I rolled my late wife's HSA over into my HSA. Box 4 is checked (death not code 6). Why is the distribution is being shown as taxable?

[RobertB4444]

A death distribution other than code 6 just means that it is being distributed to a spouse.  Because your wife didn't pay taxes on it when she was alive they're expecting you to pay taxes on it now.  The 1099-SA form that you received doesn't tell the IRS or the system that you rolled the HSA over into your HSA.

You'll need to do a contribution to your HSA for the amount that was in your late wife's account.  The account is yours since you were the named beneficiary.  Enter the 1099-SA into the system just as it is on the form.  Box 4 - FMV on date of death - should match box 1 for the distribution amount.

The next screen will ask if you inherited this from a spouse.  You'll answer yes.

The following screen will ask if you spent the money on medical expenses only.  You'll answer no.  Then check the box that pops up that says "I didn't spend any of it on medical expenses".  The box that pops up at that point will ask how much of the account you rolled over into another HSA.  If you enter the same amount that was in box 1 then none of the distribution will be taxable.  If you enter less than what was in box 1 the leftover portion will be taxable.

Sorry for your loss.

[dmertz · Accepted solution]

If you were the beneficiary of the HSA, code 4 is incorrect.  Code 4 is only to be used for a distribution paid to the estate of the decedent.  An HSA  distribution was truly  made to your wife's estate, the distribution was not eligible for rollover you your own HSA (at least not without an expensive Private Letter Ruling, but likely only if you were executor and sole beneficiary of your wife's estate).

If you were the beneficiary, the HSA should have been moved to your HSA by nonreportable trustee-to-trustee transfer, in which can no Form 1099-SA should have been generated.  By operation of law, if a spouse is the designated (or default) beneficiary, the HSA automatically becomes an HSA of surviving spouse.  The HSA can subsequently be moved by distribution and rollover, reported with code 1 on the Form 1099-SA, but it is better to move an HSA by nonreportable trustee-to-trustee transfer.

If the HSA custodian issued the Form 1099-SA inappropriately or incorrectly, contact the HSA custodian to obtain a corrected form.  However, apparently so many HSA custodians mistakenly use code 4 inappropriately that TurboTax allows a code-4 distribution to be indicated as rolled over even though a true code-4 distribution is not eligible for rollover.