HSA Excess Contribution/Earning Reporting over multiple Tax Years - 1099-SA

[Jerry Lantzy]

I made excess contributions to my HSA account during 2023 tax year.  I reported the reversal of the excess contribution and earnings on my 2023 tax filings and executed the appropriate reversing entry(s) with my(our) HSA custodian prior to the Apr 15, 2024 (2023 tax filing) deadline.  

In the collection of tax forms for execution of the 2024 Tax year, I have received (3) separate  2024 1099-SAs.  1 representing Gross Distributions for medical related payments made during tax year 2024(this one is fine).  2 additional 1099-SA (mine and spouse's) Gross Distributions for reversal of contributions and earning made and reported under the 2023 tax year.  TurboTax doesn't seem to provide the ability to report the 2024 1099-SAs as "Prior year Excess Contributions & Earnings, reported on Prior Year (2023) tax filings. 

How do you recommend we address these two additional 2024 1099-SAs?  

[Mike9241]

you may have misreported in 2023.

Earnings on excess HSA contributions are taxed in the year they are withdrawn.

[Jerry Lantzy]

Excess contribution (made with post tax dollars)  and related earnings were both reversed in 2024 and reported accordingly for tax year 2023.   Now the custodian of the HSA has issued a 2024 1099-SA for the distribution.   Unfortunately, if I enter this form in TurboTax the software doesn’t enable me to qualify it as a reversal distribution made for a prior tax year reversal of an excess contribution.   TurboTax is applying the income and excise tax penalty on an unqualified distribution with earnings.   The tax liability is actually reflected correctly if the 1099-SA are omitted from the TurboTax calculation.  I’m not entirely comfortable with this solution.   

[BillM223]

It sounds like your two 1099-SAs were created with Distribution code of "1" in box 3, i.e., a normal distribution.

If so, then either you didn't tell the HSA custodian that this was a "withdrawal of excess contributions", or the HSA custodian made a mistake.

Whichever it was, there is no good fix now, because HSA custodians normally refuse to correct even their own errors from the previous year.

The "solution" is to enter the 1099-SAs for the withdrawal of excess contributions with distribution code of "2" in box 3. When you do this, the distribution amount in box 1 is ignored (good) and only the earnings in box 2 are added to income (as they should be).

NOTE: entering a form with different information than the copy that was sent to the IRS by the HSA custodian may trigger a letter to you from the IRS asking why. You will have to be prepared to explain that the HSA custodian made a mistake and that you had to change to data on the form to correct it. If you have any evidence of this mistake, like a copy of the withdrawal request or an email from the HSA custodian, that would be a very good thing to put in your tax archive in case anyone asks.

NOTE: 1099-SAs for withdrawal of excess contributions are normally entered in the tax return of the year following the original contributions. This is because most people don't realize that they have an excess until they do their tax return after the end of the year. Besides, the earnings are generated both in the original tax year and the year following, so it would not make sense to report the earnings before you actually earned them.

So it is correct that the 1099-SAs reporting the withdrawals of excess contributions in 2023 would go into your 2024 return.

[Jerry Lantzy]

Custodian coded the 2024 1099-SA correctly as a "2" distribution.

IMHO TurboTax Premier lacks the ability to qualify the separate handling of 1099-SAs received that reflect compliance with the IRS publication.

Per IRS Publication #969

Excess contributions. You will have excess contributions if the contributions to your HSA for the year are
greater than the limits discussed earlier. Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.
You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.
• You withdraw the excess contributions by the due
date, including extensions, of your tax return for the
year the contributions were made.
• You withdraw any income earned on the withdrawn
contributions and include the earnings in “Other income” on your tax return for the year you withdraw the
contributions and earnings.

[BillM223]

"TurboTax doesn't seem to provide the ability to report the 2024 1099-SAs as "Prior year Excess Contributions & Earnings, reported on Prior Year (2023) tax filings. "

Please explain to me why you think that TurboTax is unable to handle these 1099-SAs. If the two 1099-SAs were properly coded with distribution code of "2" as you said, then there wouldn't be a problem.

TurboTax is perfectly able to handle one or more 1099-SAs for qualified medical expenses and one or more 1099-SAs for withdrawal of excess contributions.

Please clarify what exactly what you think is not right.

[Shanks2]

Did you get a resolution? I am in the same boat (and I am sure there are others). It doesn't seem right that we have to pay tax twice on the excess contribution.

[BillM223]

Shanks2 - please clarify what your issue is. There is a situation in which you have to pay tax twice on an excess contribution, but the IRS permits two ways to avoid this. Furthermore, taxpayers often misunderstand how the 1099-SA works.

So please describe to me what you contributed and when and how much was in excess and what was carried over, and all details, so that we can get you to the best possible solution.

