The IRS guidance does a poor job of explaining this. Section 223(f)(3)(A)(i) of the tax code states that the deadline for obtaining a return of excess contribution, the type of distribution that can be reported with code 2, is the due date for filing the tax return and must include, shown in box 2, the net earnings attributable to the excess being returned. Because any normal (code 1) distribution from the HSA that is made taxable by not applying it to qualified medical expenses is applied against excess contributions, Forms 1099-SA distributions after the due date of the tax return to correct excess contributions should always have code 1. Using code 2 to also indicate distributions of excess contributions after the due date of the tax return would make it impossible for the IRS to determine the taxability of the distribution.
