HSA (overfunding question)

[indexfundinvestor]

Hello and good day, everyone!

I've been doing a lot of research, seeing conflicting answers and therefore really need your guidance on something. I'll try to make it as simple as possible:

Summary

• My wife and I fully funded our 2020 (and 2021) HSAs (not through payroll) based on what we expected our employers to contribute

• We recently came to find out that my wife's employer made an error and "forgot" to contribute ~$20 and when the error was discovered a few weeks ago, they funded it, leading to an overfunding of the same

• We've been been going back and forth with the HSA administrator (telling them we need an excess contribution withdrawal of ~$20) and they finally disbursed the funds

• On the website, the Administrator is showing a 2021 1099-SA (not the full thing, just a quick blurb) with a distribution of "Normal" and tax year of 2021

• My understanding is that if I withdraw the excess funds prior to April 15, it is just like the overfunding never happened and there is nothing special I need to do for my 2020 taxes (according to TurboTax)

Questions

• Is it correct to have a 2021 1099-SA or should it have been 2020?

• Will it be a problem if the 1099-SA has a distribution code of 1 - Normal Distributions as opposed to 2- Excess Contributions?

The HSA administrator has been very difficult to work with and I'm wondering if I need to go back to them again to get this corrected (if indeed that is required).

Thank you for your time and guidance!

[BillM223 · Accepted solution]

You requested the withdrawal of excess contributions this year (i.e., after January 1st), right? The 1099-SA has not been revised since November 2019, so I am sure that the boxes are the same no matter what year it says. Don't worry about the year.

Yes, a distribution code of "1" is correct, because the reporting of the return of excess contributions is as a "normal" distribution. It's the HSA custodian's own paperwork that shows the difference.

Early next year (2022), you will receive another 1099-SA. This one will have a distribution code of "2" and box 2 will have the earnings on that $20. Box 1 may or may not have anything in it - it will be ignored anyway, because the excess was reported as income in 2020.

"My understanding is that if I withdraw the excess funds prior to April 15, it is just like the overfunding never happened and there is nothing special I need to do for my 2020 taxes (according to TurboTax)" - mostly correct. As soon as the excess was discovered by TurboTax, that amount was added to line 8 on Schedule 1 (1040) to be taxable income in 2020. However, other than withdrawing the money, there is nothing else you need to do.

OK?

[indexfundinvestor]

@BillM223 

Thank you so much for your response! This really helps a lot.

To answer your first question "You requested the withdrawal of excess contributions this year (i.e., after January 1st), right?",  That is correct; I requested it a few weeks ago.  

Just one question for you:

"Early next year (2022), you will receive another 1099-SA."

I haven't received a 1099-SA this year, nor am I expecting to (unless I am just missing something). I just noticed on the HSA administrator's website a Tax Year 2021 1099-SA, which I assume will be here early 2022. If that is indeed the only 1099-SA I receive, will that create any issues?

Thank you again for your help with this. Your answers were so helpful to me 

[BillM223]

I am surprised that the HSA custodian would have created a 2021 form yet, but I guess they will do what they do.

Yes, you may not receive a 1099-SA for this until early next year.

I expect you to receive at least two 1099-SAs early next year, one with a distribution code of '1' for all the normal qualified medical expenses (you also had those, right), and a second 1099-SA with a distribution code of '2' for the earnings on the excess that you withdrew. Since these are two different distribution codes, they can't put them on the same form.

Sounds like you have everything under control.

[indexfundinvestor]

Excellent. Thank you very much for your response/help on this! @BillM223 , you have been extremely helpful.