Excess HSA Contribution withdrawal - How to handle it in FreeTaxUSA?

Question

Hello

Apologize upfront for the long-winded note on my tax topic.

I contributed the full amount to my HSA (self funded) in 2023 and claimed deduction for it when I filed taxes in April 2024.

After filing 2023 tax, I enrolled in Medicare and due to the "6 month look back" rule, I became ineligible to contribute to HSA in 2023 for 3 months. In June 2024, I withdrew my excess HSA contribution for the 3 months of 2023. My HSA provider said that the excess contribution withdrawal would be reflected in the 2024 1099-SA.

Last month, I received my 1099-SA for 2024 with (i) Gross distribution - $X (ii) Earnings on excess contribution - $Y and Distribution (iii) code = 2 (indicates excess contribution)

Below is how I have handled entry of the 1099-SA in FreeTaxUSA and noted my questions along the way:

1. Did you take an HSA distribution in 2024? Yes/No

2. Your Total HSA Distributions: $X (Form 1099-SA, Box 1)

3. Did you use all of the HSA distributions for medical expenses? Yes/No

If I answer Yes to the above question, then I don't get Question #s 4, 5 and 6 and the software directly goes to Question #7 below.

4. Amount Used for Medical Expenses (Enter the amount of distributions you used for medical expenses:) $X (same as in Question #2); used for medical expenses in 2024

5. Did you make excess 2023 or 2024 HSA contributions and then withdraw them? Yes/No

Only answer Yes if the excess contributions (and any earnings) were withdrawn by the specific 2023 or 2024 tax return's due date (including extensions).

Based on the above footnote - As I had filed my 2023 taxes before April 15, 2024, and withdrawn the 2023 excess contribution in June 2024, i.e. before October 15, 2024 (i.e. extension deadline), IRS considers the withdrawal compliant with the return due date, and I don't owe a penalty (I am also a senior citizen, no 20% additional tax on the distribution.) Is my understanding on this correct?

6. Enter the amount of 2023 or 2024 excess contributions (including earnings) withdrawn by the specific 2023 or 2024 tax return's due date (including extensions): $X (same as distribution of excess contribution)

7. Were you taxed for excess HSA contributions in 2023? Yes/No (didn't pay taxes for the excess HSA contributions in 2023)

I am not sure if the above responses are correct since:

a. Question # 4 - As the distribution is of excess contribution and not reimbursement of medical expenses, shouldn't the response be $0? (Coincidentally, I noticed that the tax refund $ doesn't change when I enter $0 or $Z - the entire distribution)?

b. Question #5 - is my understanding correct?

c. Do I have to amend my tax return for 2023 due to this excess contribution withdrawal?

Thanks in advance for your attention and comments.

Regards

KristineS

Hi Question,

Thanks for providing such great detail. I'll do my best to respond.

Working in reverse order, unless you filed a timely extension for your 2023 tax return, the additional time to withdraw the funds between April 15th - October 15th, doesn't apply to you. Did you file a timely extension (i.e. on or before April 15th)? If yes, the rule applies in terms of avoiding a penalty. If not, the penalty will apply because the withdrawal of excess was not timely.

You may need to change the #5 to 'no' instead of 'yes'.

Question #4 refers to the amount of distributions use for medical expenses in 2024. This is separate from a withdrawal of excess contribution.

Amending your prior year return doesn't change the penalty you would pay for failure to withdraw the excess by the April 15th deadline (unless you filed an extension).

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