What documents are needed to file with ineligible HSA contributions that have been withdrawn before the tax filing deadline?

[kimmartini1]

This March, I discovered that I was ineligible for an HSA. I notified my employer, and they withdrew the money contributed in 2016 and will be adding my pre-tax contributions onto my wages for 2017. I received a corrected 5498-SA and 1099-SA, which stated total contributions made in 2016 as $0 and distributions as $0. My original W2 shows $500 for employer contributions in Box 12, which will not match my 5498-SA form. Do I need a corrected W2 that shows $0 contributions, or do I simply need to enter in that $500 as excess contributions?

[BMcCalpin · Accepted solution]

Normally, when you discover that you are not eligible for an HSA, you would tell TurboTax that, and then TurboTax declare all contributions to be excess and then ask you if you would withdraw it before the original due date. If you say, "yes", then TurboTax would add the amount that was under employer contributions (the amount on your W-2 in box 12 with a code of "W") to Other Income, so that you would pay tax on it in 2016.

Any amount that you contributed directly (not through payroll deduction) will be ignored and not reported on the return.

The form 5498-SA does not get entered on your tax return, so we don't have to worry about that.

Your W-2 is correct as it stands, because we are going to assume that your employer filled out a Mistaken Contribution form with the HSA plan. When someone does that, the HSA plan administrator returns the amount of the mistaken contributions and TurboTax handles the rest.

In TurboTax, you handle this by doing what I described in the first line.

You don't need a corrected W-2.

The only thing you need to work out is to tell you employer that you will actually be reporting that contribution on your 2016 tax return, so please don't add it to your 2017 Wages.