Excess HSA Contributions - novice

[NSiw2874]

During my 2024 income tax filing, my Turbo Tax desktop informed me that I had excess HSA contribution for $999 that I need to withdrew + the amount of earning.  I contacted Fidelity to withdraw on February 14, 2025, to withdraw the $999 amount but forgot to add the earning.  In my 2024 filing, I did not do anything regarding Form 8889 and Form 5329 (I though it would be done automatically)

I'm preparing 2025 filing entered 1099-SA as per form received (which showed Distribution Code = 1). I also did my HSA contribution for 2025 ($5,300).  Turbo tax now show $999 withdraw as income and indicated that I still also have $50 excess to withdraw.  I did some research and realize that distribution code should be 2 and I also have to withdraw and report the earning of that $999.  I think it has to be something to do with Form 8889 and 5329.

dear Experts, can you guide me on what to do please?

[BillM223]

Did you tell Fidelity in February of last year that this was for "the withdrawal of excess contributions"? For example, did you go to their website and find a form for this and use it?

Evidently, they understood this to be a normal withdrawal. This presents a problem. The first solution might be to contact Fidelity and ask if they will, in effect change this request for a normal withdrawal to a request for a withdrawal for excess contributions. If they did, they will issue a new 1099-SA but this time with a distribution code of '2'. Also, if they are on the ball, they should calculate the interest for you - if for no other reason that you don't have access to all the information necessary to do this completely accurately.

However, I have noticed that HSA custodians tend to be reluctant to fix their "mistakes" or anything from the previous year, their mistake or not.

Yes, the 8889 and 5329 will be handled automatically. 

Please let me know what Fidelity says before I present you with multiple choices about this 1099-SA.

[NSiw2874]

Just talked to Fidelity Rep. Here is what he said for each point

- about fixing the 1099-SA to make it as "Withdrawal of Excess Contribution: + calculating the earning, he cannot do that because it already passed their deadline of fixing errors for 2024 (which was April 15 2025).  He said I need to work with tax Advisor to calculate the earning and fill the form as needed.  For this one, I contributed $1,300 on 10/16/2024 and withdrew on 02/13/2025 (settled on 02/14/2025)

- about the possible $50 excess contribution made for 2025, he is going to send me the request form to get it done etc.

Your advice please

[NSiw2874]

** CORRECTION **

About 2024 HSA Contribution activity

- 02/01/2024 - retired from work

- July 2024 - I initiated a transfer of existing HSA account balance from my company HSA custodian to Fidelity

- 08/15/2024 - HSA account balance has been settled with Fidelity

- 08/15/2024 - I made remaining 2024 contribution amount $4,175

- 02/13/2025 - excess amount with drew $999

[BillM223]

"he cannot do that because it already passed their deadline of fixing errors for 2024" - Actually I am happy to hear that, because too many HSA custodians really have no idea how to apply the HSA regulations. However, this leaves more work for you.

First, you will need to determine at what point over the year, your contributions became excess. You start your earnings calculation from that date with the amount that is excess. 

Then to calculate the earnings, please look at the following paragraph from page 3 of the Instructions for form 1099-SA:

For HSAs and Archer MSAs, if you are reporting earnings on a distribution of excess contributions, use the method under Regulations section 1.408-11 for calculating the net income attributable to IRA contributions that are distributed as a returned contribution. If the amount in box 2 includes earnings on excess contributions, enter distribution code 2 in box 3.

Unfortunately, I can't do the calculation for you, because that would have me crossing the line into being considered to have substantially done your tax return (i.e. I would have to sign your return).

At this point, you might seriously consider having professional help to do your return. As you surely have noticed, TurboTax would happily do your return for you (meaning everything, not just this section 1.408-11 calculation). Please see TurboTax Full service.

[NSiw2874]

'First, you will need to determine at what point over the year, your contributions became excess. You start your earnings calculation from that date with the amount that is excess'  I was aware of the excess during early Feb 2024 while working on my 2024 tax return. I would say around Feb 8, 2024. So, to put that into the time line, it will be like this

About 2024 HSA Contribution activity

- 02/01/2024 - retired from work

- July 2024 - I initiated a transfer of existing HSA account balance from my company HSA custodian to Fidelity

- 08/15/2024 - HSA account balance has been settled with Fidelity

- 08/15/2024 - I made remaining 2024 contribution amount $4,175

- 02/8/2024 - became aware of $999 excess amount

- 02/13/2025 - excess amount with drew $999

I can see all transactions from Fidelity portal, I know the fund name, #shares sell price on 2/13/24. In this case, I would think that Earning$ = [#Shares Sold] * [price diff between 8-13 Feb 24]

I would appreciate your advice on next steps, i.e.,

- To produce the corrected version of 1099-SA form, i.e., can I get a blank form from T.Tax desktop version and fill it.

- Do I need to submit it along with Form 5498-SA as well? (any advice on how to fill it correctly?)

- Lastly, how to I submit them? I'm not sure if there is a way to incorporate it into T.Tax 2025 that I am working on or I have to print and mail it in?

Also another point about $50 T.Tax tells me today as excess for 2025 HSA contribution ☹️

For this, I will ask Fidelity to provide excess distribution, I assume I should be getting their 1099-SA with code 2 and once I entered this into T.Tax then it should detect this automatically.  Once that is done, then I can e-file my 2025 stuff. Is my understanding correct?

Thanks again for your advice, 

[NSiw2874]

I just checked the fund price, 2/7/24 Closing @ $26.81 and Sold price 2/14/24 @ $26.69 and total shares sold = 37.43 shares

==> 37.43 * (26.69-26.81) = -4.49$ . . . so it is a loss !!

[BillM223]

I am not "doing" your return, but I would consider doing this:

- To produce the corrected version of 1099-SA form, i.e., can I get a blank form from T.Tax desktop version and fill it.

Yes, you will need a record of what you did and why. You don't need to send this to the IRS, who will wonder why you send it to them. Yes, You will need to either delete the original 1099-SA or set the dollar values to zero, and add your new 1099-SA. 

NOTE: any change to a form that is copied to the IRS (like the original 1099-SA) may invite a letter from the IRS. However, these kinds of letters consist of (1) notice of an adjustment and please pay (or receive), and (2) a request to explain if you accept the IRS's adjustment and if not, why not. This gives you every chance to explain what you did and why, emphasizing that you are attempting to correct a mistake from 2024. In my experience, the people at the IRS who send these letters out are not out to get blood from a stone.

- Do I need to submit it along with Form 5498-SA as well? (any advice on how to fill it correctly?)

Since the 5498-SA is only an advisory form, you don't have to make any changes to it, unless you want to make some notes of what you did and why.

- Lastly, how to I submit them? I'm not sure if there is a way to incorporate it into T.Tax 2025 that I am working on or I have to print and mail it in?

As noted above, delete the original 2024-SA and insert the new one, recognizing the likelihood of triggering an IRS letter (this really can't be helped, and besides, if the IRS discovers this issue  later in an audit, you would very likely pay interest from 2024 on any amount due as a result).

No, you can't incorporate the 2024 earnings into 2025.

Yes, ask for the withdrawal of excess HSA contributions now (i.e., at least before April 15th) before your 2025 return. As noted, there is likely a form for this on the Fidelity website. Also note that Fidelity should calculate the earnings for you and add it to the excess amount. I am curious to see what they will do with your loss.