How to handle HSA excess contribution for tax year 2024 when the withdrew for the excess occurred in January 2025

[kingcrumb]

Hello,

I over contributed my HSA contribution for tax year 2024. I submitted the Excess Contribution Removal form in January 2025.   The custodian has removed the overage but the 1099-SA will be reported on my 2025 return.  So should I report this when I do my taxes for tax year 2025?  If not then how do I enter this in Turbo Tax when there is no 1099-SA form for tax year 2024?

Thank you in advance.

[DavidD66]

It depends on whether the contribution was made through payroll deduction or if you made the contribution with after-tax funds.  If it was done pre-tax through payroll, your employer should issue you a corrected Form W-2 with the excess contribution included in your income.  If you don't get a corrected Form W-2 you should report the excess contribution as "other income" on your 2024 tax return.  If you made the contribution with after tax funds and there were no earnings associated with it, you don't need to report anything, as long as the excess was removed prior to filing your 2024 tax return.

If there were any attributable earnings distributed associated with the excess contribution, it has to be removed as well and reported as income for the year the distribution is received.

[kingcrumb]

Thank you for the response.  To be more specific I requested my HSA to withdraw the excessive contribution amount of $5,000(based on my calcualation). My HSA sent a check to me for $5,000  plus  the earnings made on the $5,000).  However, Turbo Tax says that the over-contribution amount should be $4,000 not $5,000.  How do we fix this problem?  Can I just return $1,000 plus proportional earning made back into my HSA and do this before I file my taxes?

[BillM223]

"Can I just return $1,000 plus proportional earning made back into my HSA and do this before I file my taxes?"

No, if you do that, the HSA custodian will report the $1,000 as a new contribution.

TurboTax will not allow you to withdraw a random amount as excess contributions and then force the number into your tax return. The reason for this is that the HSA is not a savings account into which you can willy-nilly put money in and take money out. Instead, all transactions are subject to certain rules.

In the future, please do not do withdrawals of excess contributions until TurboTax tells you the amount. It is difficult for taxpayers to know all the variables that go into calculating the annual HSA contribution limit and the application of contributions.

To your issue, let's see what we can do. 

1. The way with the best result would be for you to contact your HSA custodian and declare that the $5,000 was a Mistaken Distribution, and that it should have been $4,000. If the custodian accepts this (they do not have to, so be very nice and grovel), the you will have to send them that $1,000 to put back into the HSA. Yes, this is what you were suggesting, but in this way, their paperwork will not report the $1,000 as an additional contribution.

2. If they do not permit #1 (and it is likely that they won't), then look at your expected medical expenses over the next several months. Remember that HSA payment can cover not just doctors and hospitals but also eye tests and glasses, dental cleanings and fillings, and anything listed in Pub 502.

If you can apply this $1,000 to current year medical expenses not otherwise not reimbursed by insurance or your HSA, then document the list and put it in your tax archives, in case anyone ever asks.

3. You can try to carry over the $1,000 to 2025, if you will have HDHP coverage with no conflicting coverage. The $1,000 would be applied as a "personal" contribution (line 2, 8889). You would need to reduce your planned HSA contributions by $1,000 so that you would not perpetuate the excess, which will be more expensive to fix.

Ask the HSA custodian if they would allow this. Of course, you will need to reimburse them that $1,000 anyway.

4. If you can't do #1, #2, or #3, then you will have to:

A. Change the box 1 amount on the 1099-SA to $4,000 - note that this may invite a letter from the IRS since they got a copy of the original 1099-SA, wondering why the change.

B. Add a pseudo 1099-SA with $1,000 in box 1 and "1" in box 3.

C. When you enter this pseudo 1099-SA, you will state that none of it was used for qualified medical expenses.

D. The result of these entries is that $1,000 will be added to Other Income, and a 20% penalty added to Other Income as well.

As you can see, any of the first three items are preferable to #4.

[kingcrumb]

Hi, 

Thank you for your reponse, extremely helpful.  I do have some follow up questions on Option 2 and 3.

For Option 2 that stated above.  How does this work?  Turbo tax says that I need to remove $4,000 so I will keep as is.  Let's say that I will have medical expense for $1,200.  You said that I can use  " expected medical expenses over the next several months. Define "several months"?  Is there a time limit as far as using 2025 medical expense?  How about medical expense that I paid out of pocket in 2024, can I use this expense as well?

Lastly, how do I associate the $1,000 (money taken out from 2024 HSA contribution)  to the potential $1,200 (expense from 2025 tax year)?  Is this acceptable to do from a tax law stand point?  Do I need to enter anything in Turbo Tax for 2024 tax season?  Do I need to do anything in Turbo Tax for 2025 tax season to explain this?

For Option 3 you stated below:  ...applying "personal" contribution (line 2, 8889)...  Is this something I should do in Turbo Tax for 2025 Tax year and not for 2024 Tax year?

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You can try to carry over the $1,000 to 2025, if you will have HDHP coverage with no conflicting coverage. The $1,000 would be applied as a "personal" contribution (line 2, 8889). You would need to reduce your planned HSA contributions by $1,000 so that you would not perpetuate the excess, which will be more expensive to fix.

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Thank you in advance for your help on this.

[BillM223]

The IRS permits you to take distributions from your HSA for previous expenses made after the creation of the HSA. As a variation on this, we suggest if you have already taken the distribution, that you apply it to soon-expected medical expenses.

There is no definition for "several months" because this procedure is not described at all in the IRS instructions and notices. The procedure to take a distribution for previous expenses is barely described. There are any situations in the HSA world where what-if results in not defined answer yet. So we suggest this as an alternative.

If you document it well what expenses you spent the $1,000 on (not $1,200), if it ever came to an audit you could own up to the withdrawal of too much excess contributions but that you applied the excess-excess $1,000 to qualified medical expenses in the short period thereafter. No, there is no definition to "short period"; this is just an argument that you could make at audit time that you adhered to the spirit of the law by making sure that everything distributed from the HSA conformed either to the excess contribution procedure or the qualified medical expense procedure.

Note that in 2025, if you create this list of actual medical expenses to be applied to the $1,000, then you cannot list those same expenses on Schedule A. And no, you will not report the $1,000 at all in TurboTax in 2025.

The alternative (as seen in Option 3) is to carry over the $1,000 to 2025. If you decide to carry over that $1,000 to 2025, you will need to do two things:

1. Contact your HSA custodian and ask them to change $1,000 on their books as an excess contribution to 2025.

2. In the HSA interview on your 2025 (not 2024) return, when TurboTax asks "did you overfund your HSA in 2024?", answer Yes, and then enter $1,000. This will be treated as a carryover from 2024 to 2025, and TurboTax will try to apply it as a personal contribution for 2025. Please do NOT try to fix this yourself, but let the step-by-step interview handle placing numbers on the 8889.

As for 2024, TurboTax told you the excess was $4,000 and then you agreed to withdraw all of it (you in fact withdrew more). What we are dong here is trying to correct your error in withdrawing too much from your HSA. 

Again, just as in the previous discussion, we are giving you a basis in which you can argue that you adhered to the spirit of the law. In your case, you made a mistake but the HSA custodian would not let you fix it (I don't see any reason what they couldn't fix it if they wanted to, but I see that many HSA custodians are reluctant to fix anything, even their own mistakes).

So in the latter case above, you are applying the excess to the next year, limiting the amount that you can contribute next year, again trying to work within the spirit of the law.