Excess 2023 HSA contributions but withdrew in 2024

[kledwa13]

I over contributed to my HSA in 2023. I did not realize the excess contributions until turbo tax prompted me about coverage per month of 2023 this past week. I called HSA provider and have started the process to get the excess contributions withdrawn prior to tax deadline and they stated that this withdrawal of excess contributions will show up on a 2024 1099-SA. I did not receive a 1099-SA in 2023 because I had no distributions during the year. 

To my understanding I have to claim the withdrawal of excess contributions and the investment gain on the excess contributions (the # is being calculated for my by HSA company). But if this withdrawal is not being reflected until the 2024 1099-SA do i have to report it in 2024 as well?

Also am i missing anything in the process above to report the excess contributions? and I saw somewhere that there is a 20% penalty on top of income tax on the excessive contributions, is this true?

[BillM223 · Accepted solution]

You are doing fine.

1. The moment that the excess contributions were discovered by TurboTax, if they were the result of "employer contributions", then the excess is added back to Other Income - you don't have to do anything about this (in fact, please don't even try).

2. The HSA custodian will calculate the amount of earnings that the excess earned while it was in the HSA. 

3. This amount will be put on to a 1099-SA for 2024: Box 1 may or may not contain the excess, box 2 will contain the earnings for 2024, box 3 will contain a distribution code of 2 for 2024, in which case the box 1 amount is ignored.

4. Yes, this 1099-SA is for 2024. Why? Because your excess was already added to 2023 income by TurboTax, and the earnings were earned in tax years 2023 and 2024.

5. You've got the process. The 20% penalty is for 2 different cases: (1) if you have to do a distribution but not for qualified medical expenses, or (2) you have to cut off a carryover of excess contributions by doing a distribution not for medical expenses.

Neither of these apply to you.

[kledwa13]

Update: Called the HSA custodian, they told me that because my base HSA account is not an interest bearing account, the excess contribution from their perspective did not earn anything, therefore the removal would just be the excess contribution. 

BUT, the excess contribution was invested in the market through the investment platform side of the HSA through a broker. It was my understanding that that investment gain would also need to be removed in addition to the excess contributions themselves. is this wrong? 

Therefore I am struggling to find the number that I actually need to pull as an excess contribution. Any resources for how to figure this number out?

Or do i just need to pull the excess contributions as HSA custodian said and not investment gains?

Thanks

[BillM223]

Here is the statute for calculating the earnings on the excess contributions - here. Yes, it says for IRA, but the calculations are the same as for HSA.

You are correct that when you make excess contributions, when you request the "withdrawal of excess contributions" from the HSA custodian, that the custodian should also calculate what the excess earned while it was in the HSA and add that to the 1099-SA to be sent to you.

Ask for a supervisor at your HSA custodian, because there is no reason you should have to do this calculation.

If they refuse to make the calculation, use the link at the top to do it yourself, and document this situation so you can tell the auditor how your HSA custodian fell short on the job if you are ever audited.

[kledwa13]

Thank you for the info. So just to be sure I am clear ill use my actual numbers:

I had an excess contribution of $2887 for tax year 2023. This excess earned (based on my best attempt at the calculation) $1,590.

Therefore I should be withdrawing $4,477 from the HSA immediately, with reason of "excess contribution".

On my 2023 taxes, turbo tax will only show that this 2887 as "excess employer contribution withdrawn", and nothing in the category of "taxable earnings on excess contributions". Then, I should receive a 1099-SA from HSA custodian for tax year 2024 that shows $4,477 in box 1 for total distribution, $1,590 in box 2 for earnings on excess contributions, and a distribution code of 2 in box 3. At which time when filing for 2024, turbo tax will prompt me about what to do with the earnings?

[BillM223]

No, your 2024 1099-SA should look like this:

Box 1: 2887 (the original excess)

Box 2: 1,590 (but only if the HSA custodian grew up and calculated the excess the same way that you did)

Box 3: 2 (indicates a withdrawal for excess contributions)

Box 4-6: empty

"Therefore I should be withdrawing $4,477 from the HSA immediately, with reason of "excess contribution"." - This is backwards, but only because your HSA custodian refuses to do their job and calculate the earnings themselves. The way it should work is that you ask for the withdrawal of the original excess, then the custodian calculates the earnings, then the custodian sends you a check for excess and earnings, and the custodian sends you a 1099-SA with excess in box 1, earnings in box 2, and distribution code in box 3. Simple if your custodian would just co-operate.

HOWEVER, since your custodian will not do their job, do what you said about withdrawing the 4,477, and edit 1099-SA to match - UNLESS the custodian puts something in box 2 in which case you'll have to go to plan B.

 "turbo tax will prompt me about what to do with the earnings?" - the earnings are entered as part of the entry of the 1099-SA. You are not separately prompted for this.

In any case, you must document what you did and why, in case someone asks about it later, because you won't remember by then.