Excess HSA contribution - withdrew more than excess & 1099-SA doesn't report earnings on excess contributions

[michantax]

To those who can kindly help -

I worked for two different employers in 2025, and my total HSA contributions according to box 12 of my W2s were $8,856. Having a family, my max is $8,550. Since I knew that there might be an over-contribution, I unwisely did an early excess contribution request that processed December of 2025 for $401.05 and again in January for $200.00.
My HSA bank (Optum) unfortunately doesn't help with regards to earnins on over-contributions; they leave it to you to handle. How am I to calculate the pennies of interest I made in Dec 2025 due to the over contribution? And is it a big issue that I withdrew more than my exccess?
Finally how do I enter the above i TurboTax?

Thanks!

[BillM223]

First, please realize that HSA accounts are not savings accounts that you can willy-nilly put money in and take money out. There are processes which the HSA custodian (and you) have to follow, and these processes have tax consequences.

Second, realize that the number of questions that you can ask the HSA custodian are limited. There are many things that your HSA custodian does not know about you, so even when they think they know the answer, they often don't.

OK, what should have happened is this: 

1. You go through TurboTax, especially the HSA interview.

2. In the HSA interview, TurboTax tells you that you had an excess contribution - apparently $6 in this case.

3. TurboTax asks you if you are going to withdraw the excess before April 15th or let it ride to next year (with a 6% penalty).

4. If you say Yes, then you call the HSA custodian and ask for the "withdrawal of excess contributions" (this exact phrase - it makes a difference). Note that many HSA custodians have a form for this exact process on their websites.

5. Then the HSA custodian will send you a check for $6 and a 1099-SA late in 2026 or in early 2027 with a distribution code of '2'. Note that the HSA custodian SHOULD have calculated the earnings for you...it is disappointing how more and more they are declining to do so.

How do you calculate the earnings? This is what SuperChamp dmertz says:

The calculation is the same as for a return of contribution from an IRA before the due date of your tax return.  The HSA custodian should do the calculation for you when you tell them that you want a return of excess contribution.  CFR 1.408-11 describes the required calculation:  https://www.law.cornell.edu/cfr/text/26/1.408-11

But we know that your HSA custodian is declining to do the calculation. 

You do it this way (see the link above for a better formatted version:

Net Income=Contribution×(Adjusted Closing Balance−Adjusted Opening Balance)/Adjusted Opening Balance.

In other words, you determine the amount of increase in your HSA from the date that the excess was created to the date that you withdrew it, then make a percentage by dividing by the value on the date the excess was created, then multiply this by the amount of the excess - this will should you how much the excess earned. This is called NIA - Net Income Attributable. 

The 1099-SA for the withdrawal of excess contributions should have a distribution code of '2'. Did your 1099-SAs have a distribution code of '1' or '2'? Every dollar that was withdrawn in excess of your excess contributions should be taxed and penalized at 20%.

Can you contact the HSA custodian and ask them to treat the two withdrawal requests as "mistaken distributions"? If they will do that, then that allows you to calculate the earnings and do the proper withdrawal request.

Find out what they will say, then come back to us.

[michantax]

My 1099-SA from Optum has a "1" as the Distribution Code. My two withdrawals according to Optum are Excessive Contribution withdrawals.  I'm okay with paying any penalty; I just am hoping there is a way to get my taxes in order.

I did call them, and they did process my mistaken withdrawals; and I went ahead and redeposited the funds back into my Optum HSA. They told me that after this, after some business days I will receive a new 1099-SA.

What should I do from here?

[BillM223 · Accepted solution]

Wow, I am impressed that they did that without a fight...well, let's hope you're on a roll.

First, you need to calculate the earnings in the excess. You need to know when the excess started and when it ended, and what the balances were in your HSA on those dates in order to do that formula.

OK, the first date is when the excess began. It began when the last deposit was made into your HSA on 2025, because the excess was just $6, so the excess was created when the last deposit was made by one of your employers into the HSA.

The excess ended when it was withdrawn. Don't worry about the two mistaken withdrawals; we're going to focus on a new withdrawal that you are going to do between today and April 15th. So look at your HSA account and find the HSA balance on the date of a deposit on or about December 15th, and the HSA balance today. Plug these values into the formula to make a percentage, then multiply this times your $6. Yeah, it's going to be small. If it's less than $0.50, just treat it as zero.

Now add the earnings (whatever they are) to the $6 (the excess) and ask for a "withdrawal of excess HSA contributions" from the HSA custodian. As noted, there are probably forms on the website for this.

They will send you a check for this princely sum as well as another 1099-SA, this also having a distribution code of '2'. I don't know when they will get around to sending the 1099-SA to you, because you don't put it on the current return (tax year 2025), but into next year's return (tax year 2026), so you may not get it until early 2027.

Most importantly, as you do this, you will document everything you did and why, in case any one ever asks. This will provide evidence, if not proof, that you tried as hard as you could to file correctly and to correct any previous missteps.

PS

"My 1099-SA from Optum has a "1" as the Distribution Code." This is probably the 1099-SA reporting on distributions for qualified medical expenses. Enter this into you current (2025) tax return.

[michantax]

Hi!

You mention that I need to "find the HSA balance on the date of a deposit on or about December 15th, and the HSA balance today."  The thing that I am wondering about is what about all the regular HSA contributions that are occurring as part of 2026?  Do I include the bi-weekly 2026 HSA contributions (from Jan to end of March) into the formula for computing my NIA?

And a small correction - my excess contribution is $306.35 as reported by TurboTax and not $6, but I think I understand the gist of what you're saying.

Thanks!

[BillM223]

In calculating the earnings on the excess, you need to 

1. Determine when the excess began (i.e., with which contribution, which indeed could have been in 2026 for 2025), and

2. Determine when the excess ended (i.e., the approximate date that the HSA custodian is going to withdraw the excess and send it to you...note: the date they withdraw it from your HSA, not the date you get the check in the mail.

Note that we are working on your 2025 contribution limit only.

So, you see that ongoing contributions do not affect this calculation. I am assuming that your 2026 contributions are being applied against your 2026 HSA contribution limit, so they are not part of your excess contributions earning calculation above.