Question on Prior Year HSA Excess Contribution & Taxable Distribution

[AL5336937]

Hi TurboTax Support and Community,

I have a question about an odd situation that I have with a prior year HSA contribution that was in excess of that year's limit, and how I can get TurboTax Online to correctly recognize a distribution that I made to correct the excess contribution. 

I inadvertently overcontributed to an HSA in 2021. It was an overcontribution because I changed employers during 2021 and ended up in a non-HDHP health plan for part of the year, so my limit for HSA contributions was lower for that year. I didn't know about this at the time and ended up contributing the full annual limit, and thus a part of it was an excess contribution ($900). I didn't have an HDHP for 2022 and 2023, but I thought I might end up with one, so I never took a distribution of the excess amount, and instead opted to pay the 6% tax on the excess contribution for those two years. In 2024, I finally had the $900 distributed so that I can just pay the 20% tax on that amount one-time and stop paying the 6% tax every year.

However, my HSA bank noted the $900 distribution on a second 2024 1099-SA as code 2 - excess contribution. I am wondering if this is incorrectly coded, because, when I enter this information into TurboTax Online for my 2024 return, it looks like TurboTax is not recognizing it as a taxable distribution. I am not getting the 20% tax ($180) and instead I am still seeing the 6% tax ($54) on my return. I believe the 6% tax should be removed and I should be just paying the 20% tax on the distribution. 

How should I enter this information into TurboTax to get it to correctly recognize the $900 distribution as a taxable withdrawal, and thus pay the 20% tax instead of the 6% tax?

Thanks for your help!

[BillM223]

You probably told the HSA custodian in 2024 that you were withdrawing an excess contribution, so they issued you a 1099-SA with a distribution code of "2" - which is your problem. But, as you will read in other comments in this forum, you can't withdraw excess contribution after the due date of the return (with one exception that doesn't apply to you).

So you got a 1099-SA which won't work until you change the distribution code to "1". Note that when you do, the interview will change somewhat, to enable you to say that this distribution was not for medical expenses.

Also note that this may invite attention from the IRS, because they look for changes to forms that are copied to the IRS. However, I would just document what you did and why and put it in your tax archive, in case anyone asks.

Your defense (and it would be a good one) is that you are willing to pay extra income and a 20% penalty just to cut off this carryover. You just needed to workaround a form that was incorrectly generated.