HSA Excess contribution made in 2021, withdrawn in Jan 2022.

[Bruce801]

I over funded my HSA in 2021.

The excess contribution and associated earnings were removed from the HSA in January 2022.  The HSA custodian has classified the distribution of excess contributions and earnings as a 2022 event and said they will report it on my 2022 1099SA. 

Since the distribution was received in 2022 and will be reported on my 2022 1099SA, will it be included on my 2022 8889 and taxed as 2022 income on my 2022 1040 Schedule 1?  Or will it be included on the 2021 1040 Schedule 1? 

All of my 2021 contributions were made through payroll and do not show as income on my W2. 

[Mike9241]

if your HSA contributions were made through payroll they should show up on your w-2 box 12 code w. This includes any employer contribution + any amount taken out of your salary. the amount taken out of your salary should reduce line 1 taxable wages on the w-2.

since you withdrew the excess including earnings before the due date of your 2021 return they are reported on line 14b of form 8889 for 2021 so no penalty. the income withdrawn is also taxable in 2021

[Bruce801]

Thanks @Mike9241 .  If the HSA custodian is correct in telling me that the distribution of excess funds contributed in 2021 will be included on my 2022 1099SA since the funds were removed in January 2022, wont that trigger a taxable distribution in 2022 on line 16 of my 8889 since the amount would be included on line 14a of the 2022 form 8889? 

For 2021, the HSA custodian is saying I will not receive a 1099SA as I did not receive any distributions during 2021.  Is this correct or should they be issuing a 1099SA for the 2022 distribution of the 2021 excess contribution and earnings?

[Mike9241]

it should be on a 2021 1099-sa

here's from the 2020 pub 969 on HSA excess contributions. the rules did not change for 2021

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 Quali-fied 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 (I take the word "for" to mean 2021 - if it said "in" the year I would take it to mean 2022)  you withdraw the contributions and earnings

[Bruce801]

Thanks @Mike9241.  After reading that excerpt from pub 969 and instructions for form 8889 line 13, I figured that I would be reporting the excess contribution as 2021 income and the earnings on the excess contribution as 2022 income.   Thought being that the excess contribution amount was income earned as part of my 2021 salary and the earnings that were withdrawn were delivered to me (earned) in 2022.  Interested to see how turbo tax handles this when I file.  At the end of the day, I'm confident the appropriate steps have been taken to avoid the 6% excise tax as the excess contributions and earnings were removed ahead of the filing deadline.  Thanks again. 

[Mike9241]

before you rush to file you should wait for the 1099-SA from the custodian. you can actually 1 for normal distributions and maybe a second for the removal of excess contributions. then there is form 5498-SA which reports contributions. you need to report normal distributions ( if there were any for reimbursement or payment of qualifying medical expenses) this needs to be reported. an incomplete 8889 can delay a refund for months. 

see this link because I believe that the wording in the IRC makes the income taxable in 2021 even though withdrawn in 2022 because you are withdrawing the excess for 2021.

https://www.hsaedge.com/2016/11/06/how-to-remove-excess-contributions-to-an-hsa/#:~:text=The%20IRS%2...