2018 Employer HSA Overfunded

[krshaf01]

I retired in June 2018, my employer made an excess contribution to my HSA fund of $296 at that time. I carried this overage and paid the yearly tax on the excess until 2025. In 2025, I contacted the HSA fund and withdrew the $296 in March, identifying the withdrawal as an employer overfund. The HSA fund sent me a 2025 1099-SA form, which identified the $296 distribution, but identified this as a Code 1 Normal Distribution, rather than a Code 2 "Excess Contribution" distribution. Is a Code 1 withdrawal closing out the funding excess in TurboTax and in the eyes of the IRS and the HSA fund. I do not believe the TurboTax box is checked indicating overfunding, explicitly indicating an overfunding condition is being addressed. Do I need to ask the HSA fund to provide a new SA form identifying the distribution as Code 2. I suspect there is no impact to the tax, because the $296 is already computed in the taxable income. TurboTax gives a clean review for the above conditions.

Thanks, krs

[BillM223]

No, you can use this 1099-SA to permanently end the year after year carry over. Even though it has a distribution code of '1', when you enter it and state that none of the distribution is for qualified medical expenses, TurboTax will terminate the carryovers. 

According to the IRS' rules (which are not obvious) there are only two ways to cure a carryover of excess contributions, once the original deadline has passed (generally the due date of the original return, or in your case, April 15, 2019. I am ignoring all the changes in due dates for Covid)

1. In a subsequent tax year, reduce HSA contributions so the the carryover can be used up in the subsequent year as a personal contribution (line 2 (8889)).

2. Make a distribution (code 1 on the 1099-SA) and label it NOT for medical expenses. This will cause the carryover amount to be added to income, AND add a 20% penalty. But also in that case, the carryover will be permanently terminated.

It appears to me that your 1099-SA is made up for #2, as it should be, if you are never going to have HDHP coverage again, and you are ready for the carryover to cease.

[krshaf01]

Yes, No 2 solution did answer the question anTurbotax seems to be happy. One exception, 20% penalty was not added because of my age over 65, the overpay just became taxable. Thanks for your help