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OvermyheadNE
Returning Member

Excess HSA distribution not matching increase in taxable income

Did not know until signing up for Medicare at the end of 2023 that this made me ineligible to use an HSA for the last 6 months of 2023. Total was included under box 12c with code W on the W2.  Married, over 65.

I asked custodian to remove the excess, and they calculated and did so before the end of 2023. They reported Gross distribution in 1099-SA as 3,715 with a distribution code 2 for excess contribution. I believe they removed the amounts from each pay period after 6/30/23 until the error was recognized and calculated interest.

 

Turbotax calculated that I could have contributed more for the 6 months I was eligible and wants to add only 2331 to my taxable income.  I have paid medical expenses which could cover the difference, but I'm concerned that the difference between the 1099-SA with a distribution code of 2 for excess contribution , and the lower additional taxable income reported by Turbotax is a red flag to the IRS ?

Thank you in advance for your time and advice

 

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1 Reply
BillM223
Expert Alumni

Excess HSA distribution not matching increase in taxable income

"I'm concerned that the difference between the 1099-SA with a distribution code of 2 for excess contribution , and the lower additional taxable income reported by Turbotax is a red flag to the IRS ?"

 

I have not heard that the IRS has paid close attention to this. Besides, there might actually be a good reason for it.

 

So, so long you have qualifying medical expenses that you can apply to the $1,384 difference, I would not be greatly concerned. Please document what they are and stick it in your tax file.

 

Since you are now on Medicare, this issue won't come up again - you'll never be able to contribute to an HSA again, and you can distribute funds from the HSA until they run out.

 

NOTE, since you are probably 65+, you can take funds out of the HSA as if it were an IRA - no penalty. Still, you pay income tax on the withdrawal, so unless you have a gazillion dollars in your HSA, you might as well save it for the medical expenses (on which you don't pay income tax)...

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