Reporting Excess HSA Contribution return

[Anonymous]

Hello,

My spouse has an HSA through her employer (family) and for year 2022 the total contribution (employer/employee) ended up at $7412.00 ($112.00 over contribution limit).  We recognized this in 2023 and contacted her HSA re: return of the excess contribution.  When my wife spoke with the HSA over the phone, the customer service agent was unable to provide a satisfactory answer about whether we needed to specify the amount of gains on the excess contribution to be returned.  While we were $112 over the limit, we requested $130 returned to ensure we would be covered for any gains the $112 may have accrued in 2022 (HSA was unable to tell my wife over phone this information-- in retrospect I now realized requesting more was a mistake).  We received a check for $131.98 in the mail (130 + 1.98 in gains/interest) last week.

Going through the  HSA section in Wages&Income section, Turbotax says it looks like we have an excess contribution of $112.  I select "We'll withdraw some of the excess contribution by April 18, 2023" and when I try to type amount withdrawn as $130, it gives me an error (saying I can only enter up to $112).  I am able to enter the forms mode and enter $130 manually into Form 8889-S in line 12 B, but then the line 12 C becomes -18 (negative 18) and I'm not sure this is correct (probably not correct?).

Any recommendations on how to proceed now that we have a return of our excess HSA contribution + $18?  We had medical expenses for 2022 well in excess of $18 (but so far have not withdrawn anything for these expenses, or expenses from any previous years, but have saved all receipts).    And do I need to add the full $130 (or just $18) as "Other Income" or does Turbotax do that automatically with information supplied above?  

Thanks in advance for any recommendations

[BillM223 · Accepted solution]

The moment that TurboTax detected that you had excess contributions for 2022, TurboTax added the amount of the excess ($112 only) to Other Income on Schedule 1 (1040) on your 2022 return - you need to do nothing. 

As for the $18 that you withdrew in "excess" from your HSA, you need to identify an $18 medical bill that you can assign to this amount - it sounds like you are well on the way to doing this. Just write down the medical bill paid (in part ) by the $18 and stick in case your tax file because you won't remember this when someone asks.

You will receive (probably in late 2023 or early 2024) a 1099-SA for the withdrawal of excess contributions (the $130). It will have $130 in box 1, the $1.98 in box 2 for earnings, and a distribution code of '2' in box 3. 

Because of the distribution code of '2', the $130 in box 1 will be ignored (The $112 was already counted as income in tax year 2022, and we will get to the $18 in a minute), and the $1.98 will be added to income.

The $18 needs to be manually added to income (because TurboTax added only $112 automatically). So go to Personal Income (or Wages and Income, whichever), then go to Less Common Income->Miscellaneous Income. Add a single entry for "HSA distribution" and $18. Write down on your copy of your return why you did this - you will keep a copy of your return, right?

Now you should be done.

Don't make any overrides in Forms Mode.

[Anonymous]

Thanks so much for your prompt and thorough response, it is much appreciated.

Your instructions make sense and I was able to follow them in Turbotax.  I always keep a copy of my tax returns and this year (for 2022 return) I will plan to include (for my records) a medical bill from 2022 that we apply the excess $18 to.  And I will write out exactly the reasoning for all of this so future me remembers what/why.

When I receive the 1099-SA late-2023/early-2024, and when I enter this information into my 2023 tax return, will I need to do a similar manual addition of income for the gains ($1.98)?  Or by entering the information as I receive it on the 1099-SA will Turbotax automatically include the gains as taxable income in 2023?

Once again, I really appreciate the guidance.

[BillM223]

"Or by entering the information as I receive it on the 1099-SA will Turbotax automatically include the gains as taxable income in 2023?" Yes, the code '2' in box 3 of the 1099-SA will cause the box 2 amount to be added to Income.

[Anonymous]

For my own understanding, will the $18 that I have now included in my 2022 return as Miscellaneous Income/"HSA distribution" be taxed at my marginal rate for 2022 even though I plan to apply it to a medical expense from 2022 (by saving/noting a bill with my personal tax records)?  It's obviously not a big deal to me if it is, just want to be sure I understand it.  And there is no 20% penalty on this amount ($18) as I am applying it to a medical expense from 2022, correct?  

Thanks again for all your help.

[BillM223]

The problem is that you withdrew too much money for the excess. But you are right that had you withdrawn this for the purpose of reimbursing your self for medical expenses, then you would not have to declare as income, so ignore what I said about the Miscellaneous Income. Just document it this way.

There is definitely no 20% penalty in any case.

[Anonymous]

OK thanks so much for the feedback and help.  So just to make sure I understand this completely:

1. I have updated the HSA section in Wages&Income to indicate that I have withdrawn the  $112 excess deposited for 2022 (this will now show up automatically Other Income on Schedule 1 (1040) on my 2022 return)

2. I will NOT report the $18 under Miscellaneous Income for my 2022 return.  The $18 excess received will not show up anywhere on my 2022 return because it was technically a distribution from the HSA in 2023 as it was not technically an "excess contribution" (correct?).

3. Late-2023/Earely-2024 I will receive a 1099-SA which I will input into my tax return for year 2023.  This 1099-SA will include both the gains received ($1.98) on the excess returned ($130).  The $1.98 will show up under Misc Income for 2023 automatically after inputting the 1099-SA information.  The $112 excess was already adjusted in my 2022 return.  And the $18 will essentially be accounted for in my 2023 return as a qualified medical expense (as that's when the extra money was distributed) as long as I save medical receipt to which I am applying the $18?

[BillM223]

1. Yes

2. We are treating the $18 as a reimbursement for medical expenses. Such items are bundled up into line 15 on the 8889. Because this $18 is not part of a normal 1099-SA (it should be on a 1099-SA with a dist code of '1'. not '2'), it may not show up there, but you have well documented what happened.

3. Yes.

I wish more taxpayers put the amount of work into understanding HSAs that you do!