I had an excess HSA contribution in year 2021. We withdrew that amount in year 2022. So, we received a 1099-SA form with a distribution code "2". Unfortunately, TurboTax still believes I don't have taxable distributions in the 8889 form. Therefore, I continue to have excess HSA contributions in the 5329 form. What should I do?
To clarify, did you withdraw the excess 2021 contribution before April 18, 2022. If so, you will need to amend your 2021 tax return that reports this withdrawal.
Unfortunately, we withdrew the excess 2021 contribution after April 18, 2022, and before Dec 31, 2022. Thanks!
To clarify again, did you report the 1099 SA in the return? Also did you make any contributions to your HSA account and do you have a family plan or a self-only plan?
Yes, I entered the 1099-SA in TurboTax (with a distribution code "2"). Unfortunately, TurboTax still believes I don't have taxable distributions in the 8889 form. Therefore, I continue to have excess HSA contributions in the 5329 form.
In 2022, I continued to contribute to the HSA account (but did not over-contribute).
Double check that you entered code 2. If you inadvertently entered code 1 , normal distribution and you indicated that you used the money to pay for your medical expenses in the next screen, then the distribution would not be taxable.
My next suggestion would be
Go back to your original entry input and delete it.
See here
then reenter the information by hitting the search glass and typing in 1099sa, go to jump to and reenter the information
from scratch.
I tried (that is, I deleted it and re-entered the form). It is still the same.
Hi, all,
I believe this is a bug in TurboTax (in both desktop and on-line versions). I usedProConnect (another software by Intuit). The treatments are very different.
Background: The over-contributed $130 in the year 2021 was withdrawn in the year 2022. In 1099-SA, box 3 has code "2-Excess contributions" as the distribution code.
In TurboTax's 8889 form, $130 is not taxable.
Therefore, in 5329, I continued to have $130 excess contribution.
And, the $130 is never added to my income in the year 2022.
However, ProConnect treated it differently. In 8889, $130 distribution is considered taxable.
Then, I no longer have excess contributions in 5329 after the year 2022.
Furthermore, $130 is added to my total income.
Any comments are welcome.
Because we get into answering this, we need to know some things.
1. You are referring to a 1099-SA, not a 1098-SA or anything like it (like an SSA-1099 or any 1098)?
2. Box 5 on the 1099-SA is not the distribution code - this is in box 3.
3. 1099-SAs with regular distributions and/or earnings in excess contributions, are not tightly tied to a tax year in TurboTax. That is, the distribution code of '2' just reports an amount to be added to taxable income for the current year, no matter if the 1099-SA was generated by events in the current year or the previous year.
4. Did you not receive two 1099-SAs: one with a distribution code of '1' and another with a distribution code of '2'? I think that the confusion is rooted in the fact that you got one and entered it, and not the other.
Please confirm the amounts in all the boxes in your 1099-SA.
Sorry about the TYPOs in my previous post.
(1) It is 1099-SA.
(2) It is Box 3.
(3) I did not take any other money out from HSA (even for any medical expenses). Thus, there is only one 1099-SA.
It appears based on your information (removing the excess but after the filing date for 2021) that you will have a penalty for 2022. An excise tax would be required in 2022 since the excess contributions were not removed by the required date which was you filing date for your 2021 tax return (after April 18th, 2022).
Excess contributions.
You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return.
Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.
You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.
You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
My question is, which of Intuit's tax software treats the withdrawal correctly? I have used both TurboTax and ProConnect and shared the screenshots.
In TurboTax Desktop, using most of your data the desired result on Form 8889, Line 16 may need a change to the answers. I realize you do not show any earnings on your return but there should be an amount for this. This information comes from the holder of the HSA. The full distribution is taxable and has a penalty that is calculated on Form 8889. Both appear on the right lines (Schedule 1 for the taxable amount and Schedule 2 for the additional tax).
Let's try another approach. You can send us a “diagnostic” file that has your “numbers” but not your personal information. If you would like to do this, here are the instructions:
TurboTax Online:
Go to the black panel on the left side of your program and select Tax Tools.
TurboTax CD/Download:
If you like, you can send a copy of your return that will be scrubbed to eliminate your personal data by using these steps:
We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.
@YKChen
[Edited: 02/23/2023 | 1:52p PST]
If I have to override Form 8889, Line 16, does this mean I cannot e-file?
The article has a statement: "Returns that contain overrides cannot be e-filed."
