Turbotax online flags excess HSA contribution but does not prompt whether that was withdraw in the current year

[arlindo4nc]

 here is the scenario:  

   Couple filling jointly - both have HSA accounts.   

    Husband has an excess HSA contribution of $ 3000 carried from 2024 tax.  ( line 48 of 2024 Form 5329 ) 

    In 2025,  the total family contribution were $1,000 below the IRS family limit. ( both 55+ years old ) .

    In February 2026,  the husband  asks the HSA custodian, to withdraw $2,000 from the 2025 HSA contributions, so that there will be no longer excess in HSA being carried over. 

    At  the Deduction -> HSA,   after entering the 1099-SA distribution ( cod 1 ) ,  in the window " Who made the excess HSA contribution?"    Turbotax Online calculates an  excess contribution of $ 2,000 , and asks to allocate the excess to one of them , or both,  and there is a note in that page:

       " If you already withdrew your excess contribution, you still need to include it here. We'll ask about withdrawn contributions next. Be sure to allocate the excess contribution to the person who has withdrawn the excess contribution."

  The excess is allocated 100% to the husband - who withdrew from his account already . 
    Then click on  "continue" ,  and the  Turbotax online  DOES NOT PROMPT TO ASK IF THE EXCESS WAS WITHDRAW. 
   After the continue ,  the next screen is for the prompt of  balances of the HSA accounts, and then the next screen is the "Your HSA Summary:"
  In the summary,  it contains 

      Taxable earnings on excess contributions.  $ 0   

      Excess company contributions withdrawn.  $ 0  

( both values are zero ) 

Shouldn't the software prompt for the question about withdrawn of the excess  ? . What are the implications for the 2026 tax? 

[BillM223]

Please allow me to ask you a number of questions:

1. Were either one of you 5 or over by December 31, 2025?

2. Just to confirm, the 1099-SA that you received was (1) for the anticipated excess contribution amount for 2025, and (2) had a code of '1'?

3. When you entered the 1099-SA, did you tell TurboTax that this $2,000 was all for qualified medical expenses?

I think you may have a timing issue, but I need to know what exactly you did before I can say.

[Opus 17]

The 1099-SA could only be for withdrawals made in 2025 for medical expenses.  It would not reflect the withdrawal in February 2026 -- that will be on a 1099-SA that you will receive in 2027.

There might be a workflow problem since the excess contribution could be removed from either spouse's account, the program might not know when to ask about the removal.

[arlindo4nc]

1- yes both of us 55+ by December 2025

2- the 1099-SÁ was for  distribution, all used for qualified medical expenses 

3- yes

I have tried this scenario multiple times, restarting the interview from scratch , and it repeatedly does not prompt. 
it appears that the workflow only prompts if I will withdraw, when the last year HSA contribution is in excess. But if the contribution for the year was below the limit, but there is a  carryover  from 2024 that makes the total ( carryOver + contribution)  in excess , it has calculated correctly that the will be an  excess to carry over  to 2026 - and it even asks whom to assign that excess to,  bit it did not  trigger TT the  prompt to answer that there was  an withdraw to reset that excess. 

 So it looks like this will be listed as "carryOver" for 2026, even if I have actually withdrew the excess to reset the balance going forward. ????

[BillM223]

Earlier in your HSA interview, did you see the screen "Do any of these situations apply to [your name]?" Did you check the line ""[your name] overfunded their HSA last year"?

When you continued through the HSA interview, did you see a screen with the title "Enter last year's excess contribution"? What did you enter for these lines?

[arlindo4nc]

Yes, I did  see the screen "Do any of these situations apply to [name]?"

Yes , I did check the line  "[name] overfunded their HSA last year"

Yes, I did see a screen with the title "Enter last year's excess contribution" . I entered the value of $ 3000

[BillM223]

Let's do this: let's delete all your HSA data and start over again. I have done this on my tests, and I don't get a message about having an excess nor do I expect one. See HSA Reset below.

After the HSA Reset, in the HSA Interview, enter your 1099-SA, for $2,000 with code of '1' as you did before. This has the effect of chopping off $2,000 of the $3,000 carryover from 2024 which was not withdrawn in a timely manner (it should have been done by April 15, 2025), at the expense of the $2,000 being added to income on line 8f on Schedule 1 (1040) BUT leaving a $1,000 carryover to be applied as a personal contribution to tax year 2025 (line 2 on your 8889). 

As you continue, when you see "Do any of these situations apply to you?" make sure to check "(you) overfunded their HSA last year". Keep going until you see "Enter last year's excess contribution". Enter $3,000 for you (I am guessing most of the contributions and spending are in/out of your HSA).

Yes, this is overriding the Carryover Worksheet because with the HSA Reset, I don't know what we did to its HSA part.

Having done all this, you won't need to see a message about excess contributions at all, so no need to see the message about how much to withdraw. 

