I opened and funded an HSA in error in 2017. The account was closed and all funds withdrawn in 2017. How do I account for this since I have a 1099-SA?

[workingonit]

Excellent and very informative answer! Here are some added details for clarity.

All contributions were made out of net pay to an institution outside of employer. 1099-SA has a 1 under distribution code.

All contributions were made in 2017 and the account was closed before the end of the year with check received. HSA administrator was informed of mistaken contribution with form to close account.

[BMcCalpin]

OK, most people do their contributions through the employer, so it skews my answer (otherwise, I have to allow for too many options to keep your attention).

Your contributions were not made through the employer, which means that the contributions were not removed from Wages. Good. Your income will be correct.

However, the distribution code of '1' complicates things. Now the IRS thinks you had a valid HSA and that you spent money from it on presumably qualified medical expenses - you do not want to say that you didn't spend it on qualified medical expenses (even though that's what happened).

Call the HSA administrator and see if they will issue a corrected 1099-SA to indicate a code '2'. It was an excess contribution, after all. Also, did they report earnings on the amount in the HSA? If you did all this before 12/31/2017, they should/could have.

Note: we can't make TurboTax work properly if they won't re-issue the 1099-SA with code '2'.

If they won't issue a corrected 1099-SA (not good odds), you should
1. Not enter the 1099-SA (but keep good records in case the IRS asks why you got a 1099-SA).
2. Not add the contribution as a "personal" contribution (in the HSA interview). That is, it should not appear on line 25 of page 1 of the 1040.

The issue is that there is no way to enter this in TurboTax without (1) saying something untrue (that you spent it all on qualified medical expenses), or (2) triggering undeserved penalties (which you would get if you said that you didn't spend it on qualified medical expenses), unless the HSA administrator gives you a 1099-SA with a code of '2'. (If they will, then enter everything as is - the distribution will disappear in the withdrawal of excess contributions, so no penalty).

Just keep good records so that you can explain what happened if the IRS writes you.

[workingonit]

Thank you for your time and expertise. I learned a lot today and will work on getting a corrected 1099-SA

[BMcCalpin · Accepted solution]

You should have told the HSA administration that you had a "Mistaken Contribution" or you wanted to withdraw "excess contributions". In either case, the HSA administrator would have sent you a check for the amount.

Did you tell your employer about this situation?

You need to ask your employer if the contributions that the employer made or that you made through payroll deduction were removed from Wages in boxes 1, 3, and 5 on your W-2. If so, then your employer should have also entered the amount of the contributions on your W-2 in box 12 with a code of W.

This situation (when you go through the HSA interview (Federal->Deductions & Credits->Medical->HSA, MSA Contributions) and indicate that you had "None" for HDHP coverage in 2017) will cause TurboTax to report an excess contribution (good) and will ask you to withdraw the entire excess before the due date of the return. In this case, you can say "OK" because you already have. The excess will be added to Other Income, and hopefully, the 1099-SA has a code of '2' with the earnings on the excess, which will be added to Other Income also.

It may happen that your employer did NOT remove your HSA contributions from Wages on your W-2, but reported the contributions in box 12 with a code of W. In this case, ask the employer for a corrected W-2 - either the amount should be removed from wages and listed in box 12 with code W, or the amount is not removed from wages and no amount is listed in box 12 with a code of W.

What is the distribution code on the 1099-SA? If it is '2', then the earnings will be added to Other Income. If the employer did the W-2 correctly (see paragraph above), then your return should be OK.

If, however, the distribution code is '1', then come back to us, because if the distributions were not for qualified medical expenses (and they could not be, in your situation), not only are they added to Other Income (again), but they are penalized.