Excess HSA Contribution and Earnings

[legaltaxeagle]

2022 excess contribution to * Bank HSA. The HSA account has a "cash" component and an "investment" component (segregated and listed separately on the monthly statement) - the cash portion earns .01% APY and the investment component is in mutual funds. Excess deposited in cash account on 12/19/2022, distribution from cash account on 2/14/2023 - interest for 1/1/2023-1/31/2023 was about 4 cents. Taxpayer requested distribution of excess, and * Bank calculated excess earnings. * Bank used the entire account balance (cash and investment portions) to calculate earnings on the excess, and distributed $110 earnings on a $1,825 excess. 

 The excess was a result of a severance from service and the taxpayer no longer participated in a HDHP - * Bank told taxpayer he could fund the remaining HSA contribution available from private funds as opposed to payroll deductions (this was not correct). Upon severance, taxpayer was able to draw down from cash/investments, but the investment account was frozen for additional contributions.

I understand the HSA excess/earnings rules follow IRA rules, but is there a different calculation for earnings when the contribution went into a segregated cash account and distributed from that cash account (.01% APY), and never subject to investment experience in the mutual funds?

Thanks for reading!

[Brian Gilmore]

If you take a look at IRS Publication 969 and the Form 8889 instructions (relevant part copied at the bottom of this post https://www.newfront.com/blog/correcting-excess-hsa-contributions), they generically refer to these additional amounts as "earnings."  That should include amounts from the standard interest-bearing cash portion and the investment portion.  Then again, if we're talking about 4 cents in interest I don't really think it matters either way.

[Mr. HSA]

I agree. And with IRS "rounding" rules (to the nearest dollar), it would be $0.00 anyway.

[Gary Lesser]

Earnings are all earnings; my 4 cents--From Roth IRA Answer Book Q&A 2:28

"Note. The final regulations provide that net income calculations must be based on the overall
value of an IRA and the dollar amounts contributed or distributed from the IRA. The
regulations do not permit the calculation of net income on the basis of the return on specific
assets (the “anti-cherry picking” rule). [ T.D. 9056, 68 Fed. Reg. 23586–23590 (May 5,
2003); REG-124256-02 (67 Fed. Reg. 48067–48070), as corrected at 67 Fed. Reg. 53644
(Aug. 16, 2002)] However, the anti-cherry picking rules can be avoided by specifically
identifying assets to be transferred or purchased into newly established Roth IRAs, one
Roth IRA for each grouping of assets (e.g., a particular fund, different stock or market
sector groupings). It may still be possible, however, to cherry pick some contributions by
characterizing a full or partial contribution or a recent conversion. [ See “How to Cherry Pick
Assets for a Recharacterization,” The Retirement Dictionary (Apr. 2018), available at https://
retirementdictionary.com/how-to-cherry-pick-assets-for-a-recharacterization (visited on July
15, 2022)]" {Emphasis added.}

From Roth IRA Answer Book Q&A 2:28