Thanks @Opus 17
As you stated that one option for removing the excess HSA contribution from prior years is to take a non-qualified withdrawal. I found this solution from multiple sources on the web and few replies to the original question in this chain. This was a fairly straightforward answer, but what was unclear is how would I make the withdrawal such that the withdrawal of the excess amount would be flagged as the non-qualified withdrawal when the withdrawal is for excess contributions from years past. Basically how would the 1099-SA be marked to make this distinction. I think others following this post had probably the same confusion as to how to distinguish the non-qualified withdrawal of excess from past years from the withdrawal of excess from 2021 or normal eligible withdrawals.
Your response provides this clarification. Simply make the withdrawal from HSA without specifying it as excess withdrawal. Then when filing taxes for 2022, inform TurboTax that not all monies taken from HSA were for medical expenses. Consider this hypothetical scenario, for example,
- I have $1000 excess HSA contribution carried from 2019
- I will have accrued $2000 eligible medical expenses in 2022
- I can withdraw $3000 over the course of tax year 2022 as normal distribution. I will receive a 1099-SA from HSA custodian specify $3000 as normal distribution.
- When preparing 2022 taxes on TurboTax 2023, TurboTax will recognize that $3000 were taken out from an HSA based on the 1099-SA. At this point, I can enter in to TurboTax 2023 that $2000 of the $3000 HSA withdrawal were for eligible medical expenses. Consequently, TurboTax would mark $1000 as non-qualified withdrawal and apply 20% penalty and tax on that $1000 amount. Simple as that.
