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HSA Excess Contribution

Turbo tax showed me initially that I made an excess contribution of $4125, so withdraw it before Apr 15th. So I did. But now it is showing that my excess contribution is $2155, but I have already withdrawn $4125. It does not allow me to change the $2155 number to $4125. What should I do?
2 Replies
Level 13

HSA Excess Contribution

Unfortunately, you have accidentally made a non-qualified withdrawal from your HSA.

So do this:

1. Tell TurboTax that you will withdraw the entire excess (of $2,155) before April 15th (since you already have).

2. TurboTax automatically adds the $2,155 to Other Income on line 21 on Schedule 1 (good).

3. You need to scour your house and records for any qualified medical expenses that you paid for with after tax dollars AFTER the day you created the HSA. This amount becomes your "reimbursement for qualified medical expenses". (BE SURE TO LIST THE BILLS ON PAPER AND ADD THAT THEY WERE REIMBURSED BY THIS DISTRIBUTION AND SAVE IT IN YOUR TAX FILE/RECORDS).

4. You need to subtract the $2,155 from the $4,125 ($1,970).

5. Then you need to subtract any previously unreimbursed qualified medical expenses (line #3) from the $1,970.

6. The remainder on line #5 is your unqualified distribution.

7. For your 2019 tax return in early 2020, you will receive a 1099-SA for the earnings on the excess while they were in the HSA. Enter this as is, and the earnings will be added to your 2019 income (as they should be). Note that if the $2,155 is in box 1, it will just be ignored if the distribution code is '2' (as it should be).

8. Then you will have to make up a fake 1099-SA. This fake 1099-SA will have the same information as the real 1099-SA, with the following changes: (1) the distribution code should be '1', (2) the entry in box 1 should be your unqualified distribution (line #6), and (2) box 2 should be blank.

9. After you enter the fake 1099-SA, you will be asked if any of the distribution was for qualified medical expenses. Answer "no" (as in none of it). This will cause the unqualified distribution to be added to your 2019 income AND an additional 20% penalty on the unqualified distribution.

This is why it is important that you diligently search for medical bills that you paid with after-tax dollars AFTER the date you started the HSA (step #3). The more bills that you can apply to this $1,970, the less you will be penalized on.

Now, all of this won't exactly match the records that the IRS and the HSA custodian have, but that's OK. You have declared the right things to be income and have been penalized the right amount. Keep those records from step #3 because if you are ever audited, you will need them to explain what happened.

Level 13

HSA Excess Contribution

It occurs to me that you might try to contact the HSA custodian and report a $4,125 "mistaken distribution". If the HSA custodian accepts that (they certainly don't have to, so be nice), you will have to send them the $4,125. Then you can request the withdrawal of excess contributions (the $2,155 number this time) and they will send you the $2,155 back. NOTE that this all has to be done by the due date of the return (including extensions), so you probably want to file an extension just to give your self some time to do this.

If the HSA custodian is a good sport and actually allows you to do this, then you need to do only steps #1, #2, and #7. You will have undone the unqualified distribution, although you will still get a 1099-SA next year with the earnings (as you should).

I should have thought of this first, but since the HSA custodian is not required to accept requests for mistaken distributions, you can't count on this working. But it is worth a shot.
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