Is there a way to dispute a gross distribution on a 1099-SA for an HSA?

[ladw]

What if the money was not distributed but paid  back to the employer?

[dmertz]

What is the code in box 3 of the Form 1099-SA?
Was the HSA contribution reported with code W in box 12 of your W-2?

[ladw]

The Code is 1.

[BMcCalpin]

Depending on how the 1099-SA is completed by the HSA custodian, you may or may not have a problem.

When the employer overcontributes to your HSA, this is what should happen:

Case #1

If the employer catches this before 12/31/2018 (for this year), then the employer can ask the HSA custodian to return the money to the employer.

If this is the case, then if the distribution code is '2' on the 1099-SA, then you probably don't have a problem. The employer presumably adjusted the Wages amount on your W-2 to remove the excess so it didn't show up as taxable income. The earnings on the excess contributions were likely left on your HSA, so if you are taxed on it, you at least received it. When the distribution code on the 1099-SA is '2', then TurboTax adds only the amount in box 2 to your Other Income (line 21 on Schedule 1).

Case #2

If the employer doesn't catch the excess contribution until after the end of the year, then the W-2 is likely the way it originally would have been had the employer not realized the problem. You get the excess contribution error message, and you agree to withdraw the excess before April 15th. The excess gets added to your Other Income on line 25, and the HSA custodian sends you a check for the excess (not the employer).

Based on what you have written, it seems that case #1 is what happened (you can confirm this with your employer).

If so, then you should expect a 1099-SA with a distribution code of '2'. Even if the amount of the excess is in box 1, it won't be added to your return. Only the amount in box 2 will be added to your return. If your employer left the earnings in your HSA account, then this is fair.

If the HSA custodian sent you a 1099-SA with a distribution code of '1' and the amount of the excess in box 1, then you need to do two things:

1. File an extension for your return (do this because you can fix many things with an HSA, but only before the due date of the return, including extensions). Filing an extension gives you an extra 6 months to sort this out (but you can still file as soon as this is straightened out - you don't have to actually wait 6 months).
2. Contact your employer and ask them to have the HSA custodian recharacterize the distribution as a "withdrawal of excess contributions" made by the employer. Otherwise the IRS is going to think that you took money out of your HSA for reasons other than paying for qualified medical expenses - which will cause a 20% penalty at the least. Then ask the custodian for a 1099-SA that has only the earnings and a distribution code of '2'. (if they want to put the distribution in box 1, that's OK so long as the distribution code is '2').
   

[ladw]

I was not eligible for the HSA. When me and the employer figured this out I closed the account and and paid all the money back to the employer with a cashiers check of which I have a copy.

[dmertz]

Code 1 indicates a regular distribution from the HSA, not a return of excess contribution.  This distribution of the excess contribution was either done improperly or was reported improperly by the HSA custodian.

See the last part TurboTaxBillMc's answer for what to do for a code-1 Form 1099-SA.

If the HSA custodian refuses to correct the form, you'll need to omit the Form 1099-SA from your tax return, provide an explanation statement with your mailed tax return that the amount returned to the employer was the entire balance in the HSA, qualifying the distribution as a distribution of the excess before the due date of your 2018 tax return despite the code 1 indicating a regular distribution.  If the employer included this amount in box 1 of your 2018 W-2 and the amount was returned to the employer in 2018, your 2018 W-2 should not include this amount in either box 1 or with code W in box 12.  If the employer included the amount in box 1 of your 2018 W-2, the amount was returned to the employer in 2019 the amount is more than $3,000, you'll likely need to treat the amount returned to the employer as a claim of right.