Thanks for the prompt reply, and I'll probably try to contact HealthEquity support to see if I can cancel the withdraw since I just submit the request yesterday. And option 3 seems a little bit less process needed and no additional 20% penalty (?).
And forgive me if I am being too nitpick as I still have puzzle regarding the double tax on excess amount. When I read the IRS pub 969, it seems only mention two things:
- Excess contribution is subject tot 6% tax penalty every year if not being removed.
- Unqualified distribution subject to income tax and maybe additional 20% penalty.
And it didn't mention whether you should pay the income tax for the year of the excess contribution is made. I also checked the instructions of Form 8889, Form 5329 and Form 1040 Schedule 1. (Both 2021 and 2023 version). They seem only mention the concept of Taxable HSA distributions from Form 1099 SA. I assume all that means we only subject to the income tax when we distribute the money from HSA for non medical purpose.
However, in tax year 2021 TurboTax just put $500 in that line 16 of Form 8889 while I haven't received any 1099 SA (I never used any of the money in my HSA in 2021). And that lead me to pay the tax for the $500. Is it an expected behavior? Is the basis of doing this come from 'Excess contributions aren’t deductible' in pub969?
Something probably make more sense to me is, in tax year 2021, no distribution happens, so should be no Taxable HSA distributions for the $500. And the real distribution happens at 2024, which I'll expect to get a 1099 SA for Tax Year 2024. Then you paid the income tax and penalty for the $500 because you withdraw it as pre-tax money. In that situation, I totally agree with you that we should use the code 1 for 1099 SA. But given I paid the tax already, shouldn't the income tax just apply to the earnings (code 2)? The publication seems vague about whether we are expecting the double tax.
If you didn't mind to give me some detail explanation, I would be super appreciate it. Thanks again for really taking time on this.
