HSA Excess withdrawal amount

[univ0298]

My wife and I made a simple HSA over contribution mistake in 2021 (we misunderstood how the limit works when we had one family-covering HSA and one individual - turns out the limit was still the family maximum, not a combination of family and individual). 

We realized this early and already withdrew the excess from hers towards the end of last year. We did this as a quick and easy calculation that we were $1791 over contributed, and then used Fidelity's excess form to withdraw this. But I figured it wouldn't hurt to round up to $1800 and that's what we actually withdrew (and have a 1099-SA from Fidelity now that shows this).

So.. simple $1791 excess, simple $1800 withdrawal done in plenty of time inside the same 2021 year.

The concern/question I have though is that Turbo Tax is insisting that the excess withdrawal must be $1791. I can't seem to tell it that we actually withdrew $1800. 

Does anyone know how I can handle this or what I'm supposed to do? Or does it even matter? Thank you!

[GeorgeM777]

Because the actual amount of the excess contribution (and subsequent withdrawal) was $1,791, that is the correct amount to include on your return ( the withdrawal of that excess appears to have been done timely).  The additional amount that you withdrew, the $9.00, may need to be included on your return as a taxable withdrawal assuming it was not a qualified HSA distribution.   Qualified HSA distributions are not taxable, but the taxpayer must still file IRS Form 8889 to report any distributions made during the year.

If you take a non-qualified distribution, you are subject to ordinary income tax on the distribution and a 20% penalty tax. The penalty may not apply:

• if you are age 65 or older,
• if you are disabled or
• for the year in which you die.

The IRS requires that you confirm your distributions are for qualified medical expenses. It is your responsibility to keep all documents (such as receipts) that show how you used your HSA, including for non-qualified transactions, and self-report accordingly on your annual tax return.

You should have received a 1099 SA form.  Refer to it again as you move through that part of the TurboTax application that relates to HSA withdrawals.  As you move through the TurboTax application relating to HSA withdrawals you will see a screen which asks: "Did you spend all the money you took out on medical expenses?"   Answer the question appropriately and follow the remaining steps.  

[univ0298]

Thank you George for that fast reply. I understand the concepts you're saying I think:

- I over-contributed $1791 and was returned that amount from the HSA (part of the overall $1800 distribution). Therefore that $1791 amount goes on 1040 line 8 as income (since it was never taxed). This part is simple at first sight...

After that I am still confused unfortunately. I have a 1099-SA that says $1800 was a 'distribution code 2' (excess contribution withdrawal). Clearly that's not true but I guess the HSA provider is showing that because that's what I asked them to withdraw as excess. But when I punch this into Turbo Tax it is not asking me about the $9 difference anywhere. It's not asking me at all about the "Did you spend all the money you took out on medical questions?". 

I am thinking that Turbo Tax should be putting all $1800 onto the line 8 (for income) so I can be taxed on it. OR it should be putting $1791 like it has, and then doing something else with the extra $9. Because right now I don't think that $9 is accounted for as an HSA distribution (qualified or not) and it not accounted for as income.

PS Our HSAs are reported in W2 box 12-w

[BillM223 · Accepted solution]

TurboTax correctly calculated the excess contribution to be $1,791, and added that amount to line 8 on Schedule 1 (1040) as Other Income. It did this because, as you understand, an HSA contribution made through your employer (whether by your employer or by you through payroll deduction) is removed from Wages in boxes 1, 3, and 5 before your W-2 is printed. This these dollars would not be included in your income, but since part of the contribution was in excess, the excess has to be made taxable again, which it is on line 8.

As for the $9 too much that you withdrew, please understand that the HSA is not an ordinary savings account that you can deposit money into or withdraw money out of willy-nilly. The $9 is not an excess contribution, so it cannot be treated as one. Instead, if you elect to keep the $9, when you get the 1099-SA for the $1,800 (you don't have it yet, do you?), then when it arrives, you will need to break up the 1099-SA into two 1099-SAs: one for $1,791 with the distribution code of 2, and one for $9 with the distribution code of 1. On the $9 1099-SA, when it asks if this distribution was for qualified medical expenses, answer NO, and not only will it be added to Other Income as a taxable HSA distribution, but you will also be penalized 20% on the $9 as it appropriate for a non-qualified distribution.

Yes, this means that you are changing one form and creating another form that didn't exist - but you will keep all your paperwork and notes to explain what you did and why. The point here is that the correct income will be reported, so you will be OK, in case anyone ever asks.

One alternative to the split 1099-SA is this: contact your HSA custodian and tell them that the excess amount that you had reported earlier was incorrect, that the actual amount was $1,791, which makes the other $9 a "mistaken distribution". Custodians may accept the report of a mistaken distribution (they don't have to so be nice), and see if they will convert the original excess contribution report to $1,791, and issue an amended 1099-SA for $1,791. It's worth a shot.

NOTE: if they accept your request for handling a mistaken distribution, then you fill out a form (probably online at their website) and send them a check for $9.

[univ0298]

Awesome help thank you so much!

I think both the options you suggest are viable. I actually contacted Fidelity and they said I could report the mistaken distribution of $9, add a letter of explanation, and a check. Form is here: Fidelity HSA return mistaken distribution

They said they would not send a corrected 1099-SA in this case (yes I already have the 1099-SA) so even if I do this I wouldn't have a 1099-SA that showed $1791, so I think your alternative to split this 1099-SA up and use the $9 as a qualified distribution (with a supporting medical expense receipt) is equally ok as an option.

Again thanks so much