Withdrawing excess HSA contribution and reporting

[putty174]

In 2024, I signed up for an HDHP through my employer, as well as opened an HSA through them. From June 2024 to Oct 2024, I contributed $2075 to my HSA. During this time there was maybe $0.05 of growth from interest, while $5 was deducted for fees. I wasn't allowed any investment growth, since the provider needed $4000 to allow investment options.

It turns out I am ineligible to contribute to an HSA due to being covered by my wife's FSA for ALL of 2024. In December 2024, I called my HSA provider and had them close my account, and send me a check for $2070, my original contribution minus fees. I have discontinued my HDHP in Jan 2025, opting to be covered under my wife's PPO.

Now I'm filing my 2024 taxes, and they sent a 1099-SA for $2070 (box 1), blank (box 2), with a distribution code 1 (box 3). I've been calling them to fix this to distribution code 2, but they refuse, since they only see "my information", which is I had an HDHP, and had "no information about any other disqualifying factors", even after I told them I was covered by my wife's FSA.

I played with the numbers, pretending to have never contributed to my HSA, and the only tax difference was the 20% penalty for unqualified expenses, about $414.

In my situation, am I correct that my $2070 should be reported with distribution code 2?

How do I file this for my 2024 taxes? Or do I wait to fix it next year? TurboTax isn't letting me edit the field to report withdrawn excess contributions if I use distribution code 1, even in Form mode.

Or did I mess up and I'll have to pay the 20% penalty?

PS, I have already filed my 2024 taxes, because I'm not sure if my HSA provider will send a corrected 1099-SA in time. I figured better to file on time and amend later. At least I won't be penalized for being late on taxes. I haven't done state yet though, but I'll probably do the same thing and file first, and amend later.

[BillM223]

I am sorry to say this, but, yes, you did "mess up", but in a way that is all too common.

When you called your HSA custodian to ask to return the $2,070, I imagine that you did not say the magic words "Withdrawal of excess contributions". This would have let the HSA custodian know that they needed to put a 2 in box 3 instead of 1, that they needed to calculate the earnings on the excess while it was in your HSA, and to put the earnings in box 2 on your 1099-SA.

Without you telling them this, they had no way of knowing, so they did what they did with their limited information.

TurboTax is set up so that it calculates the amount of excess contributions - you are not allowed to set the amount of the excess. That's why you can't change it.

So you will have to do this. Write up on a piece of paper the following:

1. You made contributions of $2,075. This amount was shown with code W on your W-2.

2. You subsequently realized that you were not eligible to contribute to an HSA.

3. You asked the HSA custodian to withdraw $2,070, mistakenly not realizing that the entire $2,075 needed to be withdrawn.

4. Furthermore, you failed to tell the HSA custodian that this was a withdrawal of excess contributions, which caused the HSA custodian to put the wrong distribution code in box 3 of the 1099-SA.

5. You calculated the earnings of the excess to be $0.05. You added this to Other Income.

6. You shortchanged the original contribution of $2,075 by removing only $2,070. The $5 difference is an excess contribution that you did not withdraw, so it will be carried over to next year. You will be assessed an excise tax of 6% on the carryover. NOTE: this is 6% of the lesser of the carry over or the value of your HSA at year-end. Since your HSA is now zero, your penalty will be zero.

7. If, at some future point, you resume HDHP coverage without the conflicting FSA coverage, you will use that $5 carryover as a "personal contribution" and the penalty will cease.

8. You understand that the paperwork of the HSA custodian differs from yours, but you have, to the best of your ability, made the situation right by withdrawing nearly all the excess contributions, paying tax on the original contributions and the earnings, and carrying over the excess that you did not withdraw (the $5). 

9. You will keep this piece of paper in your tax files in case any one ever asks about it.

[putty174]

@BillM223 The best part about all of this is that I did tell them every time that I wanted to "withdraw my excess contributions."  Multiple times per call. I only hung up after they told me they would have it categorized correctly.

Each time, the HSA's agents said that since I had no disqualifying factors that forbade me to contribute, so my annual contribution limit was $4300. I closed the account because one of the agents said "the only way we can return all of your contributions is if you close your account, since we don't allow you to have an HSA with $0". I even confirmed with this agent that after closing my account and returning my funds, the tax form would correctly state that it would be an "excess contribution distribution", and not a "regular distribution".

As for the $5 that was removed due to plan fees, they said that they would remove it from account balance and send me a check for the rest. But it seems like they messed that part up too.

And in the future, if I do open another HSA, I just have to remember that I "already have $5" from a previous HSA?

[BillM223]

Ouch. They made not just one but several terrible mistakes.

There is no way they could safely announce that they knew your annual HSA contribution limit, so they never should have said, "so my annual contribution limit was $4300." After all, they didn't know about your spouse's FSA, did they?

And it is just as well that they forced you to close your HSA, since they don't seem to understand how HSAs work anyway.

Well, now it is all the more important that you document what happened - include any written communications that you had with them.

[putty174]

Is it possible to file an amended tax return, with "my own numbers" and explanation? If the IRS audits me, I send them my call logs and documents?

[BillM223]

If you change any numbers on a form like the 1099-SA which the IRS has a copy of, this is more likely to draw the attention of the IRS that doing what we talked about above. Once reason that the IRS gets copies of forms (like your W-2 and 1099s) is to compare what you reported with what they hears from other sources.

Since your HSA custodian won't co-operate in correcting their mistakes, there is no way that you can file a clean amended return. 