@Shanks2 

[Shanks2]

As the earlier member explained, excess contribution amount for 2023 (including earnings on the same) was captured as Other Income in the 2023 tax return since that amount was withdrawn between Jan 1- Apr 15, 2024 from the HSA custodian. This is done (as per publ. 969) to prevent paying the penalty although you do not get a 1099-SA 2023 showing this excess contribution.  So, the 2023 return is all good. Fast forward to 2024 tax return, the custodian issues the 1099-SA 2024 for this excess contribution withdrawal in 2025 (understandably since the withdrawal happened between Jan1-Apr 15, 2024). Now this 1099-SA 2024 has to be shown in the 2024 tax return to avoid a notice from the IRS as you say. But as you can see, if you include this in 2024 return, you are paying tax again on this amount since you already paid tax on this amount in 2023 return (Other Income). So, there should be a way to include this 1099-SA 2024 amount in the 2024 return without being taxable. Hope it makes sense, and you provide a solution.

[BillM223]

If you withdrew the 2023 excess in the period Jan to April 2024, then you are supposed to get a 1099-SA with a distribution code of "2" in early 2025 to file with your 2024 return.

The reason why this happens is that this 1099-SA has earnings on the interest on the excess from 2023 and 2024 so it makes sense that it can't be reported until your 2024 return, which you are doing now.

Despite the fact that the excess that was withdrawn appears in box 1 of the 1099-SA, if the distribution code is "2", the box 1 amount is not added to income on your 2024 return, only the earnings in box 2 are added to your 2024 return.

So if the distribution code is "2", the excess will not be added to income on your 2024 return. If it is, then something else is happening, so come back and tell us.

[Shanks2]

Box 1 amount is the excess contribution

Box 2 amount is the earnings. Do note that Box 1 amount minus Box 2 amount is the actual excess contribution.

Box 3 distribution code is 2

 You are saying only box 2 amount, i.e., earnings amount will be added? Have to check. Even if this were to be true, we would still be paying tax twice on the earnings amount since the total of the earnings and the excess amount were already included as Other Income in the 2023 return. Do you see my point?

As per publ. 969, if you withdraw the excess amount between Jan 1-Apr 15, 2024 (by the tax due date effectively) then it would be treated as though the excess was not contributed, thus avoiding penalty on the excess and the earnings. And this should be shown as Other Income, which is what we did in 2023 tax return.

[Jerry Lantzy]

The only way I could file using the TurboTax software was to file an Amendment to my 2023 return to pay the tax liability on the earnings and avoid paying a penalty in the current year filing.  Provided a single page explanation with the amendment.  Then I submitted the 2024 1099 form and zeroed out the values.  Made every effort to comply with the tax law.   

[Shanks2]

Could you please clarify?

- When you filed your 2023 original return, if you already reported the excess contribution and earnings, where does the tax liability on earnings come again from? 

- And what do you mean by zeroing out values - don't you have to enter the amounts from the 2024 1099 forms that show the 2023 excess contribution and earnings?

[BillM223]

Shanks2

"although you do not get a 1099-SA 2023 showing this excess contribution" - No, you don't get a 1099-SA for an excess contribution, you get it only for withdrawing the excess. 1099-SAs report on distributions from your HSA.

If you did not withdraw the excess, then you would not get any form at all - the only notice would be that the non-withdrawn excess would be carried over to line 2, form 8889 on your 2024 return as a "personal" contribution.

"Even if this were to be true, we would still be paying tax twice on the earnings amount since the total of the earnings and the excess amount were already included as Other Income in the 2023 return." No, you are paying tax on the earnings only once. TurboTax doesn't know what your earnings were for your 2023 return, so it could not have added them to 2023 income. TurboTax only added the earnings to your 2024 return, when you entered the 2024 1099-SA.

"if you withdraw the excess amount between Jan 1-Apr 15, 2024 (by the tax due date effectively) then it would be treated as though the excess was not contributed, thus avoiding penalty on the excess and the earnings. And this should be shown as Other Income, which is what we did in 2023 tax return." To clarify, what is actually happening is this:

On your 2023 return, as soon as TurboTax detected an excess contributions that were from "employer" contributions (i.e., from the code W amount in box 12 of your W-2), TurboTax added the excess employer contributions to Other Income. This means that the excess employer contributions will be assessed income tax, just like the rest of your income. 

If you withdrew the entire excess in a timely manner, then there would be no penalty, but the penalty is only in the carryover (the amount not withdrawn). Since TurboTax does not know what the earnings are yet, there can't be any penalty on the earnings.

Repeat: "employer" does not refer to the source of the contributions (from you or from the employer), but to how the contributions were sent to the HSA.

@Shanks2