1. She will receive a 1099-SA by January 2027 for the withdrawal of excess contributions (distribution code of '2'). This form will go on her 2026 tax return.
2. It sounds like she will also get a 1099-SA with a distribution code of '1' for qualified medical expenses that she already made.
3. The $40 (6% of $671) is the penalty for carrying over the new excess to 2026.
4. As you realize, she won't be able to use the carry over up in a future year unless she gets an HDHP policy again. This would mean 6% a year, forever.
5. She should contact the HSA custodian and ask them to tell her about the $671 withdrawal.
If the custodian made this a "normal" distribution (distribution code of '1'), then she will just enter this on the 2026 tax return early next year. TurboTax will automatically apply it to the $671 that is being carried over. The bad news is that the $671 will be added to Other Income along with a 20% penalty. The good new is that the carryover will be done with for good.
If the custodian says "but you asked for the withdrawal of excess contributions so the distribution code will be '2' ", then she needs to ask for them to consider this distribution to be a "mistaken distribution" (they don't have to accept this request so tell her to be nice). She will have to send the $671 back to them, and then she will ask for a "normal" distribution (distribution code of '1'), whereupon she will get the $671 back and a new 1099-SA with a code of '1' to enter on next year's return.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
