Deductions & credits

"What type of High Deductible Health Plan did William have on December 1, 2020?"

It is correct that TurboTax asks about 2020, because you would be subject to the last-month rule only if you had HDHP coverage on December 1, 2020 and made contributions to your HSA in 2020.

As you have probably read, the last-month rule is activated when you have coverage on the first day of the last month, because no matter what coverage you had for the rest of the year, the last-month lets you use the annual HSA contribution limit for the full year. 

The catch is, as you see, is that you need to stay under HDHP coverage for the next twelve months, i.e., 2021 (this is why it asks about 2020).

However, there is something else amiss with your return. First you are quite correct that you should have been able to contribute 1/2 a year's worth of HSA contributions.

And second, the HSA funding distribution should not be there in any case.

So let's do this. Let's clear out all your HSA data, and start over and see if we can get you back to where you belong.

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop***

3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one) and a 5329-T and -S (if one).

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview. 

When you see that question about "What type of High Deductible Health Plan did [name] have on December 1, 2020?", go ahead and answer it.

Because TurboTax knows that you did not have HDHP coverage for all of 2021, this now becomes significant, and TurboTax needs to know if you used the last-month rule in 2020 and whether or not you failed to maintain HDHP coverage long enough.

So TurboTax is going to ask you a series of questions, one of which may have been about an HSA Funding Distribution (otherwise, I don't know how that HSA Funding Distribution got in there).

Let's clear out everything and give it another go.