I am asking you to do the HSA Reset to erase all your HSA data because sometimes numbers get "stuck" in the HSA, as you repeatedly go through the interview trying this number or that. Once this happens, the only way to "fix" it is to start with a clean slate in the HSA space, because you can't change or rest those numbers through the interview itself. So clear out your HSA data, start over, and see if your trip through the HSA interview is quieter.

HSA RESET

***Reset***

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen)

*** Desktop/Windows***

3. Go to the upper right and click on Forms, and 

4. Select the desired form (1099-SA (if one), 8889-T, and 8889-S (if one)). Note the Delete Form button at the bottom of the form’s screen.

*** Desktop/Mac***

3. Switch to Forms Mode by selecting the Forms icon.

4. From the menu, select the form (1099-SA (if one), 8889-T, and 8889-S (if one)) you want to remove (if you don't see it, select Open Form at the top). From the Forms menu, select Remove [form name].

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form 

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one)

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview....

[arlindo4nc]

@BillM223 ,

     I am using TT online:  I found forms 1099-SA, 8889-T and 8889-S under "Tools" -> "Delete Forms"

- I deleted 1099-SA - and it is gone from the list. 

- Then I choose to delete  form 8889-T,   

    - a message pops up: 

   " Form 8889-T: Health Savings Accounts (HSAs) from 2025 Federal Form 1040: Individual and any linked forms will be permanently deleted."

  - I click on the red button "Yes, Delete"

 - a message is displayed "Form 8889-T: Health Savings Accounts (HSAs) was successfully deleted."

 - then I search the form again, and it remains there, listed within the "Delete a form" window. 

  I repeated the operation multiple times, and the form does not disappear from the list. 

   Same situation for form  8889-S.

--------------------------------------------------------

NOTE: Following is the exact step by step of the interview.  At this time I have used the exact numbers as I will need entered in the interview, ( as reminder:  both husband/wife are 55+ by Dec 31,2025) : 

Step-by-Step: 

Go  the interview  "Federal -> income -> Distributions from Health savings account": 

-  "Select the health-related accounts you had in 2025"

            -> HSA is selected for both 

-  "Did you use your Health Savings Account (HSA) to pay for anything in 2025?"

          -> Answer "yes"

- "Who Received this Form 1099-SA?"

          -> select "husband's name"

 -  "Let's get the info from your Form 1099-SA"

     -> enter the values manually:

         Gross distribution: 1,333

         Earning on Excess : 0

         Distribution code 1

         Type of plan:  HSA

 - "Let's make sure [husband] personal info matches your 1099-SA"

           no changes made,  click on "continue"

 - "Tell us about [husband] HSA spending"

           -> "I used all the money for medical expense only"

 - "1099-SA Summary" is presented

              click on continue

  -  "Let's enter [husband]  HSA contributions"

              2025 employer and payroll contribution. -

                      $ 5,600. (note: box is grayed  ) 

          Contributions made personally   

                     0

  -  "Covered by HDHP" -> yes

  - "Did any of these situation apply to [name]"? 

          -> selected "[husband] overfunded their HSA last year" 

  - "What type of HDHP..."

         -> "covered by family plan every month of the year"

  -  "Let's enter [wife]  HSA contributions"

              2025 employer and payroll contribution. 

                         $ 3,795 

          Contributions made personally -

                          $ 0

  -  "Covered by HDHP" -> yes

  - "Did any of these situation apply to [wife]"? 

              no box selected

  - "What type of HDHP..."

         -> covered by Self plan every month of the year

 - "Enter last year's excess contribution"

    "[Husband] excess contribution" : $ 3,183

    "[wife] excess contribution"  : $ 0

 -   " Who made the excess HSA contribution?

       You contributed more to your HSAs than you were allowed. You may allocate $2,028 of excess contribution among you. Who should we treat as having made the excess contribution of $2,028 ?"

        -> select "[husband]"

"Note: If you already withdrew your excess contribution, you still need to include it here. We'll ask about withdrawn contributions next. Be sure to allocate the excess contribution to the person who has withdrawn the excess contribution."

 click on continue and the next form is the following:

 -  "What's the total value of all your HSAs?"

    Input the balances for both accounts from Dec/31st. as there were no additional contribution for 2025 after  that. 

-     " Your HSA Summary

Here's what we have for your HSA. You can make any changes if needed.

                           husband.    wife

      Deduction: $ 1,155.   $ 0

      Total distribution $ 1,333 $ 0 

      Taxable distribution: $0   $0 

      Taxable earnings ... :  $0    $0

      Tax Free company contribution:    $ 5600  $ 3795

       Excess company contribution withdraw:   $ 0   $ 0 

"

-----------------------------------------------------------------------------------------------------------------------

There was No option prompted   to  specify that a withdraw was made on Feb-2026, from the 2025 contributions, in the amount equal to  the excess that was calculated by TT.

[arlindo4nc]

In time, I have already cleared out the entire interview and started from scratch twice. Same results.

[BillM223]

It appears that both of your W-2s had a code W in box 12. These show that there were "employer" contributions to your HSA(s). Note that in IRS-speak, "employer" contribution is simply HSA contributions made through your employer, whether by you or your employer or the Man in the Moon.

