Unable to fix HSA excess contribution in TurboTax

[Strats63]

I enrolled to a HDHP and started contributed to an HSA account since 2019.  Only till recently (Apr 2020) I found that I was not eligible to HSA because my spouse has a PPO insurance which covers by an FSA.  This makes my whole contribution (including my employer's contribution) to HSA invalid.

I've contacted my HSA provider, and basically I will first return all distributions back to them (since they were mistaken), and then they will return all contributions back to me as excess contributions.  They won't fix my 2019 1099-SA however, but said this will show up in my 2020's 1099-SA with distribution code 2 that reports mistaken contributions.

My employer also told me that there won't be a corrected w-2 and I should use the info from my HSA provider to file tax.

So now, I think what I should do for 2019 tax, is to not put my 1099-SA into TurboTax (since it should be null in the first place), and report all my contributions shown in w-2 as excess contributions.  However I couldn't find a way to report that as excess contributions in TurboTax: it only asked me questions including if I was in HDHP, overfund in 2018, etc., but didn't ask me if I've overfund in 2019.  I can't seem to find a way to report that my whole w2 contributions was excess contribution.

Please let me know if there's a way for me to correct that, or if I should do something differently.  Thanks!

[Opus 17]

@dmertz 

Don't bother returning the distributions, as long as you used them for qualified expenses.  The penalty for making unallowable contributions is 6% of the contributions, or 6% of the remaining balance, whichever is lower.  So you don't save anything by returning the distributions it just makes extra paperwork.

Your 1099-SA does not change because that represents the money you actually received in 2019 and that doesn't change.  And you must enter the 1099-SA or you will get an automatic mis-match letter from the IRS.  Just enter your contributions from your W-2 and any extra contributions, and enter your distributions, and check the box that yes, they were used for qualified expenses.  Answer that you did not have qualifying insurance.  Turbotax will ask if you plan to remove the excess from your account before the July 15 deadline.  Say yes.  Turbotax may ask you how much you removed (I haven't done this section myself) but it should also ask the closing balance.  So if you remove less than the contribution amount but your closing balance is zero, there won't be a penalty.  The contributions will be added back to your taxable income. 

[Strats63]

Thanks for the reply!  I have a few questions though:

>> Don't bother returning the distributions, as long as you used them for qualified expenses.  The penalty for making unallowable contributions is 6% of the contributions, or 6% of the remaining balance, whichever is lower.  So you don't save anything by returning the distributions it just makes extra paperwork.

My understanding is that if I returned the distribution back before tax due day I shouldn't need to pay the 6% penalty.  Isn't that true?

>>  Your 1099-SA does not change because that represents the money you actually received in 2019 and that doesn't change.  

The 1099-SA only presents the distribution but not the contribution.  It doesn't really say how much I received isn't it?

>> And you must enter the 1099-SA or you will get an automatic mis-match letter from the IRS.  Just enter your contributions from your W-2 and any extra contributions, and enter your distributions, and check the box that yes, they were used for qualified expenses.  Answer that you did not have qualifying insurance.  Turbotax will ask if you plan to remove the excess from your account before the July 15 deadline.  Say yes.  Turbotax may ask you how much you removed (I haven't done this section myself) but it should also ask the closing balance.  So if you remove less than the contribution amount but your closing balance is zero, there won't be a penalty.  The contributions will be added back to your taxable income. 

Thanks.  I tried entering back the 1099-SA amount and followed what you described.  The final amount looks correct.  However if I don't put in the 1099-SA, and similarly marked myself as not having HDHP, the final amount was also the same.  Both showed that my total contribution was excess (correct), and the difference was if I entered 1099-SA it shows I have made distribution, while the other shows zero in distribution.

My confusion now is if I returned the distribution (which as mentioned I think I won't need to pay 6% penalty), doesn't it mean there's actually no distribution happened and I shouldn't put that amount in my tax report?  But according to you sounds like I should still list that distribution or there will be mismatch at IRS?  Thanks!