2025 Distribution of a 2023 excess contribution to HSA

[user177]

In 2023 my husband made an excess contribution to his HSA account, and we did not remove it timely.

We finally had the excess funds removed in April of 2025.  The 20251099-SA has the correct code 2 in box 3.  In the interview I check that he had overfunded his HSA last year, and put the amount of $2829 in the Excess Contribution question.  However, form 5329 line 48 still shows there is an excess contribution and an additional tax.  (We did pay taxes on the $2829 in 2023.)   I have tried changing the answers to the interview but I can't get the 8889 and the 5329 to present the information correctly.  Right now we have:

form 8889 line 2 = $2829; line 14 =$2830 ; line 14b = $2830; line 14c = 0

form 5329 line 42 = $2829 line 45 $0; line 46 $2829 ; line 48 $2829; line 49 $170

In the forms view for form 8889 I see a line in line 2 smart worksheet for "Excess HSA contributions withdrawn before April 15, 2025" but it is blank.  I really just don't want the $2829 to carry over to next year on form 5329 and I want the forms to show we withdrew the excess.   Can you advise what we need to do to get the forms to be correct?

Thank you in advance.

[BillM223]

Since the 2023 excess was not removed in a timely fashion, the 1099-SA should have a distribution code of '1', not '2'. However, it is difficult for HSA custodians to get this right, so if you tell them that this was a distribution for an excess, they take your word for it and put a '2' in the distribution code even when this is not right for a late excess distribution.

Although we normally discourage taxpayers from changing data on forms, you won't be able to get the correct results unless you do.

When you enter the 1099-SA, change the distribution code to '1'. In the interview, be sure to tell TurboTax that this distribution was NOT for qualified medical expenses. This will have three effects:

1. The amount of the distribution will be added to your taxable income.

2. An amount equal to 20% of this distribution will be added to line 17c, Schedule 2 (1040).

3. This will cut off the excess from 2023 so no more penalties.

It is important for you to document what you did and why and save it with the paper copy of your tax return (you keep one, don't you?), in case the IRS ever writes you a letter asking about this.

[user177]

Thank you for the reply.

He is over the age limit where they impose the 20% penalty tax so we don't have that issue thankfully.

I believe code 2 is correct since it is for “excess contributions”  made in 2023, which is when he overfunded his HSA due to retiring that year.  Although it is too late for a "corrective" distribution, I believe he still had excess contributions in the account until we received the check on April 8, 2025.

I did try to use code 1 and call this a normal distribution, not for medical expenses, but it still presents incorrectly.  It adds the $2829 to our taxable income, so we will be paying tax again on this $2829 when we already paid the tax on the $2829 in 2023.

My thought is to leave it as a code 2 "excess contribution" as shown on the 1099-SA, and since the $2829 and the ($1) earnings were withdrawn by the due date of the 2024 return, in the interview I will not check the box that he overfunded his HSA last year (2024) and put $0.00 for the excess contribution question.  When I do this the $170 penalty disappears, and we are only taxed on the $1.00 gain earned on the $2829.  Also, Form 5329 line 48 is blank so the excess contribution is not carrying over to 2026.  (We did pay the $170 penalty both in 2023 and 2024.)  So far this seems to be the most correct way to enter the information.

Thank you for the reminder to I keep records in case I have to explain things to the IRS.  I will keep a copy of the cancelled check from the HSA administrator (deposited before the due date of the 2024 return), and they should be able to verify that we paid taxes on the $2829 on our 2023 return (copy saved in our records as well).  Again, it is my understanding that at this point we should not have to pay income tax again on the $2829 -- we only owe taxes on the earnings in the year (2025) we received the distribution of the excess contribution plus earnings.

[BillM223 · Accepted solution]

One issue is that yes, indeed, according to the IRS rules, there are situations in which you will have to pay income tax on an excess contribution twice.

"I really just don't want the $2829 to carry over to next year on form 5329 and I want the forms to show we withdrew the excess. "

Unfortunately, that's the way the system works, because you did not withdraw the excess in a timely fashion.

Let's see: are you still under HDHP coverage?

I asked about current HDHP coverage because there are only two ways to get rid of an excess contribution carryover (that thing on the 5329): (1) withdraw the money and pay tax on it (again), or (2) reduce your normal HSA contributions in a future year when you have HDHP coverage. In the latter case, the carryover will be applied to your current year HSA contributions (line 2, 8889). If the carryover can be applied with a new excess, then the old carryover excess will be applied to the new year, and the recurring penalty will disappear. 

[user177]

Thank you for your patience.  I have made the changes you recommended.  It’s all making a little more sense now.

To answer your question, neither myself nor my husband is currently under HDHP coverage, and we haven’t been since around the middle of 2023 when he retired.

I didn’t want to believe that we would be double taxed -- pay regular income tax for a second time in addition to an annual excise tax -- on the excess contribution amount of $2829, but it does appear that that is the case.  (I am basing this on the “caution” and the paragraph following on “Deducting an Excess Contribution in a Later Year” in Pub 969.)

Again, thank you so much for your time in clarifying this point for us.

One last issue -- I am checking the self-only box for HDHP coverage in forms mode on Form 8889-T only for purposes of forcing TT to recognize that the form is completed.  It doesn't appear to change the amounts on the forms mentioned above.  Please let me know if in your experience this is an acceptable work around?

Thanks.

[BillM223 · Accepted solution]

Yes, since you will probably never be under HDHP coverage again (your husband certainly not since I figure he is on Medicare), you can't use the cheaper way of discharging the excess that is carried over. This leaves only the distribution way, paying income tax twice as well as the "excise tax" (good for you for finding that term - most people don't)

"I am checking the self-only box for HDHP coverage in forms mode on Form 8889-T only for purposes of forcing TT to recognize that the form is completed. " - is this in reference to a question in the Review wherein TurboTax asks you to enter either Self or Family on line 1 on the 8889? Yes, it seems that you have been doing your research on this issue! Yes, since you have already told TurboTax that you did not have any HDHP coverage for 2025, the review in TurboTax is puzzled on why you have a form 8889 when you don't have HDHP coverage. No matter, do as you intend and check Self, so you can get around this obstacle. Yes, this is acceptable.