The normal way to report this is:
- First transfer is a "personal" contribution to your HSA
- Second transfer is a distribution for non-qualified medical expenses.
The contribution will lower your taxable income. The distribution for non medical distribution will be added to your Other Income (thus, a "wash" with the contribution) but you will also pay a 20% penalty on the distribution.
Note that you can reduce this effect if you get the excess contribution error message in TurboTax. You might see this when you add the first transfer as a personal contribution.
If this happens, then agree to withdraw the excess by April 15, 2020. Then contact the HSA administrator and request the withdrawal of an excess contribution. Call this amount X.
If you tell TurboTax that you will withdraw the excess, then TurboTax will reduce your contribution to zero. At the same time, you should contact your HSA custodian and report a "mistaken distribution" in the amount of the value of the second transfer minus X.
Be nice because the custodian does not have to accept this request, but if they do, they are required by the IRS to give you a corrected 1099-SA.
Note: you will still get credit for the amount of the first transfer that was not excess as a contribution to the HSA, and you will still report the amount of the second transfer less the mistaken distribution as income and be penalized on it...but the amount of the penalty should be less.
What you cannot legally do is just take out the amount you put in by mistake. The HSA is not a simple savings account that you can give to and withdraw at will.
I know this is complicated, but I am trying to minimize the penalty you are going to have to pay.
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