Excess HSA contributions

[DaveTT2019]

I'm doing a friend's tax return in Turbotax Desktop. There were excessive HSA contributions that carried over from 2024TY into 2025TY. She got busy and didn't get her remaining excess withdrawn in 2025 calendar year.   As a result the excess is showing up on the HSA screen with the $40 tax on  the 2025 return I am working on right now. In April she contacted the company managing the HSA and requested they withdraw the remaining excess before the April 15 deadline, which they evidently did.  How do I enter this excess withdrawal done in April of 2026 and get it applied to the return for 2025 so that we are at zero with the ex and also zero on the 6% tax?  Can someone give me the EXACT, STEP BY STEP directions on how to get this done and I am running into dead ends on my Google searches for her situation.  I must be missing something very simple but could use help with the specific instructions, beyond what I am finding online.  Thanks in advance for any help.

Here is the "Your HSA Summary" screen

Here's what we have for your HSA. You can make any changes if needed.

 

Deduction	$1,119
Total distributions	$3,029
Taxable distributions	$0
Taxable earnings on excess contributions	$0
Tax-free company contributions	$3,181
Excess company contributions withdrawn	$0

Where could I enter the "excess contributions withdrawal" that she just did that would reduce her down to zero and thus make the 6% tax also go away. There is a zero on the excess company contributions and I want to have $671 in there which is what the HSA company pulled out and distributed to her in 2026 as excess contributions from previous years.  How do I enter that withdrawal made in 2026 (1st quarter) and get it applied to the 2025 tax year?  Do we enter a second 1099-SA with the withdrawal amount of $671 and enter "2" in the box to signify excess withdrawal.  This is driving me crazy!

[BillM223]

The simple thing that you are missing is that "withdrawal of excess contributions" has two different meanings: the IRS one and the one in plain English.

Simply put, you cannot "withdraw your excess HSA contribution" after the due date (as extended) of your original return. So, as you pointed out, your friend did not withdraw the excess HSA contribution in a timely manner for tax year 2024. After that, she had but two choices:

1. Carry the excess over to a subsequent year to be used as a "personal" contribution on line 2 form 8889. This would require that she (1) have HDHP coverage in the subsequent year, and (2) that she reduce any other contributions so that the carryover plus the current year contributions were less than the HSA contribution limit in the subsequent year.

-OR-

2. Make a "normal" withdrawal equal to the excess in a subsequent year. This will add the distribution of the excess to Other Income along with a 20% penalty when you enter the 1099-SA with a distribution code of '1'.

Obviously, option 1 is much cheaper.

OK, step by step.

Well, I can't give you step-by-step for how to do what you want, because that's not what the IRS wants.

Instead, leave 2025 alone. Was the excess from 2024 carried over to 2025 and used as a "personal" contribution? Look at line on form 8889 on the 2025 return. Is the carry over amount included here? Then your excess does not need to be withdrawn, because it was used up in a subsequent year.

If, however, you receive a 1099-SA, enter it on your 2026 return in early 2027. How you enter it depends on whether or not the distribution code is '1' (enter as is) or '2' (try to have the distribution reversed as a mistaken distribution).

IF your friend will have HDHP coverage and can use up the carry over in 2026, then call the HSA custodian and ask that the "withdrawal of excess contributions" be considered a "mistaken contribution", and be reversed. Your friend will need to sign or submit a form (probably at the HSA custodian's website) and return the dollars that she received.

Then she would need to do preferably option 2 above - carry the excess over to 2026 and use the excess up as a "personal" contribution.

[DaveTT2019]

Thanks for attempting to help. The $1790 excess from 2024 was carried over to 2025 and part of it was used up towards 2025 allowable. The remainder was $671. That can't be withdrawn and applied to the next year as she changed insurance policies and no longer has the high deductible account. As I noted in my post, she did withdraw the remaining $671 in March of this year as an excess contribution and I was hopeing there is someway to account for that and get the penalty waived. I guess my question is when she gets check for $671, will there be a 1099 created for next year (2026 TY) that shows excess contributions removed and listed as number 2 in that category box? Will there also be another 1099 that has her actual distributions used for healthcare expenses which would be a category 1 in the box? It sounds like the steps she should take are to withdrew the excess amount ($671 already done in March 2026), the $40 penalty will be there on the tax return (nothing we can do?) and that is it for the year. When we get the 1099 in 2027 for the 2026 excess contributions withdrawal, it will be entered then and TT will apply it back as additional income and then this whole cycle should be complete. Is that correct?

I know it would have been a lot easier if she had just followed my advice and make sure she had her employee not pull out that last $671 in 2025. That didn't happen and that's what complicated things. It sounds she just pays the $40 fine and chalk it up to experience. Correct?

[BillM223]

1. She will receive a 1099-SA by January 2027 for the withdrawal of excess contributions (distribution code of '2'). This form will go on her 2026 tax return.

2. It sounds like she will also get a 1099-SA with a distribution code of '1' for qualified medical expenses that she already made.

3. The $40 (6% of $671) is the penalty for carrying over the new excess to 2026.

4. As you realize, she won't be able to use the carry over up in a future year unless she gets an HDHP policy again. This would mean 6% a year, forever.

5. She should contact the HSA custodian and ask them to tell her about the $671 withdrawal. 

If the custodian made this a "normal" distribution (distribution code of '1'), then she will just enter this on the 2026 tax return early next year. TurboTax will automatically apply it to the $671 that is being carried over. The bad news is that the $671 will be added to Other Income along with a 20% penalty. The good new is that the carryover will be done with for good.

If the custodian says "but you asked for the withdrawal of excess contributions so the distribution code will be '2' ", then she needs to ask for them to consider this distribution to be a "mistaken distribution" (they don't have to accept this request so tell her to be nice). She will have to send the $671 back to them, and then she will ask for a "normal" distribution (distribution code of '1'), whereupon she will get the $671 back and a new 1099-SA with a code of '1' to enter on next year's return.