Mischaracterized Excess Contribution Withdrawal on 1099-SA

[igmcdowell]

In 2020 my insurance changed mid-year to a non-high deductible plan, and I accidentally made an excess contribution when funding my HSA, about $200.

When doing my 2020 taxes, I caught the error, and requested a distribution for that amount from my HSA account before the tax filing deadline (Feb 2021). Unfortunately, when I requested the distribution, I failed to flag it as an excess contribution distribution with the HSA provider (Fidelity).

So this year, I got a 1099-SA from Fidelity showing my 2021 excess contribution withdrawal, but it is categorized as a regular distribution. I called Fidelity's support to see if they could correct the form, but they told me that since it actually applied to the 2020 tax year, it was too late for them to do anything.

Should I just change the 2021 1099-SA when filing to the correct distribution code? I think mechanically all the right things happened, other than there was a clerical error when classifying the distribution. The other part that could be relevant is the money was invested while in the account, so there might be some earnings on the excess contributions that I need to calculate/report.

Thanks!

[BillM223 · Accepted solution]

"Should I just change the 2021 1099-SA when filing to the correct distribution code?"

No, don't do that, because this bound to attract the notice of the IRS - the IRS gets a copy of each W-2 and 1099-SA (and most other forms), so their computer can easily notice discrepancies

At this point, it is difficult to do every thing just right, because the IRS rules don't account for some situations. I assume that in early 2021 when you realized that you had made a $200 excess contribution in 2020, that you told TurboTax that you were going to withdraw the excess by the due date of the return, but when you withdrew it, it was as a regular distribution.

When TurboTax saw that you had an excess, it either (1) added the excess back to Other Income on line 8 of Schedule 1 (1040) if the excess came from employer contributions, or (2) the excess was removed from the HSA deduction on line 12 of the 2020 Schedule 1 (1040) if the excess was from personal (direct) HSA contributions. You can go see how TurboTax handled it.

In either case, you did not get a tax benefit from the excess contribution, so you are not really in a bad place.

As for the $200 1099-SA, do this. Have you spent at any point since you created the HSA $200 on qualified medical expenses that were not reimbursed by insurance or your HSA? If you, make a note that the $200 was to reimburse yourself for such expenses, because you are allowed to take distributions at any time to repay yourself for unreimbursed expenses. Itemize the list.

Before you say NO, consider this:

"Qualified medical expenses. Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Pub. 502, Medical and Dental Expenses.

Amounts paid after 2019 for over-the-counter medicine (whether or not prescribed) and menstrual care products are considered medical care and are considered a covered expense." (See page 9 of IRS Pub 969)

Now can you think of $200 of unreimbursed qualified medical expenses since the day you created the HSA, especially since you are able to include any over-the-counter medicines since January 1, 2020? Just make a list that adds up to $200 and stick it in your tax file - so that when you enter the 1099-SA with the $200, you can truthfully say it was all used for qualified medical expenses and avoid having that amount taxed or penalized.

[igmcdowell]

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@BillM223 wrote:

I assume that in early 2021 when you realized that you had made a $200 excess contribution in 2020, that you told TurboTax that you were going to withdraw the excess by the due date of the return, but when you withdrew it, it was as a regular distribution.

Correct. For my 2020 return I told TurboTax that I made an excess contribution and would withdraw it by the due date, but when I withdrew it I erroneously took it out as a regular distribution.

I definitely have $200 worth of eligible medical expenses last year, that's not a problem. I was concerned the mischaracterization of the withdrawal might be an issue, but if I'm understanding correctly as long as the money is removed "somehow" I'm off the hook for the 6% excise penalty. Does that sound right?

[BillM223]

Yes, no 6% penalty.

If you can document that $200, then no penalty for the distribution, either.

You only thing you haven't done is arranged for the withdrawal of the earnings on the excess that you miswithdrew. I.E., had you told them it was a withdrawal of excess contributions, then the HSA custodian would have calculated the earnings and put them on that 1099-SA you got. But at this point, no one knows what your earnings were and Fidelity is not going to tell you.

So document everything and take some satisfaction that you did what you could.