1099R summary form not working correctly for IRA to HSA rollover

[samgrif]

In 2023 I did a once in a lifetime rollover from my IRA to an HSA.  My IRA custodian sent me a 1099R with code G, total distribution and no taxable amount which is correct.  When I enter this into Turbo Tax Win Desktop version, the amount is carried over twice to the 1099R summary.  Once for the Box 1 Total Distribution and then again for the amount on the TurboTax 1099R form under Insurance - HSA funding distribution.  This causes an incorrect reporting of taxable income on 1040 since the rollover amount is subtracted twice from other 1099R distributions.  I am overriding one of the amounts on the summary (which is a TurboTax form) so that my income is not understated.  This needs to be fixed so that others will not have incorrect taxes.

[ThomasM125]

I made a Form 1099-R entry and left box 2 empty and entered code "G" in box 7 and I didn't have anything get doubled up. Can you clarify that you didn't enter anything in another section regarding the HSA distribution?

[samgrif]

As I mentioned in my post, there are two elements that cause the problem.  First is the code G but also the amount that is filled in on the Insurance line in the TT 1099r.  Did you do that?  If I don’t do that then TT doesn’t properly handle the HSA funding on other forms.

[DawnC]

Are you sure you don't have the 1099-R entered twice?   The summary page should list each 1099 form entered.   What is incorrect on your Form 1040, there should be no taxable income from that 1099-R on Line 4b...  

[samgrif]

Definitely sure I do not have the 1099r entered twice, it’s only there once.  TTax is putting the amount on the summary on line 2 twice which causes it to be subtracted twice from the taxable 1099r’s.  You can easily recreate.  Like I said, the amount on the 1099r on line 1 and the amount from the Insurance section for HSA funding is carried over to the 1099r summary in two places on line 2.  I can fix it by overriding the line 2 summary form for the rollover amount and make it zero.  Since the 1099r summary is just a TTax form it shouldn’t matter, but if anyone does an IRA to HSA rollover they will have understated income.  This is certain without a fix from TTAx on the 1099r.

[BillM223]

"the amount that is filled in on the Insurance line in the TT 1099r" - are you saying that the distribution amount is in box 1 but also in box 5 (Employee contributions/ Designated Roth contributions or insurance premiums)?

If so, that is an error on the part of the administrator that issued the 1099-R. There should not be an entry in box 5 on the 1099-R. Get a corrected 1099-R, or else the IRS will be confused, too.

[dmertz]

An IRA custodian is not permitted to use code G to report an HSA funding distribution.

On the Form 1099-R provided by the payer, is the IRA/SEP/SIMPLE box marked?

[samgrif]

I am not able to find anywhere that says an IRA custodian cannot use code G for a Direct Rollover to an HSA.  There is no other codes that would apply.  Please let me know where to find this rule you mention.  The distribution was a direct rollover from an IRA to an HSA, this is a once a lifetime allowance so is probably pretty rare for TTax to handle.  The IRA box on the 1099R is checked since this was an IRA distribution.  The problems I have are with TurboTax forms, not the IRS forms.  The 1099R summary and the 1099R worksheet are Turbotax forms and are causing the problem.  The 1099R worksheet has a field for HSA funding that I have to fill in to get the rollover amount to move to the 1099R summary which then populates form 8889 to show the funding contribution correctly.  So the 1099R worksheet moves two numbers to the 1099R summary, both the line 1 total distribution and the HSA funding distribution field, a TurboTax only field.  When this happens then the distribution is subtracted twice from the total 1099R distributions from all 1099Rs.  This understates taxable income for the amount of the HSA funding distribution direct rollover. 

[samgrif]

No I did not mean to imply that.  What the 1099R has is box 1 with the total distribution and box 7 is G with X for IRA.  That is all that is filled in on the formal 1099R from the custodian.  What I am saying is that I am entering the HSA funding amount on the 1099R worksheet from Turbotax, it's below the formal boxes on the Win desktop form, along with several other fields and boxes that can be checked.  The distribution was a direct rollover from an IRA to an HSA, this is a once a lifetime allowance so is probably pretty rare for TTax to handle.  The IRA box on the 1099R is checked since this was an IRA distribution.  The problems I have are with TurboTax forms, not the IRS forms.  The 1099R summary and the 1099R worksheet are Turbotax forms and are causing the problem.  The 1099R worksheet has a field for HSA funding that I have to fill in to get the rollover amount to move to the 1099R summary which then populates form 8889 to show the funding contribution correctly.  So the 1099R worksheet moves two numbers to the 1099R summary, both the line 1 total distribution and the HSA funding distribution field, a TurboTax only field.  When this happens then the distribution is subtracted twice from the total 1099R distributions from all 1099Rs.  This understates taxable income for the amount of the HSA funding distribution direct rollover.  

