Withdrew excess HSA contribution early in year - still counted as excess contribution?

[cruss]

I accidentally contributed too much to my HSA in 2023, which I withdrew in September 2023 to get be back to the limit. I received 2 1099-SA forms, one for my total overall contribution and one for my excess contribution.

I entered both forms into TurboTax, and now it shows my total contribution as the full number inclusive of the excess that was withdrawn earlier in the year. Will I be penalized even though the excess was already removed?

[PatriciaV]

You have the option to exclude the excess contribution because you removed the excess before the end of 2023.

Or TurboTax can do it for you. Return to the HSA topic and work through the interview until you come to the page "You may want to withdraw money from your HSA." Check the box for "I'll withdraw the full excess contribution by April 15." This removes the excess and the associated penalty.

[cruss]

Thanks! Based on googling, that’s what I expected to do, but I never got to that page. I went through everything up through the final review but couldn’t find it. 

I received one 1099-SA with the Normal Distribution code, and another with the Excess contribution code. I put both in TurboTax and went through all the prompts, but did not end up on a page where I could note that the excess had been removed. 

[DawnC · Accepted solution]

You wouldn't get the prompt because the distribution code told TurboTax that you removed the excess.   The excess funds that were withdrawn will be listed on Form 1099-SA as a distribution, in Box 1, for the tax year in which the distribution was taken. Earnings on excess contributions withdrawn will be in Box 2 and included in Box 1. 

To verify you are not penalized for that entry, look for Form 5329 in your return.   If you were penalized, the penalty would show up on Line 8 of Schedule 2.  

[cruss]

Perfect, thank you so much for the help! 

[Beachfan11]

I overfunded my 2022 HSA contribution.

My deadline was extended until October 15, 2023 (due to living in a county with a disaster)  and I made  an withdrawal of my excess contributions after 4/15/23 but prior to the official filing deadline.

Because it's beyond April 15, 2023, Turbotax won't let me exclude the withdrawn overcontribution.

I can't figure out how to get it to show the correct treatment per the IRS instructions which is

a) excess contributions shown in the tax year (done in 2022 return) and

b) earnings showing as other income in the distribution year

Do I just dummy something up to show the earnings as income rather than in the HSA section?

[Beachfan11]

The only way to get it to work within HSA seems to be

1) Remove excess distributions from the total and leave just the investment income 

2) Change the distribution to "normal" from excess

I think that's the right tax treatment but it won't match the 1099-SA.

https://www.irs.gov/pub/irs-pdf/i8889.pdf

Any suggestions?

[BillM223]

@Beachfan11

I am thinking that when TurboTax asks you if you will withdraw the excess by the due date of April 15, 20XX, you should just say Yes. 

Although the TurboTax interview does not talk about extensions, the instructions for the 8889 clearly state that you can withdraw the excess by the extension date (as you know).

In looking at the 8889, I don't see that withdrawing the excess between April 15th and October 15th would make the form look any different. And the form just says "due date of your return" on line 14b, it does not specify April 15th (which is good since the due date isn't always April 15th).

Give it a try and see what it looks like.

[Beachfan11]

When I am asked whether I will withdraw my excess contribution before April 15, it won't let me, it says it's too late. 

But this clearly a turbotax error, as I could have withdrawn it by April 15, but after the 1099 was issued.  The prevention of me excluding is faulty logic as I could have done it by April 15, no matter when I am filing Turbotax.  It should ask if you already withdrew it before April 15.

This is a clear error in Turbotax.  Where do I report it.

[BillM223]

Is it possible that you had a carryover of excess HSA contributions from 2022?

Because if you tried to withdraw that now, yes, it would tell you that this is too late - IRS rules are that an excess must be withdrawn by the due date (and extension), so an excess on your 2022 return needed to be withdrawn by April 15, 2023 or by the extension date, October 15, 2023 (the days might vary based on the year).

Since you are doing this now in 2024, any excess from 2022 can no longer be withdrawn as an excess contribution.

Please confirm that you had a carryover from 2022, and we'll proceed from there.