Unexpected 1099-SA due to account consolidation

[farleylai]

I had an HSA with Optum bank through my previous employer. Then I switched to a new employer in 2022 who created a new HSA with Optum bank as well. Next, I requested Optum bank to consolidate both accounts but Optum bank in reality closed the first one and sent me a check. So I called in again and asked to void and apply the check amount to the new HSA. Unexpectedly, I just received an 1099-SA due to the account closure withdrawal check. Now, what do I do with the 1099-SA in the tax return?

Technically, the distribution is not spent but deposited back to my new HSA account. Should I expect another form for the deposit amount or select something else when filing the tax return?

[MarilynG1]

Type '1099-SA' in the Search area, then click on 'Jump to 1099-sa' to get to this section.

Enter the info from the 1099-SA, Continue, and choose Distribution Code 2 for Excess Contributions.

Say NO the amount was not deducted from your wages.

Continue and enter the amount on your 1099-SA as a Contribution you made.

Indicate you were covered by a HDHP Health Plan.

Say NO you did not overfund your HSA in 2021.

The income will not be taxable and will be shown on Form 8889 as a Contribution/Rollover.

You may not receive any other form for the Contribution.

[farleylai]

Thanks for the timely response. I took a closer look at the 1099-SA and the box 3 Distribution code is labeled as 1, not 2. Should I ask Optum bank for a corrected form?

[BillM223]

If Optum Bank did indeed rollover one of your HSA accounts to another, then they should have sent you a 1099-SA with a distribution code of '1'.

To enter this 1099-SA, please do the following:

A rollover from one HSA to another is shown by form 1099-SA. However, since there is no code for rollover on form 1099-SA (unlike on a 1099-R), you have to take an extra step to tell TurboTax that this 1099-SA is in fact a rollover.

1. Enter the 1099-SA as usual. 
2. On the subsequent screen where you are asked if the distribution was for qualified medical expenses, answer “No”. Two new lines will appear.
3. Whether you answer that you spent part of the distribution or none of the distribution on qualified medical expenses, you will see a new line appear: “Amount rolled over into another HSA or MSA”.
4. Enter the rollover amount here. The amount rolled over will not be treated as taxable income.

For background, please read "Rollovers" on page 8 in Pub 969.

[farleylai]

Thanks for the clear answer.

I just talked to Optum bank and their representative told me they will generate a corrected 5498-SA for the new HSA account with the box 4 rollover contribution filled with the check amount (the current one is 0). Does TurboTax also take the 5498-SA as input to figure out the rollover between HSA accounts?

[BillM223]

No. You do not need to enter anything from the 5498-SA into TurboTax (better worded: "you can't enter the 5498-SA into TurboTax").

Just follow the process I described above - probably using a 1099-SA that you already have - to tell TurboTax about the rollover.

On page 8 of the Pub 969, "Note. If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer isn’t considered a rollover. There is no limit on the number of these transfers. Don’t include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889."

If Optum Bank ends up giving you a check after all (making this a rollover after all), tell them to deposit it into the new account as a ROLLOVER (this is important so they get their paperwork right), then enter the resulting 1099-SA (which you may already have) as I described above. The rollover amount should appear on line 14 of your 8889 (that is the 8889 of the spouse who did the rollover).

Does this sound good?

[farleylai]

Thanks for the elaboration and I will follow your instructions.