How to correct excess HSA contribution withdrawn as normal distribution instead of return of excess?

I messed up my HSA stuff and need advice on how to fix it on my tax return. In 2023, I accidentally contributed $270 extra to my HSA account. I caught this mistake while using FreeTaxUSA to file my 2023 taxes this April (2024). I withdrew the $270 from my HSA before the April 15 deadline, but I didn't realize there was a specific process for withdrawing excess contributions. Instead of requesting a "return of excess contributions," I just did a normal withdrawal. Now my 1099-SA for 2024 shows this as a normal distribution (distribution code 1). I called my HSA provider yesterday and they basically said "too bad" - they won't issue a corrected 1099-SA at this point and told me I need to figure it out on my tax return somehow. The problem is that I didn't report any excess contribution on Form 5329 for my 2023 taxes, and now I have this $270 showing as a regular distribution for 2024. How do I correctly handle this situation on my 2024 taxes? Can I still avoid penalties? Should I treat this as a qualified medical expense or is there another way to report it?

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18 comments

Mateo Gonzalez

•8M

This is actually a common mistake with HSAs. The good news is you can still handle this properly on your tax return even though the 1099-SA shows it as a normal distribution. When you file your 2024 taxes, you'll need to report the $270 on Form 8889 (Health Savings Accounts) since it appears on your 1099-SA. However, you can avoid taxes and penalties by completing Part II of the form correctly. You should indicate that this distribution was actually to correct an excess contribution from the prior year. There's a line for "distributions included in income" where you can enter zero if you properly document this as a correction of a prior year excess contribution, even if your HSA provider coded it as a normal distribution. You may need to attach a statement explaining the situation. The key is documenting that this was a withdrawal of excess contributions that was completed before the tax filing deadline for the contribution year, even though it wasn't processed correctly by your HSA provider.

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Mateo Gonzalez

•8M

You'll report the $270 distribution on line 14a of Form 8889 since it appears on your 1099-SA. Then on line 15, you'd enter zero for qualified medical expenses. On line 16, you'd normally calculate taxable HSA distributions, but since this was a correction of an excess contribution (even though improperly coded), you can enter zero here as well. You should attach an explanation statement to your return clearly documenting that this distribution was to correct an excess contribution from 2023, withdrawn before the filing deadline. Not reporting the excess on your 2023 Form 5329 isn't ideal, but since you withdrew the excess before the filing deadline, you can still treat this correctly. The IRS allows correction of excess contributions without penalty if withdrawn before the filing deadline, which you did.

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Aisha Ali

•8M

I was in almost the exact same situation last year! After trying to figure it out myself for hours, I finally used taxr.ai (https://taxr.ai) to analyze my HSA documents and tax situation. Their system identified exactly how to handle my incorrectly coded excess contribution withdrawal. The tool reviewed my 1099-SA and previous year's return, then walked me through exactly how to complete Form 8889 and what supporting documentation to include. What would have taken me days of research took just minutes, and I was confident everything was handled correctly. Their explanation made it clear that the timing of the withdrawal (before the tax deadline) was what mattered most, not how the HSA provider coded it on the 1099-SA. Worth checking out if you're still unsure how to document this properly.

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Aisha Ali

•8M

It actually analyzes your specific tax documents and situation rather than just giving generic advice. You upload your 1099-SA and any other relevant documents, and it identifies the specific issues and solutions for your case. For HSA excess contributions specifically, it creates a detailed explanation of how to complete each line on Form 8889, including where to report the distribution, how to document it was for excess contributions, and what supporting statement to include with your return. It even generates the statement text for you to attach to your return explaining the situation to the IRS. I haven't had any issues with the IRS. My return was accepted without questions, and I received my full refund. The documentation approach they recommended was actually more thorough than what my accountant had suggested, which gave me peace of mind.

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Yuki Nakamura

•8M

Just wanted to update that I tried taxr.ai after being skeptical in my earlier comment. I uploaded my 1099-SA and tax documents, and it immediately identified my excess contribution issue and provided step-by-step instructions for correcting it. The system generated a detailed explanation statement to attach to my return that explained how the distribution should be treated, despite being incorrectly coded on my 1099-SA. It referenced the specific IRS provisions that allow for correction of excess contributions when withdrawn before the filing deadline. I was particularly impressed that it tailored the instructions to my specific HSA provider and circumstances. Much more helpful than the generic advice I got from calling the IRS helpline, where they just kept reading from a script.

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StarSurfer

•8M

If you're still having trouble getting through to your HSA provider to discuss this, I'd recommend trying Claimyr (https://claimyr.com). I had a similar issue with my HSA administrator coding a distribution incorrectly, and I spent WEEKS trying to get through to someone who could help. After using Claimyr's callback service (you can see how it works here: https://youtu.be/_kiP6q8DX5c), I got through to a senior HSA specialist who explained that while they wouldn't reissue the 1099-SA, they could provide a letter confirming the distribution was intended to correct an excess contribution. This letter was incredibly helpful for my tax documentation. The time saved was worth it - I was spending hours on hold before, and Claimyr got me a callback within 20 minutes.

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StarSurfer

•8M

It works by navigating the phone system for you and waiting on hold in your place. When a representative finally answers, the system calls you back and connects you immediately. It doesn't "jump the queue" - it just waits in it so you don't have to. For HSA providers specifically, it helped me navigate through the phone tree to reach the specialized HSA tax documentation team, which was several layers deep in menu options I hadn't even been aware of previously. The system even detected when new support options were added that weren't in the standard menu. I absolutely got my issue resolved. The specialist I reached provided a letter confirming my distribution was intended as a return of excess contributions, which I attached to my tax return. While they couldn't change the 1099-SA coding, this letter provided the documentation I needed to properly report it on my taxes. Without getting through to that specific department, I would have been stuck.

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Andre Moreau

•8M

I can't believe I'm saying this, but I have to admit I was wrong about Claimyr in my skeptical comment above. After struggling with my HSA provider for another week and getting nowhere, I broke down and tried it out of desperation. Got connected to an actual HSA tax specialist within 30 minutes - someone I didn't even know existed at my provider. They explained that while they couldn't reissue my 1099-SA with the correct distribution code, they could add notes to my account and provide written confirmation that the distribution was for an excess contribution. This documentation was exactly what I needed to properly report everything on my tax return. The specialist even sent me their direct extension for any follow-up questions. After weeks of frustration, having this resolved in one call was honestly worth it.

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Zoe Christodoulou

•8M

Just adding another option - you could file Form 8889 as mentioned above, but you might also consider filing an amended 2023 return (Form 1040-X) to report the excess contribution on Form 5329 for that year. Then you can properly account for the distribution in 2024. Though honestly, since you withdrew the excess before the deadline, you might be overthinking this. The important thing is that you didn't claim a deduction for the excess $270 on your 2023 return and you withdrew it before the deadline. The distribution code is less important than these two facts.

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Zoe Christodoulou

•8M

Filing an amended return would create a cleaner paper trail, but it's probably more work than necessary in your situation. Since you already withdrew the excess before the deadline and didn't take a deduction for the excess amount on your 2023 return, the main issue is just documenting the nature of the distribution on your 2024 return. Attaching an explanation statement to your 2024 return is likely sufficient and much simpler than amending your 2023 return. The risk of audit is actually quite low for this situation. The IRS is primarily concerned that you didn't deduct more than you were entitled to (which you didn't) and that you properly report distributions (which you will with the explanation). This type of corrective action happens frequently with HSAs and isn't a red flag as long as you document it properly.

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