Withdraw excess HSA contribution after 2 years

[sharadbags]

I overcontributed in HSA in 2020. I got off HDHP plan in Apr 2020 due to eligible life situation changes and haven't gone back to HDHP plan. I didn't pay much attention to my tax returns and did overpay the excise taxes for tax year 2020 and 2021. In 2022 when I noticed the problem, I withdrew the overcontribution from my HSA account. So, in Feb 2023 my custodian sent me the right 1099-SA with the distribution code as 'excess contributions'

When in turbotax I enter the 1099-SA it still doesn't deduct the overcontribution, it says since I am not on HDHP plan and the overcontribution was earlier than 2021, this overcontribution can't be withdrawn. It still adds 6% excise tax in my 2022 return. How do I correct this and say that I have already withdrawn and my excess contributions should be removed now.

[Mike9241]

you are taxed on any income included in the withdrawal. on the 5329, if the actual withdrawal was in 2022 then the Fair value of the account should be zero nd needs to be entered

[sharadbags]

I don't fully understand what you are saying? Can you include more details of how can I get the excess contribution removed in tax returns so that I don't have to pay 6% every year.

[dmertz]

This excess contribution can only be corrected by reporting a taxable HSA distribution equal to the amount of the excess.  This means receiving a code-1 Form 1099-SA that shows at least the amount of the excess and indicating that the amount used for qualified medical expenses is only the amount on the Form 1099-SA  that exceeds the amount of the excess.

The HSA custodian has messed up by treating this as a return of contribution before the due date of your 2020 tax return since the distribution was made long after that.  A 2022 Form 1099-SA with code 2 is only permitted when correcting an excess contribution made for 2021or 2022, not for an excess contribution made for 2021.  I suggest contacting the HSA custodian to inform them of their error and to obtain a corrected 2022 Form 1099-SA showing a $0 code-2 distribution and another 2022 Form 1099-SA showing this amount distributed as a regular distribution with code 1.

[sharadbags]

I contacted my HSA custodian, HealtEquity, many times and created ticket for them twice, explaining all the details. Healthequity says 2 is the right code and they won't change it. I have explained the logic that 'there can't be excess contribution in year where there is no contribution' but they are oblivious to it.

What are my options now?

[Mks76]

Hi. I ended up in a similar situation. Were you able to address this? Would you please share how it got corrected?

I ended up over contributing for year  2022 in the month of apr 2023 with post tax money while filing taxes for 2022 and also took some tax saving with that.  This year I realized I was a mistake. I am not eligible for HDHP IN 2022, 2023 and 2024. but plan to have HDHP in 2025. 

My hsa custodian says since I am not hsa eligible, I can not carry forward to future years. And only option is withdraw which comes with code 1 of normal distribution and subjected to 20% penality plus adding this post tax paid money to earnings again. 

[RobertB4444]

Since you are not eligible to have the deduction all of the money that you received a deduction for you need to take into income now.  That means taking all of the money out of the HSA and paying taxes on it.  Unfortunately that is the only way to go here.

@Mks76