Overfunded HSA in 2022 and took excess contributions out in March 2024 but still getting 6% penalty

Forum|Forum|1 year ago
March 4, 2025
3 replies
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In 2022 I overfunded my HSA by $149. TurboTax applied 6% fee (form 5329) on that money and also added the $149 back into line 8 of 1040 Other Income.

In 2023 that same $149 was carried over and I again paid the 6% fee (form 5329). I was advised by TurboTax advisor to withdraw the $149 from my HSA from 2022 as soon as possible to stop the 6% from happening again in 2024. In March 2024 I withdrew $149 and was sent a 1099-SA form for that amount plus $1 for earnings.

I am now filing my 2024 taxes and after entering 1099-SA information the same 6% is being calculated and appears will also happen in 2025 and beyond.

How do I fix this once and for all? Please note that I had an high deductible plan from Jan-July 2022 but did not have high deductible plan in 2023 or 2024.

Any help is appreciated. Thanks!

Best answer by BillM223

If you withdraw the amount equal to the carry over AND say that it was NOT for qualified medical expenses, then that will stop the carryover. It's not enough to just withdraw the money.

So go back into the HSA interview and tell TurboTax that this 1099-SA was not for medical expenses (even if it was).

This will have several effects:

1. The amount of the distribution in box of the 1099-SA will be added to Other Income.

2. You will be hit with a 20% excise tax (penalty) on that distribution.

3. The carryover will finally go away.

The calculation of the 20% penalty appears on the 8889, line 17b. Even if you can't see your output forms because you are using the Online product, you can see the 1040 and Schedules 1-3. Go to Tax Tools (on the left), then Tools (underneath), then in the center, click on View Tax Summary...then back on the left, click on Preview my 1040. Your 1040 and the three Schedules (if applicable) follow.

If you are looking to see if the 20% excise tax was imposed (meaning that your plan worked), it will be on Schedule 2, line 17c.

You should also note that the 5329 is no longer attached to your return (unless you have one of the many other conditions that use it).

One more thing. In the HSA interview, when TurboTax asks if you "overfunded" your HSA, just say NO.

BillM223Answer

If you withdraw the amount equal to the carry over AND say that it was NOT for qualified medical expenses, then that will stop the carryover. It's not enough to just withdraw the money.

So go back into the HSA interview and tell TurboTax that this 1099-SA was not for medical expenses (even if it was).

This will have several effects:

1. The amount of the distribution in box of the 1099-SA will be added to Other Income.

2. You will be hit with a 20% excise tax (penalty) on that distribution.

3. The carryover will finally go away.

If you are looking to see if the 20% excise tax was imposed (meaning that your plan worked), it will be on Schedule 2, line 17c.

You should also note that the 5329 is no longer attached to your return (unless you have one of the many other conditions that use it).

One more thing. In the HSA interview, when TurboTax asks if you "overfunded" your HSA, just say NO.

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Marlee1Author

@BillM223

Thanks. This makes sense but my 1099-sa has a distribution code of 2 in box 3 which says its an excess distribution. Because of this I believe TurboTax never asks me if it was for qualified or non-qualified. Should I change box 3 to normal distribution? Can I do that without getting flagged?

Opus 17

Employee

@Marlee1 wrote:

@BillM223

Thanks. This makes sense but my 1099-sa has a distribution code of 2 in box 3 which says its an excess distribution. Because of this I believe TurboTax never asks me if it was for qualified or non-qualified. Should I change box 3 to normal distribution? Can I do that without getting flagged?

Something is wrong here.

@dmertz

Let's clarify the history.

1. Why did you have excess contributions in 2022? (Because your HDHP ended in July.)

2. Were you eligible in 2023? (You said no.)

3. Did you in fact make contributions in 2023? (Probably not, but confirm.)

4. Did you withdraw any money in 2024 for medical expenses, or only the $149 to correct the excess?

Here's the problem: The procedure to "remove excess" contributions for 2022 can only be made up through October 15, 2023. Since the withdrawal occurred in 2024, it was not a removal of excess, it could only be a regular withdrawal. If you asked for removal of excess, the HSA bank should have told you no, and they should have known better than to use that code, even if you didn't know better.

I think you need to contact them and ask for a corrected form 1099-SA showing a regular withdrawal, then you can pay the tax and penalty and the excess will be cleared from the account.

I don't know what would happen if you changed the code on your return without getting a corrected 1099. Turbotax would calculate the correct tax and penalty, but would anything happen at the IRS because of the mis-match?

Opus 17

Employee

"So go back into the HSA interview and tell TurboTax that this 1099-SA was not for medical expenses (even if it was)."

To be clear, only $149 needs to be "not for medical expenses." If you withdrew more than $149, you should tell turbotax that it was not all used for medical expenses, and then when it asks how much was not for medical expenses, enter the $149 there . The amount over $149 that you did use for medical expenses is still tax-free.

Opus 17

Employee

Also note, if you withdraw the money "not for medical expenses" you pay income tax plus a 20% penalty. That's a lot of tax. It would take at least 5 years of 6% penalties to equal the tax on removing the excess as a withdrawal "not for medical expenses."

If you think you are likely to spend the account down to zero in the next 5 years (since you are not eligible to make new contributions, you are spending without replenishing), it may be cheaper in the long run to keep paying the 6%.