[dmertz]

The instructions for Form 1099-R explicitly say that an HFD is to be reported as a regular IRA distribution.  A regular distribution from a traditional IRA must be reported with either code 1 or code 7, depending on the IRA owner's age, and with the IRA/SEP/SIMPLE box marked.

Code G with the IRA/SEP/SIMPLE box marked is only to be used for a direct rollover from a traditional IRA to a qualified retirement plan (401(k), 403(b), 457(b) or the federal TSP).  TurboTax knows this and will properly not provide any way to indicate that a distribution reported with code G is an HFD.

Contact the IRA custodian to obtain a correction.  They need to issue a corrected code G Form 1099-R showing $0 distributed and issue a proper original Form 1099-R with code 1 or code 7 showing this distribution.  You'll then ignore the code-G Form 1099-R and enter only the proper code-1 or code-7 Form 1099-R.

[samgrif]

Sorry to keep pushing this, I have only found one reference to HSA funding in the 1099r instructions, maybe you can give me a section, page or paragraph that you mention.  This is what I found “There is no special reporting for qualified charitable distributions under section 408(d)(8) or qualified health savings account (HSA) funding distributions described in section 408(d)(9), or for the payment of qualified health insurance premiums (including long-term care insurance premiums) for retired public safety officers described in section 402(l).”

[dmertz]

"No special reporting" means report it as a regular distribution.  That means use code 1 or code 7.

Code G is only for reporting a direct rollover.  An HSA Funding Distribution is not a direct rollover.  The tax code defines a direct rollover as a a distribution  to or from a qualified retirement plan  (a 401(k), 403(b), 457(b) or the federal TSP) paid directly to the receiving account.  Neither an IRA nor an HSA is a qualified retirement plan as defined in the tax code, so code G is not permitted to be used for reporting an HFD.

[samgrif]

I’m not seeing where “no special reporting” implies code G cannot be used.  Here is a clause from Pub 969, and I have seen this many times that an IRA QHFD must be a direct trustee to trustee rollover. 

“Qualified HSA funding distribution.

A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. This distribution can’t be made from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within the tax year in which the distribution would be made.

The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution isn’t included in your income, isn’t deductible, and reduces the amount that can be contributed to your HSA. The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made.

You can generally make only one qualified HSA funding distribution during your lifetime. However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. The total qualified HSA funding distribution can’t be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled.”

So this mean a code 1 or 7 is explicitly excluded.

I still believe that TTax is not handling an IRA QHFD properly, 

[dmertz]

You are choosing to ignore the legal definition of "rollover."  Section 402(c)(1)(B) of the tax code defines a rollover as being the transfer of funds to an "eligible retirement plan."  Section 402(c)(8)(B) defines "eligible retirement plan" and does not include an HSA in the definition.  Therefore, an HFD is not a rollover and code G, which is only permitted to be used to report rollovers, is not permitted to be used to report an HFD.

Banks have well-earned a reputation for misusing code G.  Local branch employees are notoriously poorly trained with respect to initiating distributions from retirement accounts, mark the wrong box on third-party forms commonly used by banks for initiating the movement of funds from IRAs, and the back office blindly reports the transaction based on the mismarked forms.

There is nothing wrong with TurboTax's ability to handle an HFD properly reported of Form 1099-R.  It has done so for many years.  TurboTax cannot be expected to handle an improperly reported HFD.

[samgrif]

I am not satisfied with the status of my problem.  TurboTax has now disallowed me to override the issue that TurboTax is not allowing me to properly report a IRA to HSA direct rollover, I am in the process of getting a response directly from the IRS and will update soon.  My 1099R came from Vanguard Investors, not a local bank.  They say that a Code G direct rollover is valid and can be reported that way.