HSA 1099-SA distribution code question

[indexfundinvestor]

Hello and good day, everyone! 

This forum has been very helpful and a special thanks to @BillM223 and @dmertz for excellent help in the past! 

Hopefully this is my last HSA question, and I am probably over thinking this. There was a small excess contribution made by an employer for tax year 2020 (less than $20 and its a long story) and my wife and I specifically requested an excess contribution distribution before April 15th last year. We got the check and "cured" the excess contribution for 2020. TurboTax and 2020 taxes were good.  

Fast forward to this year. We received a 1099-SA with the amount received; however, the HSA custodian coded the distribution as "1" (Normal Distribution), not "2" like we specifically requested. The custodian is difficult to work with and does not want to send a corrected 1099-SA. My wife and I have had plenty of qualified medical expenses for the past few years. Can we just say this was used for qualified medical expenses? Or, should we say it was not used for qualified medical expenses, pay the tax and penalty and move on? 

Hopefully this makes sense, and thank you in advance for any guidance. 

[dmertz]

For this as a code-1 distribution to be able to correct the excess, you must indicate that it was not used for medical expenses, subjecting the distribution to ordinary income tax and a 20% penalty.  By making it taxable, TurboTax will include the $20 on Form 8889 line 16 and on Form 5329 line 44.

By not treating this as a code-2 return of excess contribution, the excess for 2020 was not cured and your 2020 Form 5329 must show this excess contribution on line 48

Between the two tax years you'll have penalties of $1 + $4 and ordinary income tax on $20, probably cheap enough to make it not worth the effort to fight the HSA company.  (The $1 excess contribution penalty for 2020 not reported can probably be considered to be a de minimis error and be ignored.  It's doubtful that the IRS would come after you for $1.)

[indexfundinvestor]

Thank you @dmertz !