BillM223
Expert Alumni

Deductions & credits

"Failure to maintain HDHP coverage" is not the same as "excess contributions" as I think you now understand. And to clarify, "as I hadn't been HSA eligible for all the 2021", you were eligible to contribute for all of 2021, until you failed to maintain the HDHP coverage in 2022. 

 

You should go through the TurboTax HSA interview. At some point, TurboTax will realize that you failed to maintain your HDHP coverage (it will say something about a "lapse in coverage"). Then you will be taken through a number of questions to determine what your annual HSA contribution for 2021 would have been if it had not been for the last month rule (which may sound the same as the calculation for excess contributions, but it's not).

 

As a result of the failure to maintain HDHP coverage, the amount that would have been "excess" in 2021 is added back to your income in 2022. NOTE, the excess for 2021 is 3,600*11/12, or 3,300, because you did have HDHP coverage for one month (December). Then you will be assessed a 10% penalty on that of that.

 

The preceding is without regard to the 1099-SA that you received.

 

What you might do in terms of that 1099-SA is to contact your HSA custodian, and ask them to recharacterize the withdrawal of excess contributions as a mistaken contribution. They probably won't do it because it's been too long since you did the original withdrawal, but you need to give them a chance to do it. If by some miracle they agree, you will have to complete a form and send them a check for the amount of the excess that they sent you.

 

The real problem is that you withdrew dollars from the HSA for reasons other than for medical expenses. Unlike you can get the HSA custodian to reverse this, when you enter the 1099-SA into TurboTax, you will 

need to do two things:

1. change the distribution code from '2' to '1', and

2. have to answer that this distribution was not for medical expenses. 

Then, this amount will be added to income (in addition to the amount above) and penalized 20% in addition. And unless the HSA custodian reverses the earlier withdrawal, you will need to enter the 1099-SA because the IRS now has a copy of it and will wonder why you did not enter it on your return.

 

Is there anything else you can do? Well, you can do this: do you have any medical bills from the last year (i.e., 2022) that have not been paid yet? If so, then collect these bills, and make a list, showing that they were paid by this withdrawal, and stick in your tax files. This may or may not pass an audit, but at least you can show that you tried to correct the situation. 

 

You must document everything you did (like changing the '2' to '1') and why, because what you did will no longer match the paperwork of your HSA custodian.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post