Incorrect 1099-SA Distribution Code

[srfrgyrl]

I used my personal credit card to pay for HSA-eligible medical expenses, since I did not have my HSA debit card with me at the time. I transferred the amount from my HSA to personal account to pay myself. I have receipts for everything, but my bank filled out the 1099-SA with a "prohibited transaction - 5" distribution code and is refusing to send me a corrected "normal distribution", saying I should have used the debit card.  They are also not allowing me to return money into the account since they say 2023 tax year passed. How do I fill out the section for TurboTax? Can I use "normal" distribution code even though it does not match the 1099-SA? Thanks in advance. 

[dmertz]

I would try again to escalate this with the bank because a code 5 implies that the HSA account has been terminated.  Of course code 5 makes no sense since reimbursing yourself for a qualified medical expense paid out of pocket (or simply taking money out of the HSA for any reason)  is not a prohibited transaction as defined in section 4975(c) of the tax code.     Code 5 is only to be used when an actual prohibited transaction as defined in section 4975 occurs, with the gross amount of the distribution being the entire balance in the HSA and the HSA ceasing to be an HSA.

The bank indicating that you are not permitted to roll the distribution over is because you are past the 60-day rollover deadline seems to imply that the bank does not think that that distribution was a prohibited transaction because a distribution as a result of a prohibited transaction is not eligible for rollover under any circumstances.

Absent the bank issuing a correction, I would probably try contacting the IRS.   There is no equivalent to the Form 4852 that you would use in place of an erroneous Form 1099-R for a distribution from a retirement plan.  With Form 4852 you are normally required that you contact the IRS before filing that form, so it might be prudent to do that in this similar case as well.  The IRS might intervene by contacting the bank.  Otherwise, I see no alternative but to enter the Form 1099-SA using code 1, then print an mail your tax return with an explanation statement describing the bank's error and why you are not including the amount in taxable income but are instead treating it as reimbursement for a qualified medical expense paid out of pocket.  Information on a 2023 Form 5498-SA showing the same account number might be useful in substantiating that the bank has not actually terminated the HSA.

[srfrgyrl]

Thanks for the reply! For additional details, the full amount of the HSA was transferred out into my personal account as a single transaction (since I had all receipts for all of it and it wasn't a huge amount). I thought that would close out the HSA account, but now I a few pennies in it due to earned interest that hit after the transfer. Is the bank able to submit a corrected form? I will try the bank once more and take my receipts in person. I do want to close my HSA account since I have contributed to it in over a decade. The bank advised that any withdrawal not using the HSA debit card is considered prohibited; is this true? Doesn't seem right. 

[dmertz]

I suppose that, absent a formal reimbursement request made by you, they could consider the movement of cash from the HSA to another of your accounts to be a "transfer to or use by you, or for your benefit, of any assets of the HSA" that would constitute a prohibited transaction, but, unless they charge a fee for a reimbursement request, it seems odd that they would not just consider such a transfer to be an ordinary distribution.  It seems unthinkable that they would even provide a mechanism whereby you could make a cash transfer that they would consider to be anything other than an ordinary distribution.  The HSA that I have has no such mechanism and the only ways that I can cause cash to be moved out of the HSA are by using the associated debit card, making an explicit reimbursement request, or requesting that a payment be made directly to a medical provider.