How do I tell TurboTax that I withdrew (as taxable) a prior year excess HSA contribution? I set "Excess HSA contributions carryover from 2023 still in HSA account" to 0.

[davisnwd]

How do I tell TurboTax that I withdrew (as taxable) a prior year excess HSA contribution? I set "Excess HSA contributions carryover from 2023 still in HSA account" to 0.

[LindaS5247]

Make sure that you answered "No" to the question "Did you overfund your HSA in 2023?" if you corrected it timely (prior to the filing of your 2023 tax return, April 15, 2024).

To revisit your HSA screen in TurboTax to make sure your excess HSA contribution was not due to an entry error, you can:

1. Click on the search icon in the upper right corner of your TurboTax screen
2. Type "HSA" in the search box
3. Click on the link "Jump to HSA"
4. Answer the questions until you get to the screen "Let's enter your HSA Contribution"
5. Make sure you did not accidently enter an amount on this screen that was already reported in Box 12 of your Form W-2. This will double your total contribution amount.
6. Continue through your TurboTax screens and make sure all questions were correctly answered.
7. As per the above, if you removed the excess contribution from 2023 or did not have one answer "No" to "Did you overfund your HSA in 2023?"

Your TurboTax screens will look something like this:

Click here for "Why am I showing an excess HSA contribution?"

Click here for "What is a health savings account (HSA)?

[davisnwd]

The problem is that I didn't correct the overfunding before April 15, 2024.  So I owed a 6% penalty on the overfunded amount in 2023.

However, I withdrew that excess afterwards, so now in 2024, there is no remaining excess contribution.

But Turbotax refuses to allow me to indicate that:

So first I tell it there is no excess remaining, but then it sees that I had excess in 2023, and it says there is still excess remaining.

According to the help, I should be able to get rid of the excess by making a withdrawal, which is what I did:

But Turbo Tax doesn't give me an option to show that I withdrew the excess and take the 20% one-time penalty to clear the excess.

[BillM223]

Did you contact the HSA custodian to request the distribution? If you did, then the HSA custodian would send you a 1099-SA reporting the distribution.

You would enter the 1099-SA and then tell TurboTax that none of the distribution was for medical expenses (this is a question in the 1099-SA sub-interview). When you do this, then the distribution will be added to Other Income and 20% penalty added as well...but the carryover will be cut off at last.

[davisnwd]

Ok, we're getting a bit warmer.  But I still have the problem.

I got my timeline a little mixed up.  The corrected timeline of events:

1. For Tax Year 2022, my employer overfunded my HSA by $50
   1. I did not get the excess resolved in 2022
2. For Tax Year 2023, I contacted the HSA administrator, and had the excess funds removed.  I received the 1099-SA for Tax Year 2023, and filed it with Tax Year 2023
   1. My understanding is that this should have taken the one-time 20% penalty, and resolved the issue
3. Unfortunately, in Tax Year 2024, Turbo Tax still thinks I have an excess contribution.

My 2023 1099-SA:

From my 2023 Tax return worksheets:

My 2023 5329 Part VII (including line 48) and  looks like maybe it did not correctly apply the 20% penalty? But as shown above, I showed the return of excess contributions.

So I'm at a bit of a loss here.  Is this a bug in TurboTax, or am I still doing something wrong?

[BillM223]

"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.

[davisnwd]

That is definitely helpful.  It's starting to make a little sense.

However, I'm still confused on what this interview question actually affects?

Regardless of whether I set it to $0 or $50, the rest of the HSA interview behaves exactly the same.  So I'm unsure what the correct amount is to enter in this question.

[RobertB4444]

The correct amount is zero, since you pulled it all out.  Otherwise it will carry over to next year.

@davisnwd