HSA opened in error, funded by employer, and immediately closed

[tungher]

My employer mistakenly allowed me to open a HSA account and the employer contributed the maximum of $8300 allowed for a family. I found out later that I did not in fact qualify and closed the account, and the $8300 was transferred to my (employees's) bank account.  I know I need to report this as income, but how do I best do so in turbotax? There should be no penalties as this account was created in error and immediately closed etc. 

[dmertz · Accepted solution]

When you complete the HSA section resulting in the $8,300 code-W amount being and excess contribution, I believe that TurboTax will automatically include the $8,300 on either Form 1040 line 1h or Schedule 1 line 8z, I don't remember which,  to make is taxable income.

[Edit]  Correction, it will appear on Schedule 1 line 8f.

[tungher]

@dmertz - thank you for the quick response. I will be sure to sort this out when I prepare my 2024 taxes. 

[Opus 17]

This will all happen automatically in Turbotax, and it gets reported on form 8889.  The one thing you may need to verify is that the removal of the excess funds was coded by the HSA bank as a "removal of excess funds" and not a regular withdrawal.  Also, you must withdraw any earnings on the excess contribution (this might be a small amount of interest, or maybe nothing if the issue was discovered immediately.)

Turbotax will "see" the contribution from the employer on your W-2.  That will cause the program to ask you about your insurance coverage.  When you answer that you did NOT have a qualifying HDHP, the program will tell you that you need to remove the excess or pay a penalty.  You can answer that you already removed or will remove the excess.  That will cause the program to add the amount to your taxable income.  Tuurbotax should also ask about any earnings, they are also taxable.  

You will also get a 1099-SA from the HSA plan at the end of January, this is a statement of your distributions.  The statement should have code 2 for withdrawal of excess contributions, and not code 1 for a regular distribution.  You must enter this in Turbotax as well. The withdrawal won't be taxable again (because of code 2), but it needs to be there to satisfy the IRS.  If the 1099-SA shows code 1, you will need to get it corrected, which is why you may want to double check (unless you already confirmed) that the withdrawal was a "withdrawal of excess" and not a regular withdrawal.

[dmertz]

Correction, the $8,300 will appear on Schedule 1 line 8f of the tax return for the year of the contribution, 2024 in this case.

[tungher]

@dmertz - thank you for the detailed answer. I am confirming with my HSA administrator to ensure that the paperwork is executed and coded correctly.