My former employer erroneously paid into an HSA (I'm not eligible). Do I change that entry to 0 and add it back into wages? Can I do that where W-2 was not corrected?

[michaelsmahoney-]

I thought it was an FSA so did not pick up on it until this year.  Technically the 2021 w-2 isn't incorrect, just the pre-tax distribution was not authorized.

[tagteam]

Please check back later. I will page @dmertz for your question.

[Opus 17]

What years did this happen?  You said 2021, is that correct?

There are two separate principles here.

1. Regardless of how it happened, any non-eligible contributions are handled the same way.  They must be reported, added back to your taxable income, and you may owe a penalty, unless the excess can legally be removed.  This depends on how long ago this happened, and other factors.  Your contributions are reported on a form 5498-SA that is usually issued in May of the following year, but you must report them on your tax return from your own records even if you don't have the form.  It's not as simple as changing your box 1 income, you must also report the situation on form 5329.  Turbotax will do this all for you, and if you are filing manually without software, we can advise you on how to fill out the forms. 

2. Once money is held inside an HSA, it can be spent tax-free for qualified medical expenses, even if the contribution was disallowed at the time.  Withdrawals (distributions) must be reported, and you must certify that the money was used for qualified expenses.  You will get a 1099-SA in January if you withdraw money from an HSA during the previous year. 

But first, please clarify

1. What year or years are we are talking about?

2. Did you leave the money in the HSA or did you spend it on medical care?  What is your balance as of the end of the year.

3. If this was for 2023, did you file an on-time tax return and are asking about amending the return; or did you file an extension request, or are you late with no extension?

[Mike9241]

the way to do this in Turbotax is to complete the HSA form 8889 and indicate that for each month you had no HDHP (this is what to use in all situations such as having an FSA or being on Medicare or just simply not having just a HDHP). this will result in the contribution being add to taxable income. do not mess with the w-2.   you had until the due date if the return to withdraw the excess and earnings thereon. if not done the lower of the a/c Fair Market value on 12/31/2021 or the excess contribution is subject to a six percent penalty using form 5329.

penalties will be imposed every year until the excess is removed or used.