HSA excess contribution still showing after removal of excess contribution

[a908234]

Hi, hoping to get some help with an HSA situation.

In 2022/2023, I made the maximum contributions to my HSA ($3650/$3850) via employer contributions.

In early 2024, I learned that those contributions were ineligible.  I removed the 2023 contributions before Tax Day and amended my 2022 return to reflect the excess.  So for my 2022 and 2023 returns, I had $3650 excess.

By the time I realized this, I'd already contributed to my HSA for 2024, which I was eligible for ($4150).  I then distributed $3650 worth of 2024 contributions as excess.

In summary, I have the following for 2024:

• $3650 excess carried over from 2022 -> 2023
• $7500 = $3850 (from 2023) + $3650 (from 2024) of returned excess contributions
• $4150 of new employer contributions

So my net contribution for 2024 should be only $4150.

When I try to enter my 1099-SA, it still shows that I have a carried-over balance.  Looking at Forms 5329 and 8889, the excess contribution hasn't affected either the $4150 new contributions or the $3650 carryover, nor is there any tax levied on the returned excesses.

My 1099-SA has a distribution code of 2 (box 3).

How can I set the forms to correctly reflect that the return of excess should balance out the contributions?

Thanks in advance.

[dmertz]

"By the time I realized this, I'd already contributed to my HSA for 2024, which I was eligible for ($4150).  I then distributed $3650 worth of 2024 contributions as excess."

This is the problem.  Only actual excess contributions are eligible for return and none of the $4,150 deposited as a 2024 contribution was actually an excess contribution for 2024 on its own.  Because of this, TurboTax does not allow you to claim that any of the 2024 contribution was returned.

Unfortunately, there is no good workaround for this situation.  Technically the $3,650 distributed constitutes an ordinary distribution rather than a return of contribution (since no return of contribution before the due date of your tax return was actually permitted).  You could report it as an ordinary taxable distribution (code 1 in box 3 with nothing in box 2) and provide explanation with your printed and mailed tax return, but that would subject you to a 20% extra tax on the $3,650.  The only other alternative I can think of would be to change the amount entered with code W in box 12 on TurboTax's 1099-R form to show only $500 contributed for 2024, but I can't say that that the IRS would agree with that.  It would disagree with the amount shown on the Form 5498-SA issued by the HSA custodian and would disagree with the amount shown on the W-2 provided to the IRS by your employer.