"At the point of entering the SA form, the Federal Tax Due jumped 22% of the Distributed Amount. "
Ah, this is a case of watching the Refund Meter too closely. Yes, the IRS considers the HSA distribution to be taxable UNTIL you show that it was qualified (i.e., for medical purposes), which you did on the next screen. Did you not notice that the distribution was removed from income as soon as you answered the question about the distributed amount was used for Medical Expenses?
So as soon as you entered the 1099-SA, the income increased, per the IRS, and on the next screen, after you enter your answer about Medical Expenses, the income went right back down.
OK, now that I know why you think the 1099-SA was taxable income, we can address the real situation.
You received income from your former employer, although he/she did not send you any forms for it (they really should have). So to do this correctly, you should do the following:
1. Go to Wages & Income->Less Common Income->Miscellaneous Income, 1099-A, 1099-C, and click on Start.
2. Go down to Other Reportable Income on the next screen.
3. Say YES to Other Taxable income.
4. On the next screen, just enter as description, "HSA contributions" and the amount.
This will be added to Other Income on your 1040 (through Schedule 1 (1040)), so that it will be OK for this amount to be removed from your taxable income on Line 13 on Schedule 1 (1040). Now you have reported both the employer's contribution and the appropriate deduction.
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