How to enter 1099-SA correctly in TurboTax?

[YKChen]

@DianeW777  The token number is 1079860.  Thanks! 

[dmertz]

The error is on your 2021 tax return.  You must amend the 2021 tax return to show that there was no excess contribution in 2021 because, presumably (because you received a code-2 Form 1099-SA), the return of the excess contribution was made before the extended due date of your tax 2021 tax return, October 17, 2022.

When amending your 2021 tax return you must indicate that it is "Filed pursuant to section 301.9100-2."

This eliminates the excess and your 2022 Form 8889 should show no taxable distributions.

[YKChen]

@dmertz No, I withdrew the excess contribution after Oct 17, 2022 and before Dec 31, 2022.  

TurboTax should ask me when I withdrew the money and treated it correctly in the 2023 tax return.  

[dmertz]

If the distribution occurred after October 17, 2022, the HSA custodian made a mistake by processing this as a return of excess contribution (unless they thought were processing a return of a contribution made for 2022).  For a regular distribution after October 17, 2022 to resolve an excess HSA contribution made for 2021 should have code 1.  Contact the HSA custodian to have them correct the code-2 Form 1099-SA to show $0 and obtain a new Form 1099-R reporting the distribution with code 1.

[YKChen]

@dmertz 

Is there a document that describes the code should be 1 instead of 2?  I would love to see that instruction.  

[dmertz]

The IRS guidance does a poor job of explaining this.  Section 223(f)(3)(A)(i) of the tax code states that the deadline for obtaining a return of excess contribution, the type of distribution that can be reported with code 2, is the due date for filing the tax return and must include, shown in box 2, the net earnings attributable to the excess being returned.   Because any normal (code 1) distribution from the HSA that is made taxable by not applying it to qualified medical expenses is applied against excess contributions,  Forms 1099-SA distributions after the due date of the tax return to correct excess contributions should always have code 1.  Using code 2 to also indicate distributions of excess contributions after the due date of the tax return would make it impossible for the IRS to determine the taxability of the distribution.

[HSAQuestion1]

Hi @dmertz, sorry to bring up this old thread but I think my situation is relevant to this question.

I had $3,850 of excess contributions in 2023, withdrawn in December 2024. I amended 2023 to pay taxes (other income) and the 6% penalty on the excess, but when I withdrew the 2023 excess plus earnings ($4,098) in 2024, the 1099-SA was coded as 2, excess contributions (probably my mistake). This is causing my 2024 return to not appear how I think it should, with only the excess $248 in other income.

I assume I need the administrator to re-issue the 1099-SA with code 1 based on your responses? And if they won't, I guess I will just file how I *think* the 1099-SA should appear and provide an explanation somewhere on the return?

As a side note, Box 2 only has $0.78. When requesting the distribution, I did my own calculation of excess + earnings and this amount is probably the residual that I was off by. Am I understanding correctly that because this is truly not an excess distribution anymore, Box 1 should remain the same, Box 2 should be zero, and Box 3 should be code 1?

Thank you!

[BillM223]

If you think you should be taking a distribution in December 2024 not for medical expenses in order to cut off the excess from 2023, then, yes, the 1099-SA should have in box 1 the total distribution, box 2 might as well have nothing, and box 3 should have "1".

You understand that any time that you change entries on a form that is copied to the IRS, that the IRS may write you can ask why, but it seems that you understand that you will have to document what you did and why. Please do not add any explanation to your return, since the IRS - at this time anyway - is not really capable of handling such things. It's enough that you will be prepared to respond to a query, if that ever happens.

And yes, I am ignoring the $0.78. In the big scheme of things, your distribution added to Other Income and the 20% penalty, will swamp any need to address that.

[HSAQuestion1]

Thank you, so as I understand it, this is what I should see:

2023 Return - $3,850 in other income and 6% penalty (already amended and paid)

2024 Return - $248 earnings in other income, and no 6% penalty because all 2023 activity was withdrawn before 12/31/2024

I understand that I will have to pay the 20% penalty on the full $4,098. Can this be avoided (fully or partially) if I indicate that I used the distribution for medical expenses? As I understand it, even though I was ineligible for the HSA in the first place, I can still use these funds for medical expenses and avoid the 20%?

[BillM223]

If you are using this distribution to cut off the carryover of excess contributions, you must take a distribution of the entire excess amount and pay tax on it and the 20% penalty. If you try to say that you use some of it for medical expenses, then the carryover will not be cut off.

However, since you still have an HSA (I don't now how much cash is in it), you can still take distributions to pay for qualified medical expenses tax-free, even after you no longer have HDHP coverage. You just can't do it to cut off the carryover of excess contributions.

[HSAQuestion1]

Understood on the 20% penalty for the entire distribution, but I will only include the $248 earnings in Other Income for 2024, correct? I already included the excess $3,850 in Other Income for 2023. I hope TurboTax won't get confused and try to double tax me on the original $3,850 excess.

[dmertz]

To eliminate the 6% excess-contribution penalty for 2024, your 2024 tax return needs to include $3,850 of the distribution as being taxable and subject to the 20% additional tax.  If you paid medical expenses in 2024 to which you can apply the other $248, that will eliminate the tax and 20% penalty on the $248.  To eliminate all of the excess, you can claim no more than $248 as being applied to medical expenses.  A consequence of failing to correct the excess timely is double taxation of the excess.

If the HSA custodian will not correct the coding of the distribution, yes, you'll need to enter code 1 in box 3 and nothing in box 2, then provide explanation with your printed and mailed tax return.

[HSAQuestion1]

@BillM223 @dmertz 

Wow so am I understanding correctly that the 2023 excess of $3,850 is included in Other Income in both the year of contribution AND distribution?

[dmertz]

Yes.  Only a taxable distribution corrects the excess after the due date of the tax return.

[HSAQuestion1]

Unfortunate but understood, thanks for clarifying. I'm glad to just be done with this mess and start fresh with 2025.

I had excess in 2024 as well but that was removed timely in January 2025, so I will thankfully only pay the taxes on that excess in the 2024 return and on the earnings in the 2025 return.