HSA Excess Contribution withdrawn before the deadline

[pavben]

In 2022, my employer made a contribution to my HSA of $100, which is what shows on line 9 of form 8889 for 2022. However, I was not HDHP-covered at all that year 2022, so my allowed contribution for the year was $0. TurboTax correctly calculated that $100 was an excess contribution and recommended that I withdraw it by April 15th, 2023, which I did.

The $100 then appeared on Schedule 1 Part 1 8f "Income from Form 8889" for 2022. This also seems correct to me, because the $100 was paid to me and did not qualify as a non-taxable HSA contribution.

Note: From the above, it looks like I was taxed on the $100 during the 2022 tax year, when the $100 was paid to me.

Now I'm preparing my 2023 taxes and I have a 1099-SA from the HSA custodian showing that I took out $100 in 2023. It has Distribution Code 1 (Normal Distribution). Naturally, when I enter this form into TurboTax, my taxable income goes up because it sees the $100 as a taxable distribution.

What I expected: Since the $100 was already part of my 2022 taxable income, the $100 I withdrew from my HSA already had income tax paid on it for 2022, so it should not be taxable in 2023, right?

I could enter it with Distribution Code 2 (Excess contributions) and then it doesn't add it to my taxable income, but this would be using a different code from what is on the form.

What is the correct way to resolve this?

Thanks 🙂

[Mike9241 · Accepted solution]

did you tell the trustee you were withdrawing an excess contribution which is crucial? what about any earnings on the $100. contact the custodian/trustee and see if you can get the code changed to 2. 

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[pavben]

Oh yeah, that makes sense. They have a special form for requesting withdrawals of excess contributions, which I didn't know about until now. It was processed as a normal distribution, which definitely was not what I intended.

That same amount ($100) shows up on my W-2 from 2022 in box 12 with code W, so my withdrawal doesn't seem to account for any profits/losses on the $100, which aligns with it being a normal distribution.

I will contact the custodian and see if they offer any options. Thanks!