- Mark as New
- Bookmark
- Subscribe
- Subscribe to RSS Feed
- Permalink
- Report Inappropriate Content
Deductions & credits
"Return of excess contributions" means that you withdrew the excess contributions before the original due date of the return. Thus, if you had an excess in tax year 2022, you by law had to withdraw the excess by April 15, 2023 to avoid penalties. That is, the IRS gives you only a set period of time to rectify your mistake without additional penalty.
If you did not withdraw your 2022 excess by April 15, 2023, then the excess was carried over to tax year 2023, to be placed in line 2 of form 8889 as a "personal contribution". However, since many taxpayers don't realize this, they contribute the full amount in 2023, and therefore create a new excess for 2023.
Unfortunately, the IRS uses the same term "excess" for the short-term excess that you can withdraw without penalty and the long-term excess that has to be dealt with much differently.
So once you passed April 15, 2023 (in some cases, October 15, 2023) without withdrawing the short-term excess, it became a long-term excess and carried over the the next year. You cannot withdraw a long-term excess the same way you can with a short-term excess.
Yes, you told the HSA custodian that you wanted to withdraw excess contributions, and they processed it with a 1099-SA with a distribution code of "2", but this was wrong. To be fair, the HSA custodian has no way of knowing that you were making an invalid request, and for all they knew, it was appropriate for you.
To handle a long-term excess, you can do one of two things:
1. When the long-term excess has carried over to a new year, reduce your regular HSA contributions so that the carryover (which has been placed in line 2 of form 8889 as a personal contribution, so that the carryover can be accommodated under the annual HSA contribution limit. Once this happens, then the long-term excess is "used up" and finally dealt with.
2. Make a distribution for the amount of the excess (but do not tell the HSA custodian that this is the withdrawal of excess contributions), and when the 1099-SA arrives, enter it and say that none of it was for qualified medical expenses. This will have three effects:
A. the amount of the excess will be added to Other Income
B. A 20% penalty will be added to Other Income
C. Your long-term excess carryover will disappear
#1 above is obviously cheaper, but you have to have a future year in which you have HDHP coverage and you have to avoid over contributing in that future year.
I hope this explains to you what happened and why TurboTax is not working according to your understanding. TurboTax is working correctly, but honestly, most taxpayers (and quite a few tax professionals) don't understand how HSAs work, due in part to the opaque instructions by the IRS.
**Mark the post that answers your question by clicking on "Mark as Best Answer"