Excess HSA Contributions in 2022 with an incorrect 1099-sa for 2023

[psonti]

Hi, 

I need to understand what went wrong and how I can correct it.  Here is the scenario:

1. For 2022 tax year, TurboTax (TT) determined we (joint return) made a $1900 excess contribution for HSA.  I understand this is "pre-tax".

2. TT asked if I was going to withdraw the excess contribution before the 2022 tax filing deadline and I indicated Yes.  At this point, I understand that TT must have calculated Taxes on $1900 without penalities as I saw this in the additional income section.

3. I logged into the HSA account provider and withdrew $1900 and I thought it was done.

4. Fast foward to 2023 tax year (now), I see a 1099-SA with a Distribution code of 1.

5. As I do my taxes now for 2023, I think I am getting taxed again for $1900 as TT sees that as a regular distribution and maybe another penalty?

I called the HSA account provider to see if they can reissue a 1099-SA with a distribution code of 2 but they indicated they can't as I did not follow the right process and file some form with them before withdrawing money.  

What is the right way to correct this through TT?  What options do I have?

Please advise.

[dmertz · Accepted solution]

As the HSA custodian indicated, the problem is that you made a regular distribution from your HSA, not a return of contribution; a regular distribution does not constitute a return of contribution.  By doing it incorrectly, you have incurred double taxation of and a 20% additional penalty if you are under age 65.  You'll also need to amend your 2022 tax return by telling 2022 TurboTax that you did not have the excess contribution returned.

You'll need to tell 2023 TurboTax that you had an uncorrected $1,900 excess contribution carried in from 2022 (from which the taxable HSA contribution you received in 2023 will be subtracted on your 2023 Form 5329 to eliminate the penalty for 2023).