HSA Contribution Excess

[Terry D EA]

Taxpayer had major medical expenses in 2021. They qualified for a Christian assistance program that deposited funds for the expenses to the taxpayer' HSA. The total deposited is way over the limit at 40K. All of the medical expenses were paid from the HSA so I'm not sure as to what the balance is in the HSA to determine if they will be assess the excise tax. I need to clarify that the funds received are not included in taxable income and appear to be treated as a reimbursement to pay for the expenses. Only amounts the taxpayer actually paid out of pocket could be included on Sch A. However, I don't think they will be able to itemize anyway. Am I correct in my thinking regarding any of the amounts received from the Christian program for the expenses are not taxable income? Bills were submitted to the Christian program and then funds were deposited in the HSA, then the bill was paid from the HSA. In my opinion, it all becomes a wash and the only thing to look at is the balance in the HSA. Thoughts and opinions.

[Lee B]

Well this will be an interesting discussion

[Slippery Pencil]

Reimbursements from healthcare sharing ministries are not taxable income. 

If they made excess HSA contributions then withdrew the excess, there's nothing to be concerned with. Why did the HSA even allow the deposits?  One year my credit union ignored my instructions and recorded my April HSA contribution as a current year contribution instead of a prior year contribution.  When I fully funded the HSA later that year for a current year contribution, the credit union called me and said I couldn't deposit over the limit.  They eventually corrected their mistake and allowed the contribution, but the point is that they wouldn't make a deposit that exceeded the limit.  Are you sure the account was a HSA?

 

[jklcpa]

Agree wtih Slippery Pencil. Those funds should have been paid to the taxpayer but not put into the HSA. 

If the funds were all contributed to the HSA and have been spent so that there isn't enough left in the HSA to withdrawal the excess + earnings, then the taxpayer will owe the 6% excise tax until withdrawn or designated in each future period until that excess+earnings is fully used as designated contributions. 

[Terry D EA]

Thanks for the replies. I agree with both of you. I don’t know how this was allowed. The taxpayer is getting me an annual transaction report from the HSA account. Just have to wait for more info. It’s always comforting to get feedback from folks here. Thanks

[kathyc2]

I'd just add that if the excess was in the account long enough to earn interest, the interest is taxable. 

 

[Terry D EA]

Yep, thanks