2024 HSA Over Contribution Withdrawal Received in 2025

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This is a continuation of this thread from last year: HSA Over Contribution in 2024 

Background:

• Tax Year 2024: I had an HDHP but was ineligible for HSA contributions due to the Medicare look-back rule. I reported my 2024 over-contribution as "Other Income" on my 2024 return.
• Distribution: I requested a corrective distribution, which was processed in March 2025. I received a 2025 1099-SA with Distribution Code 2.
• Current Issue: In TurboTax 2025, I am being assessed a $140 excise tax (6%) on this 2024 amount, even though I already paid income tax on it last year.

My TurboTax 2025 Entries:

1. 1099-SA: Entered the 2025 form with Code 2.
2. HDHP Coverage: Answered "No" for 2025 coverage, but "Family" for Dec 1, 2024 (as I had the plan but wasn't eligible to contribute).
3. Carryover Screen: TurboTax asks for "last year’s excess contribution from Form 5329, line 48."
• My 2024 return did not generate a Form 5329 because I indicated I would withdraw the funds.
• However, the 2025 software is now showing this amount as an excess carryover.

Questions:

1. Since I withdrew the 2024 excess in early 2025 (before the filing deadline), why is it triggering an excise tax now?
2. How should I answer the "Did you overfund your HSA last year?" question if the 2024 excess was "cured" by this 2025 distribution?
3. Is there a specific way to link the 2025 1099-SA (Code 2) to the 2024 over-contribution so it clears the carryover without a penalty?
   
   

Let me know if any clarification or additional information is needed.
Thank you, in advance, for your help.

[BillM223 · Accepted solution]

#2. Since your excess contribution was cured in a timely fashion for 2024, then you should answer the question "Did you overfund your HSA last year?" with NO. This is because what TurboTax really wants to know is did you carry over any excess to this year. 

#3. No, there is no way to link the 1099-SA to an excess, but there is no need to.

#1. I do not know why TurboTax is triggering the excess this year. If you had no 5329 in 2024, then nothing was carried over to 2025, except in the unusual situation that the CarryOver Worksheet mistakenly carried over an entry. If you have the TurboTax Desktop product, you can see the Carryover Worksheet by going to Forms (upper right), then scrolling down on the left until you see Carryovr Wks.

"However, the 2025 software is now showing this amount as an excess carryover." - How is TurboTax doing this? Where does it say that this amount is an "excess carryover"? I can believe "excess" and I can believe "carryover", but "excess carryover"?

Anyway, go back and answer the overfunding question with a NO, and see if that helps. It might not because the amount withdrawn from your previous pass might still be there, which means you will have to do an HSA Reset (see below) to clear this stuck number.

P.S., thank you for the clear and detailed presentation of your situation.

HSA RESET

***Reset***

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop/Windows***

3. Go to the upper right and click on Forms, and 

4. Select the desired form (1099-SA (if one), 8889-T, and 8889-S (if one)). Note the Delete Form button at the bottom of the form’s screen.

*** Desktop/Mac***

3. Switch to Forms Mode by selecting the Forms icon.

4. From the menu, select the form (1099-SA (if one), 8889-T, and 8889-S (if one)) you want to remove (if you don't see it, select Open Form at the top). From the Forms menu, select Remove [form name].

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form 

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one)

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview....