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Excessive HSA contribution question

Forum|Forum|11 months ago
April 10, 2025
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I overfunded my HSA for tax year 2023 and found out in 2024 while filing tax. I withdrew it before 4/15/24 to avoid the penalty. However, I accidentally withdrew it as normal distribution and my 1099-SA is not correct now. When contacted my HSA account manager, they insisted I had to return the money to HSA account then withdraw it correctly. This for sure is not going to be done 4/15/25 and I am afraid that I will have to pay tax again for $3650 that I already paid in 2024, on top of 6% penalty. What’s is the best way to correct this?

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Best answer by BillM223

As I see it, you have two choices:

1. Go through the process that the HSA custodian suggested, making sure that you request the withdrawal of the excess contributions by April 15th, even if the money doesn't get to you before April 15th. Document everything in case anyone ever asks.

2, Change the distribution code on the 1099-SA to "2".

#2 has one advantage and two disadvantages. The advantage is that you can do this now.

The disadvantages are that (1) you are changing a tax form that the IRS has a copy of, so this may generate a letter from the IRS to you, and (2) you will have to calculate the earnings yourself for the period of time that the excess was in the HSA and enter it in box 2 of the 1099-SA.

Hmmmn, I guess there is a third alternative.

Ask the custodian to treat the distribution as a Mistaken Distribution (see "HSA Mistaken Distributions" in the 1099-SA Instructions). Note that these are instructions to the HSA custodian, not you. Also note that they don't have to accept this request, so be nice.

You will have to send them a check for the amount of the Distribution.

Then, because you did not withdraw the excess in time (go through the HSA interview again, and tell TurboTax that you are not withdrawing the excess), it will be carried over to 2025. You will be dinged 6% of the carryover. But if you reduce your HSA contributions for 2025, the carryover will be placed on line 2 of the 8889 and used as a personal contribution. If you don't generate a new excess, then the carryover will be "used up" in 2025, with no further problems.

Oh, there is a fourth alternative ("on the fourth hand..."), which is to extend your return. You then have until October 15th to withdraw the excess (you still have to get the money to the HSA custodian by April 15th). This means, of course, that you will either paperfile or look into how TurboTax e-files amended returns.

See the Instructions for the 5329.

B

BillM223Answer

As I see it, you have two choices:

1. Go through the process that the HSA custodian suggested, making sure that you request the withdrawal of the excess contributions by April 15th, even if the money doesn't get to you before April 15th. Document everything in case anyone ever asks.

2, Change the distribution code on the 1099-SA to "2".

#2 has one advantage and two disadvantages. The advantage is that you can do this now.

The disadvantages are that (1) you are changing a tax form that the IRS has a copy of, so this may generate a letter from the IRS to you, and (2) you will have to calculate the earnings yourself for the period of time that the excess was in the HSA and enter it in box 2 of the 1099-SA.

Hmmmn, I guess there is a third alternative.

Ask the custodian to treat the distribution as a Mistaken Distribution (see "HSA Mistaken Distributions" in the 1099-SA Instructions). Note that these are instructions to the HSA custodian, not you. Also note that they don't have to accept this request, so be nice.

You will have to send them a check for the amount of the Distribution.

Then, because you did not withdraw the excess in time (go through the HSA interview again, and tell TurboTax that you are not withdrawing the excess), it will be carried over to 2025. You will be dinged 6% of the carryover. But if you reduce your HSA contributions for 2025, the carryover will be placed on line 2 of the 8889 and used as a personal contribution. If you don't generate a new excess, then the carryover will be "used up" in 2025, with no further problems.

Oh, there is a fourth alternative ("on the fourth hand..."), which is to extend your return. You then have until October 15th to withdraw the excess (you still have to get the money to the HSA custodian by April 15th). This means, of course, that you will either paperfile or look into how TurboTax e-files amended returns.

See the Instructions for the 5329.

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G

gonglienAuthor

Thank you so much for the solutions. You are AWESOME! I am leaning the third alternative: my HSA custodian already asked me to mail a check back with the distribution as a Mistaken Distribution so that part is taken care of. She suggested to remove excessive distribution as a second step but I prefer your suggestion of taking 6% ding but carry that to 2025 HSA (I am making sure my contribution doesn’t exceed limit with the carryover this time). But my question is, the excessive contribution was from 2023, not 2024 - would it be any problem to carry that in to 2025?