Overfunding of a 2023 HSA

[ds102]

I overfunded my HSA in 2023 and that overfunded amount is still in my HSA. I know that each year that amount is carried over and I am taxed 6% on it. I will withdraw that exact amount in 2025 and will receive a 1099-SA form showing that amount as a normal distribution (and therefore taxable, along with earnings on that amount) for my 2025 taxes. Will that normal distribution satisfy and then remove the carryover overfunded amount on my 2025 taxes if just listed as a normal distribution? I know that TT will create Forms 5329 and 8889 during the interview as well - just wanted to make sure this is addressed finally.

I am over 65 so shouldn't have to pay that 20% penalty for that withdrawal, correct? And if I use that money for medical expenses in 2025, will that make a difference so that it would not be treated as taxable income or will an HSA overfunding withdrawal always be considered taxable regardless of how it is used? Thank you.

[BillM223]

If you make a withdrawal from your HSA and say that it was NOT for qualified medical expenses, then yes, it will be applied against your carryover of excess HSA contributions, potentially (if the distribution is large enough) wiping out the carryover.

Any amount of the distribution not for medical expenses beyond that of the carryover would appear to be ordinary income, which is not penalized because of your age.

"And if I use that money for medical expenses in 2025, will that make a difference so that it would not be treated as taxable income or will an HSA overfunding withdrawal always be considered taxable regardless of how it is used? "

If I understand your statement, for the HSA distribution to cut off the carryover, it must be taxable, so don't use the distribution (that is equal to the carryover) for medical purposes. 

If your distribution is larger than the carryover, then the amount of the distribution greater than the carryover can be used for qualified medical expenses and be tax-free - only the carryover amount will be added to your income.

Then, at last, you will be free of the carryover and the 6%.

[ds102]

Thank you for your response - that helps clarify and I appreciate it.

For 2025, does it matter when I take that normal distribution for the overfunding (understanding that it will be taxed as income and not as a medical expense) as far as interest it may accrue if sitting in the HSA account during the year? For instance, if I take it now versus December of 2025?

[RobertB4444]

Since the earnings on the overcontribution are taxable as well then the sooner you remove it the less earnings and the less tax you pay.  But also, less earnings.  So it's up to you.  And the company managing your HSA.

@ds102 

[ds102]

On the 1099-SA that I will receive in 2025 has: "Line 2: Earnings on extra contributions" that will be entered into Turbo Tax. So that will tell me the additional $$ in earnings that have accrued up to the date I make the withdrawal. I understand that holding off the withdrawal will cause more earnings to be entered on this form. I think my question should have been about the earnings and how I would know what they were at the time of the withdrawal. I thought about this after I posted and realized that info will be provided on the 1099-SA and added to my taxes accordingly.

I think you've answered all my questions - thanks again!