Unable to clear excess HSA contributions in TurboTax despite entering the correct Code 2 on 2024 Form 1099‑SA

[nickjwang]

I’ve had an overfunded HSA since 2021 due to an employer contribution made during a job change. I missed the correction window that year, so the excess carried forward for several years. In 2024, I finally contacted my HSA custodian and requested a return of excess contribution. They issued a 2024 Form 1099‑SA with Code 2 for the exact excess amount (plus earnings).

I expected that entering this 1099‑SA on my 2024 tax return would automatically clear the excess. However, while preparing my 2025 taxes, I discovered that the excess was still shown as existing on my 2024 return.

I tried amending the 2024 return to fix this, but TurboTax will only zero out Form 5329 Line 48 if I classify the withdrawal as something other than the actual Code 2 reported on my 1099‑SA.

Has anyone run into this? Is there a correct way to clear a prior‑year HSA excess in TurboTax while still reporting the 1099‑SA exactly as issued?

[dmertz · Accepted solution]

After the due date of the tax return for the year for which the excess HSA contribution was made, the excess is only permitted be removed by obtaining an ordinary code-1 distribution of the exact amount of the excess made taxable by not applying it to medical expenses.  A code-2 distribution is only permitted to be made to correct an excess contribution before the due date of the tax return for the year for which the excess contribution was made.  This means that the code-2 2024 Form 1099-R can only be reporting a corrective distribution of a contribution made for 2023 or 2024.  If you made no HSA contribution for 2023 or 2024, the HSA custodian should have refused to process a code-2 distribution in 2024.

[nickjwang]

Thanks for the help! I didn't realize that Code 2 had such a specific timeframe. I’ll contact my custodian to update the 1099-SA to Code 1 so I can get this cleared up in TurboTax. Much appreciated!

[kelly-marriott]

Hi there,

I have a similar issue in 2024, overfunded HSA by $267 due to an employer change.  I contacted Fidelity and they said they cannot refund an excess contribution from 2024 and can only do for 2025 or 2026.  They said talk to my tax advisor to fix?   I know it is only $16 a year, but I don't want to carry this forward forever. 

Multiple people must have provided feedback about this in Turbotax as I noticed the wording has now changed in the 2024 & 2025 desktop version to request the excess is returned.  Thanks for helping us going forward, however any advice on what I can do this year to fix?

Thanks!

Kelly

Any advice?  

[dmertz]

@kelly-marriott , there are several possibilities.  If you are eligible to treat the $267 as part of a contribution for 2025, you can simply do that and you'll have no excess for 2025 and no excess that continues to carry forward.  If you can't do that for 2025, you'll owe the $16 penalty for 2025.  Similarly, if you are HSA eligible in 2026, you could treat the excess carried forward from 2025 as part of your 2026 HSA contribution.

Absent the ability to apply it as part of a contribution for a year in which you are eligible to do so, the excess would need to be resolved by obtaining an ordinary taxable (code 1) distribution from the HSA.  An HSA distribution is made taxable by not applying it to medical expenses.  If you paid medical expenses from your HSA in 2025, you could treat up to $267 of those distributions as not applied to medical expenses, making that portion taxable.  If distributions from the HSA in 2025 were less than $267, you'll need to obtain a taxable distribution of $267 in 2026.  If you are under age 65 when the taxable distribution is made, the distribution is also subject to a 20% (in this case, $53) early-distribution penalty.

[BillM223]

First, are you under an HDHP coverage now or expect to be soon? Applying the excess to next year's HSA contribution limit is the easiest way to get rid of the excess. Apply the excess carried over by making sure that you have allowed for the carryover to be used under the total HSA contribution limit.

If no HDHP coverage, then the alternative allowed by the IRS is this: Contact your HSA custodian and ask for the distribution of the excess. Do not tell them, as I think you know, that this is a withdrawal for excess contributions, but just a regular distribution.

They will send you a check for the amount (which you can spend any way you like), as well as a 1099-SA with a distribution code of '1'.

In your return, enter the 1099-SA in the HSA interview. Several things will happen:

1. The distribution amount will be added to Other Income.

2. A 20% excise tax will be added to Other Income.

3. The carryover of the excess will be gone forever(!)