HSA Excess Removal, not showing as taxable

[austinjeju]

Hi!

I have a question about how to have my HSA excess contribution reflected properly in TurboTax. I have TurboTax Premium 2023 via the web browser.

My situation

• For the 2022 filing I had $1,430 in excess contributions and paid the 6% excise. 
• For 2023 I was eligible to contribute to my HSA for 6 months (I switched out of a high deductible plan mid-year), and contributed $1,925 through my employer 
• So this means I still had $1,430 in excess contributions by the end of 2023 
• Realizing my mistake, I withdrew funds from my HSA in March 2024, for an amount equal to the excess contribution ($1,430) plus earnings on the excess which I calculated ($325).
• Because I made the withdrawal in 2024 (for the 2023 year), I have not been issued a 1099-SA yet

How I intend for this to show up in TurboTax

• In order to not pay the excise tax, I removed my excess and earnings on the excess. I consider the "excess" a portion of the contributions I made in 2023 and then removed for the same tax year (2023)
• I would expect this amount to be taxable for 2023 given they were reported on my 2023 W-2 
• It's not clear to me whether I would owe the 20% penalty, given I removed the funds in the same year as contribution

How it's actually showing up in TurboTax

• If I indicate that I did not have a 1099-SA, then TurboTax just has me paying the 6% excise tax on the $1,430 excess (same as in 2022)
• If I indicate that I had a 1099-SA (despite not being issued one yet), and fill in the details I'd expect (box 1 is $1,755 and box 2 is $325 and box 3 would have the value 2 for excess contributions), then I see see that I'm paying the 6% excise on $1,430 and have distribution (line 14a) of $1,755 but no Taxable Distribution (line 16). I would have expected to have no excise tax (given I removed the excess) and have a taxable amount which is then reported as income, and potentially the 20% penalty (?).

Any guidance here would be much appreciated. I don't want be stuck with paying a 6% excise tax forever, and so have tried to remove the excess/earnings. If the solution here is to pay the 6% excise in 2023, wait for my official 1099-SA, and handle this in 2024 filing then that's OK too. 

Thanks!

[austinjeju]

Update here --

If I indicate that I had a 1099-SA and classify the distribution in box 3 as a Normal Distribution (code 1)  then I am able to indicate that none of the distribution was used for qualified medical expenses. Then I correctly see the withdrawal $1,755 as a Taxable Distribution on Form 8889 and this amount showing up as Other Income. I no longer see the excess contribution (nor am I paying the 6% excise tax), but would now be paying the Additional 20% tax on the $1,755 distribution. 

So now I believe my question is: am I OK to report that I had a 1099-SA for 2023 Tax year even though I made my distribution in March 2024 (prior to filing) and have not been issued the 1099-SA yet? Thanks!

[BillM223 · Accepted solution]

I would heavily document what you have done and why, in case anyone ever asks. It's hard to imagine the IRS being upset that you are paying extra taxes, and truly you were just trying to stop year-after-year penalties.

So if you do this, just remember that if you get a 1099-SA in the near future, that you have already entered it, so make note that that's what you did.