Hello,
In 2021, my employer contributed the max amount pre-tax ($3600) to my HSA. I was eligible through December 2021, so the last-month rule was applied.
However, in January 2022 I lost HDHP coverage and failed the "testing period", which stated that "For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2021, through December 31, 2022)."
What should have happened was - just waited to report this information in 2023 in my 2022 Tax return and have the extra amount that failed the last month rule's testing period to remain in the HSA but be taxed as income. According to IRS instructions: "If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are calculated on Form 8889, Part III."
HOWEVER, in 2022, I did not know about the "testing period" and mistakenly though that I had to manually withdraw the excess money as I hadn't been HSA eligible for all the 2021. I filled out the "return of excess" form with my brokerage to withdraw the money from my HSA, and the money was deposited in my bank account. This year, I received 1099-SA form with distribution code '2' , which still labels it as 'excess contributions' and not taxable. I believe this money is taxable, so what should I do with this incorrect 1099-SA saying I withdrew "excess contributions" that weren't actually excess and should be taxed as a normal HSA distribution?
Thank you!