The reason why steps 1 and 2 of the HSA Reset ask you to delete your W-2s is that so long as the W-2(s) with the code W exist in your return, the moment that you delete a 8889, it will just come back. You have to delete the W-2s to get this to work.

I am sorry because I know this can be onerous, but humor me by following all the steps.

[arlindo4nc]

@BillM223 

  thanks for your help here. 

  I re-did all the steps, starting from the deletion of the W2s,  Both of them do have the code W checked indeed.  At this time was able to delete all the three forms. 

   But even so, same flow, and same windows, and exactly same results.

  I also did a clear out and started over, following one straight flow , from beggining to end - still same results. 

  Note: At this time, I was able to preview  my 1040 form at the end of the interview,  and I can see that on  Part II line  8, (Additional tax on IRAs or other tax-favored accounts.)  there is the  $122 which is the 6% tax penalty that was calculated over the $2023 excess holding in the HSA - which actually I have withdrawn but can not report.  That does indicate the workflow  by not asking me,  is not by default selecting that the excess was withdrawn  - which I was hoping to be the case. 

[BillM223]

OK, let's do this. Please send me a "token" (see below) which is a link to a sanitized version of your return. Don't worry, any personally identifiable information is redacted, so we have no way of knowing who you are.

This will let me see what you are experiencing.

To send us a token, please do the following: 

TurboTax Online:  

Click Tax Tools in the menu to the left.

Click Tools, and then

Click Share my file with Agent.

A pop-up message will appear. Click OK to send the sanitized diagnostic copy to us.

Provide the token number that is generated onto this thread.

TurboTax Desktop:

Select Online menu if the customer is using Windows. Select “Help” if using a Mac.

Select Send Tax File to Agent.

A pop-up message will appear, and the customer will select, Send. If using Mac "Send Tax File to TurboTax Agent" 

Note: Desktop will save a file to your computer unless you uncheck the box.

Another message will appear. Provide the token number that is generated onto this thread.

At the bottom of your reply (with the token) add "@" "BillM223" (without the space in between) so I will be notified.

[arlindo4nc]

@BillM223    here you go: 1339987

[BillM223]

I see your return, and the issues.

First, "In 2025,  the total family contribution were $1,000 below the IRS family limit. ( both 55+ years old ) ." Shame on me, I took this at face value. In fact, your annual HSA contribution that is shared by both spouses is the Family amount, the Self coverage is ignored for purposes of the annual HSA contribution limit calculation.

So, your HSA contribution limit shared by the two of you is $8,550. In addition, there is a $1,000 bump for dollars going into your HSA, and $1,000 going into your spouse's HSA, so, in effect a limit of $10,550 (but no more than $9,550 going into one HSA or the other).

This is explained (opaquely) on page 6 of Pub 969 under "Rules for married people".

So you have in fact an excess of $2,028, which is what TurboTax is telling you.

Second, "In February 2026,  the husband  asks the HSA custodian, to withdraw $2,000 from the 2025 HSA contributions, so that there will be no longer excess in HSA being carried over. "

The 1099-SA showed a code of '1', (not '2', which would be normal for a "withdrawal of excess contributions"). You have to specify this exact phrase to the HSA custodian or they will give you a normal distribution (code '1'), which is what you got.

Furthermore, you marked this as "all for medical expenses", which means that it could not be used to reduce the carryover. 

In any case, it doesn't matter that you weren't asked about the "If you already withdrew your excess contribution, you still need to include it here. We'll ask about withdrawn contributions next. " You didn't withdraw any excess contributions in any case (code '2' on the 1099-SA).

The missing screen about giving you the option to withdraw the excess or carry it over...in your situation, TurboTax is just carrying over the $2,028 to 2026. It is charging you an excess tax of 6% in the process (line 49 in Part VII on the 5329).

I suggest that now that you know that your annual HSA contribution limit is much less than you thought, that you allow space for an extra $2,028 as a personal contribution in 2026 - this will use up the carryover, and you will be done with it. That is, don't contribute more next year than the Family total + $1,000 + $1,000 - $2,028. Remember that at least $1,000 must go into each HSA.

[arlindo4nc]

@BillM223 

   Thank you for the review. If I use the  TT desktop, will it allow me correct this error in the workflow and the forms?     In summary based on your comments:   I had an excess $ 3,184 HSA contribution carried over from 2024.   In  2025, family contribution were  $9,394. for an HSA family limit of $ 10,550.  TurboTax online correctly calculated an excess of $2028 ( $ 3,184+ $ 9,394 - $ 10,550 ) to carryover into 2026 . In Feb-2026 I withdrew $2028 excess from the 2025 contribution, so  according IRS rules, I  should not have been taxed $ 122 for the 6% penalty that turbotax is calculating, isn't that correct?  But because TT online is not prompting me to report that there was a withdrawn, I am going to have to pay  the penalty. That seems to be a problem to be fixed with the SW, not with my numbers correct?