My HSA custodian got back to me and said they can process the 2022 and 2023 distributions like we described, @dmertz, by providing the information on Form 1099-SA and using Code 2 in Box 3. However, they are saying they have no way to manipulate the form 1099-SA to show my 2021 amount as a normal distribution (with Code 1 in Box 3) directly, and that it would need to be done either by me using the HSA debit card or by a reimbursement. They also warn this could cause headaches later if the IRS were to audit me.
They did say they could process all three years with Code 2 in Box 3 today, if that is how I wish to proceed.
While TurboTax may be confused by how I report this, if I were to file a paper return or some other means (such as Free Fillable Forms), couldn't I simply reflect the amount I owe in tax on Form 8889 anyway? I feel like this one little detail about Box 3 on 1099-SA is the only thing stopping me from getting this processed (finally!), and since the IRS isn't even clear about Box 3 – and who knows how many others from this HSA custodian are getting it processed as Code 2 – is it really a problem?
