How to correct excess HSA contribution withdrawn as normal distribution

[Afraid_Historian7812]

I have made a couple blunders specific to my HSA contribution/withdrawal and am trying to figure out how to clean this up correctly in my tax return. I would appreciate any feedback.

In 2023, I mistakenly contributed an excess $200 to my HSA account. I realized this while filing my taxes on Turbotax in 2024, and withdrew the $200 from my HSA before the April 15 filing deadline. My 2023 tax return did not report any excess contribution (i.e., in form 5329). However, I realize now that I did not withdraw the excess $200 through the correct process and instead withdrew it as a normal distribution. It shows up as a normal distribution on my 1099-SA for 2024 (dist code 1). I called my HSA custodian and they said it is too late and they will not be able to issue a new 1099-SA for 2024 and I should sort this out on my tax return in some other way.

How can I correctly account for this excess contribution that was withdrawn as a normal distribution? Is treating this withdrawal as "withdrawal was not used for qualifying medical expenses" the correct approach?

[Mike9241]

All may be fine since the excess was taken out by 4/15 even though the code was wrong. Removing the excess by the due date of the return eliminates the penalty on the excess. The only issue remaining is if there were earnings. attributable to the excess. they needed to be removed as well. 

I could find nothing definitive about not removing the earnings. My thought would be that they would be treated as an excess contribution not removed.  Form 5329 for 2023 would need to be completed. This could affect 2024 as to the maximum HSA contribution that could be made. 

[Afraid_Historian7812]

Thank you for the response, Mike. Very much appreciate this. 

You are correct, there were earnings on the $200 excess contribution and those were not removed before the 2024 filing deadline. I understand that I will need to work on estimating these, treat those as excess contributions for 2023 and file a form 5329 for the tax year 2023 separately with that amount. My contributions to the HSA in 2024 were well below the limit and the excess earnings would be a small amount, so I do not think this affects my 2024 contributions. 
Regarding the $200 that currently show up as normal distribution on the 1099-SA for 2024 (code 1), do you have any guidance on how to treat those in Turbotax?

[BillM223]

HSA custodians seem to be uniformly loathe to make any corrections, even when the IRS allows them the option.

Well, what to do? So you had a $200 excess for tax year 2023, right? And this excess was carried over to 2024, and you were dinged a 6% penalty in 2023, right?

TurboTax is going to try to use up your 2023 carryover in tax year 2024 (the return you are doing now). The $200 will appear as a "personal" contribution on line 2 of the 8889. If you leave room for this $200 contribution, then the carryover will be over and done with.

As for the 1099-SA with the distribution code of 1, do you have any medical expenses since the start of your HSA that have not been reimbursed by insurance or your HSA? Remember that the spectrum of "medical expenses" can be broad, like contacts, eyeglasses, dentist, all sorts of things - see Pub 502 (Medical and Dental Expenses).

Indeed, if you are ABOUT to make some medical expenses, then use this $200 for it and not your HSA, since by taking the distribution, you were, in essence, taking a distribution to pay for some medical expenses.

And since your 1099-SA is a code 1 and not a code 2, you won't have to worry about the earnings - that's what the 6% is for (in part).