Has anyone tried the e-file with some line item value over-written?
The error is on your 2021 tax return. You must amend the 2021 tax return to show that there was no excess contribution in 2021 because, presumably (because you received a code-2 Form 1099-SA), the return of the excess contribution was made before the extended due date of your tax 2021 tax return, October 17, 2022.
When amending your 2021 tax return you must indicate that it is "Filed pursuant to section 301.9100-2."
This eliminates the excess and your 2022 Form 8889 should show no taxable distributions.
@dmertz No, I withdrew the excess contribution after Oct 17, 2022 and before Dec 31, 2022.
TurboTax should ask me when I withdrew the money and treated it correctly in the 2023 tax return.
If the distribution occurred after October 17, 2022, the HSA custodian made a mistake by processing this as a return of excess contribution (unless they thought were processing a return of a contribution made for 2022). For a regular distribution after October 17, 2022 to resolve an excess HSA contribution made for 2021 should have code 1. Contact the HSA custodian to have them correct the code-2 Form 1099-SA to show $0 and obtain a new Form 1099-R reporting the distribution with code 1.
Is there a document that describes the code should be 1 instead of 2? I would love to see that instruction.
The IRS guidance does a poor job of explaining this. Section 223(f)(3)(A)(i) of the tax code states that the deadline for obtaining a return of excess contribution, the type of distribution that can be reported with code 2, is the due date for filing the tax return and must include, shown in box 2, the net earnings attributable to the excess being returned. Because any normal (code 1) distribution from the HSA that is made taxable by not applying it to qualified medical expenses is applied against excess contributions, Forms 1099-SA distributions after the due date of the tax return to correct excess contributions should always have code 1. Using code 2 to also indicate distributions of excess contributions after the due date of the tax return would make it impossible for the IRS to determine the taxability of the distribution.
Hi @dmertz, sorry to bring up this old thread but I think my situation is relevant to this question.
I had $3,850 of excess contributions in 2023, withdrawn in December 2024. I amended 2023 to pay taxes (other income) and the 6% penalty on the excess, but when I withdrew the 2023 excess plus earnings ($4,098) in 2024, the 1099-SA was coded as 2, excess contributions (probably my mistake). This is causing my 2024 return to not appear how I think it should, with only the excess $248 in other income.
I assume I need the administrator to re-issue the 1099-SA with code 1 based on your responses? And if they won't, I guess I will just file how I *think* the 1099-SA should appear and provide an explanation somewhere on the return?
As a side note, Box 2 only has $0.78. When requesting the distribution, I did my own calculation of excess + earnings and this amount is probably the residual that I was off by. Am I understanding correctly that because this is truly not an excess distribution anymore, Box 1 should remain the same, Box 2 should be zero, and Box 3 should be code 1?
Thank you!
If you think you should be taking a distribution in December 2024 not for medical expenses in order to cut off the excess from 2023, then, yes, the 1099-SA should have in box 1 the total distribution, box 2 might as well have nothing, and box 3 should have "1".
You understand that any time that you change entries on a form that is copied to the IRS, that the IRS may write you can ask why, but it seems that you understand that you will have to document what you did and why. Please do not add any explanation to your return, since the IRS - at this time anyway - is not really capable of handling such things. It's enough that you will be prepared to respond to a query, if that ever happens.
And yes, I am ignoring the $0.78. In the big scheme of things, your distribution added to Other Income and the 20% penalty, will swamp any need to address that.
Thank you, so as I understand it, this is what I should see:
2023 Return - $3,850 in other income and 6% penalty (already amended and paid)
2024 Return - $248 earnings in other income, and no 6% penalty because all 2023 activity was withdrawn before 12/31/2024
I understand that I will have to pay the 20% penalty on the full $4,098. Can this be avoided (fully or partially) if I indicate that I used the distribution for medical expenses? As I understand it, even though I was ineligible for the HSA in the first place, I can still use these funds for medical expenses and avoid the 20%?
If you are using this distribution to cut off the carryover of excess contributions, you must take a distribution of the entire excess amount and pay tax on it and the 20% penalty. If you try to say that you use some of it for medical expenses, then the carryover will not be cut off.
However, since you still have an HSA (I don't now how much cash is in it), you can still take distributions to pay for qualified medical expenses tax-free, even after you no longer have HDHP coverage. You just can't do it to cut off the carryover of excess contributions.