Just document EVERYTHING in case the IRS ever asks.

[putty174]

@BillM223 This might go beyond the scope of this conversation, but would it be better to amend it myself, or through Turbotax?

For Turbotax, I'm thinking of changing the 1099-SA to have distribution code 2, then adding the balance back as miscellaneous income. When I just change 1099-SA to distribution code 2, it calculates too much refund, which is why I add it back in the misc section.

For myself, I would just keep the schedule 1099-SA to have distribution code 1, but add the line where I removed excess contributions, and then calculate normally.

[BillM223]

"For Turbotax, I'm thinking of changing the 1099-SA to have distribution code 2, then adding the balance back as miscellaneous income. When I just change 1099-SA to distribution code 2, it calculates too much refund, which is why I add it back in the misc section."

To paraphrase Miss Piggy, "too much refund? As if such a thing was even possible." 😉

When you change the distribution code to 2, then the distribution is not added back to Other Income...because it already was when the original excess was found by TurboTax. So, NO, you will not add the distribution to Other Income. If you look at your return in Forms mode, you will see that the original excess has already been added back to income - you don't need to double it.

This is the second conversation I am having now with a taxpayer about mistakes made by an HSA custodian; sadly, the best way out is for the taxpayer to correct the 1099-SA to what it should have been, and document the heck out of it. in case anyone ever asks.

P.S., there is no reason not to amend your return through TurboTax - it will make sure that things are correct.

[putty174]

@BillM223 Thank you so much for your patience and explanation. Would you mind explaining where the original excess was added? Go over my return, 1040 Line 1 is the same for both original (1099-SA code 1) and amended (1099-SA code 2). My W2 already reduced my Box 1 amount by the HSA contribution. I am assuming this is how I got my tax credit.

However, line 1040 Line 8 for the amended is $2070 in the original, and $0 in the amended. Wouldn't this mean in the amended version, the $2070 is just gone, and isn't taxed anywhere? It wasn't taxed in the W2, and wasn't taxed in the distribution. I find it hard to believe this $2070 isn't taxed at all.

When I added the 1099-SA to TurboTax and went through the steps reporting my HDHP coverage and such, TurboTax also calculated my limit to be $4150, so there was no excess either:

- This HSA was not inherited

- All $2075 of my original contribution was through my employer, by deducting from my income.

- My employer did not tell me about other contributions.

- I did NOT have Medicare at 2024

- I was covered by an HDHP from June 2024 through Dec 2024. (TurboTax calculates my max contribution limit to be $4150)

- I did not overfund my HSA in 2023.

- I did not have a HDHP on Dec 1, 2023

- My wife did not have an HDHP on Dec 1, 2023

The final result that TurboTax calculates a refund of $870, $414 from removing 20% penalty + $456 from removing income tax in the 22% tax bracket. The $456 refund is the part I don't understand, because I wasn't taxed on it in the first place when it got removed from Box 1, and I don't see it being added anywhere else in the 1040.

[putty174]

@BillM223Thank you so much for your patience and explanation. Would you mind explaining where the original excess was added? Go over my return, 1040 Line 1 is the same for both original (1099-SA code 1) and amended (1099-SA code 2). My W2 already reduced my Box 1 amount by the HSA contribution. I am assuming this is how I got my tax credit.

However, line 1040 Line 8 for the amended is $2070 in the original, and $0 in the amended. Wouldn't this mean in the amended version, the $2070 is just gone, and isn't taxed anywhere? It wasn't taxed in the W2, and wasn't taxed in the distribution. I find it hard to believe this $2070 isn't taxed at all.

When I added the 1099-SA to TurboTax and went through the steps reporting my HDHP coverage and such, TurboTax also calculated my limit to be $4150, so there was no excess either:

- This HSA was not inherited

- All $2075 of my original contribution was through my employer, by deducting from my income.

- My employer did not tell me about other contributions.

- I did NOT have Medicare at 2024

- I was covered by an HDHP from June 2024 through Dec 2024. (TurboTax calculates my max contribution limit to be $4150)

- I did not overfund my HSA in 2023.

- I did not have a HDHP on Dec 1, 2023

- My wife did not have an HDHP on Dec 1, 2023

The final result that TurboTax calculates a refund of $870, $414 from removing 20% penalty + $456 from removing income tax in the 22% tax bracket. The $456 refund is the part I don't understand, because I wasn't taxed on it in the first place when it got removed from Box 1, and I don't see it being added anywhere else in the 1040.

Sorry for the multiple tags in quick secession, but I found in the TurboTax instructions that say "If you are covered by an HDHP and another HDHP plan during the same month, select None." I had been selecting "Self Only" for the months I had an HDHP. During this time, my wife had a PPO plan that covered herself, but an FSA that covered both of us.

I am confused if I should change my answer to "None", since this sounds like the place to report that I am not qualified for an HSA, but it the instructions specify a non-HDHP plan, which an FSA is not: I only had my HDHP as my health insurance during this time. However, if I choose "None", it calculates the correct amount of refund I am expecting, the $414 20% penalty for excess contribution.

[BillM223]

Essentially in TurboTax, any time you are asked about HDHP coverage, if you have any conflicting coverage, you enter NONE, even if you have HDHP coverage. As you know, conflicting coverage is stuff like a spousal FSA, spousal regular health insurance that covers you, Medicare (yours, not the spouse's) and so on.

The taxable income generated from both excess contributions and non qualified distributions is placed on 8f on Schedule 1 (1040).