday.

My HSA is not very big but I plan to keep adding to it every year.

Is there a penalty since I did not spend $9500 on healthcare this year?

Is this going to prevent me from finishing last years taxes without resolving it first?

Please, Ally, do NOT answer.

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Answers

bwk1954 | Mar 4, 2018 | 25 posts since 2011

This problem is beyond my knowledge, but it should be resolved in order to finish your taxes.

I would first contact the credit union holding the CDs and ask if they can code them correctly. Otherwise, you break the CDs, pay the early withdrawal penalties, and put the $9500 back into the HSA by April 15th as a mistaken distribution according to this IRS publication: https://www.irs.gov/pub/irs-pdf/i1099sa.pdf

If the mistake cannot be corrected, the distribution must be included in your income for 2017 and is subject to the additional 20% tax acc. to IRS Pub. 969.

If anyone has firsthand experience with this type situation, please chime in.

RJM | Mar 5, 2018 | 499 posts since 2011

The CU responded....

In order to remove the funds for 2018, we will need you to fill out the attached withdrawal form indicating it to be an excess contribution removal. Please note that we can only deliver the funds via a check or by transferring the funds into an internal account.

We are willing to assist you with correcting the issue with the CDs as a one-time courtesy. Going forward, please be careful as any transactions through Online Banking will code it as a normal distribution. If you would like us to open an HSA CD, you will need to contact our Member Services department at 616-242-9790 ext 9910, and they can assist in opening one over the phone.

We cannot recode the CD that the funds are currently in to be an HSA CD as it is locked in. What we are able to do is transfer the original amounts over into your Health Savings Account, and re-issue a 1099-SA to show no distributions took place in 2017. However, the interest that was earned in the regular CDs will be considered taxable income (reported on your 1099-INT) and cannot be moved into the HSA. Unfortunately, there is no way to recode the dividends that were paid out as tax-free. We can leave the remaining amount in the regular CD, or we can simply transfer it to your checking or savings account.

Please let us know how you would like to proceed. If you have any questions or concerns, do not hesitate to let us know.

RJM | Mar 5, 2018 | 499 posts since 2011

This is a lifesaver. I had asked on yahoo answers and they were saying I owed the 20% penalty. Now, the new 1099 will show zero.

Although me picking the wrong Health Plan will cost me tax on $4450 for 2018 that would have been shielded.

Im ready for my taxes but the guy said he would wait until I actually got the new 1099sa before doing it. Thats fine because Im not paying until the last day anyway.

RJM | Mar 6, 2018 | 499 posts since 2011

They did not charge me any fees for solving either of my problems. But the interest earned in the 2 CDs that they broke early with no penalty earned $260 in interest and that will be taxable. Just the principle of the $9500 was returned to the HSA.
A small price to pay for saving nearly $1900 in penalties.

As for this years contribution that they are reversing, I had to send a form in by snail mail since I don't have fax.

The interest on roughly 2.15 months at 1% for $4450 comes to around $8.but I am unclear if they are going to report that or I have to. Or should I just ignore it because its such a small amount.

bwk1954 | Mar 6, 2018 | 25 posts since 2011

So glad the CU was willing to work with you to correct the mistake! I would report the $8 just to be on the safe side, but if I understand correctly, it will be on the 2018 taxes. Things could have been so much worse.

RJM | Mar 6, 2018 | 499 posts since 2011

Not sure where or how I report the excess. I use OLT which is similar to Turbo Tax.

But yes, its for the 2018 tax year, roughly a year-13 months away.

Only minor issue I'm having now is with Mint. The 2 small CDs are still showing up even though they do not show up when I log in directly. So my mint value is overstated by $9500 but I have a number of things right now that muck up my values.
But by the end of the week it should be back to normal. I might try to reconcile it after I get my coffee. Unsure if I should remove LMCU and then add it back or just wait for it to correct itself. On mint I mean.

lou | Mar 10, 2018 | 1,004 posts since 2010

One thing you should remember: if you can show $9,500 of unreimbursed medical expenses for all the years you have owned a HSA, then you can distribute that amount tax free this year. In effect, you can make a tax free distribution from your HSA account for medical expenses from prior years.

RJM | Mar 10, 2018 | 499 posts since 2011

They got my signed form today and shifted the $4450 back to my checking account. The interest earned is just 1% for 2 months on $4450. Less than $8. And given that I don't know where or how to report it next year, I'm probably just going to ignore it because my tax on $7.40 is minimal. And it was an honest mistake.

My HSA now has just under $15k as I have not had it very long and only one year did I get to add the extra $1000 for being 55.

My prior years expenses would not even come close to $9500. Maybe $1500. So I'm glad to have this cleared up.

If I live long enough, I will probably incur a large medical expense that would allow tax free withdrawals. But, I don't really need to take it out of the HSA.

As for the HSA, now that its up to nearly $15k and I found out they do have various mutual funds available, Im probably going to invest it. I think they require that I keep $1000 in cash which only earns .5% if the cash portion is under $5000.

There is a $30 annual fee for the right to buy funds within the HSA but I figure over the long term the expected returns should more than pay the $30 a year.

They don't really have any way to automatically invest so much a month or anything like that. So I'm probably going to have to try and divy it up over 6 months or something.

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