Turbo tax assumes that the employer excess contribution withdrawal amount will be at most the amount equal to the difference between the contributed amount and the maximum contribution limit. But, what if you withdraw more than that? Turbo Tax is not putting the correct number of my excess contribution withdrawal on the additional income form.
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TurboTax is designed to automatically handle legitimate tax functions. If you make excess HSA contributions, the IRS expects you to withdraw none, some, or all of the excess, plus any earnings on the excess. The IRS does not expect you to withdraw more than the excess, because that falls into a different category, that of making a withdrawal of HSA dollars that are not for qualified medical expenses.
If you withdraw more than the excess (and here I mean excess plus earnings), then when you get the 1099-SA, you need to split it in two:
A. Make the first pseudo-1099-SA to be for the following:
Box 1 - gross distribution is the total excess reported by TurboTax (not what you withdrew)
Box 2 - the earnings on box 1 (the HSA custodian MAY tell you, or you can calculate it yourself (see page 2 in the 1099-SA instructions) -
For HSAs and Archer MSAs, if you are reporting earnings on a distribution of excess contributions, use the method under Regulations section 1.408-11 for calculating the net income attributable to IRA contributions that are distributed as a returned contribution. If the amount in box 2 includes earnings on excess contributions, enter distribution code 2 in box 3.
Box 3 - enter 2 in Box 3.
Box 4 - leave blank
Box 5 - check that this is from an HSA.
B. Make the second pseudo-099-SA to be for the following:
Box 1 - the difference between what you withdrew and the excess that TurboTax reported as excess.
Box 2 - blank or zero
Box 3 - enter 1 in box 3
Box 4 - leave blank
Box 5 - check that this is from an HSA
Then in the following screen that asks if you spent this all on qualified medical expenses, answer NO. This will cause the box 1 amount to be added to your Other Income and will add an additional 20% penalty to your return.
NOTE: this is because the HSA is not a simple savings account that you can withdraw money from willy-nilly. Once money goes into an HSA, there are definite rules for taking it back out again.
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