How to handle Form 1099-SA Distribution from an HSA after over-contribution?

Thanks for the explanation! Just to be clear - even though this was fixing an over-contribution from 2021, it still needs to go on the 2022 Form 8889 since that's when the distribution actually happened, right? And does my coworker need to amend her 2021 return at all to show the correction?

Yes, since the distribution occurred in 2022, it gets reported on the 2022 tax return using Form 8889, even though it was fixing a 2021 over-contribution. This is because tax forms report transactions in the year they actually occur. Your coworker doesn't need to amend her 2021 return as long as she withdrew the excess contribution (plus any earnings on that excess amount) before the tax filing deadline. The IRS treats it as if the excess contribution was never made for 2021. The 2022 Form 8889 with the distribution code 2 will properly document that this was a correction of an excess contribution.

Does taxr.ai actually work with HSA-specific forms? I've got a similar situation but with multiple HSA contributions from different employers after switching jobs mid-year, and I'm pretty sure I'm over the limit. Would it help figure out if I need to make a withdrawal before filing?

I'm suspicious of these tax tools. How does it actually know the right way to handle HSA overcontributions? There are different rules depending on when you catch the mistake and when you withdraw the funds. Can it really understand all those nuances?

It absolutely handles HSA forms including 1099-SA and 8889. It will analyze your situation with multiple employer contributions and calculate if you're over the annual limit. It then provides step-by-step guidance on whether you need to make a withdrawal and the deadline to avoid penalties. Yes, it's specifically designed to understand these tax nuances. When you upload your documents, it identifies the distribution codes (like code 2 for excess contributions) and explains the specific rules that apply to your situation. It knows the different deadlines and tax implications based on when the overcontribution happened and when the correction was made. I was skeptical too until I saw how detailed its explanations were about my exact scenario.

How does this actually work? Do they somehow jump you ahead in the IRS phone queue? That seems impossible since the IRS phone system is notoriously awful.

This sounds like complete BS honestly. Nobody can magically get you through to the IRS faster. I've spent literal DAYS trying to reach them about my tax issues. There's no secret backdoor or way to skip the line that some random service has figured out.

It uses an automated system that navigates the IRS phone tree and waits on hold for you. Once an agent picks up, you get a call back and are connected directly to that agent. No line jumping - they're essentially waiting on hold so you don't have to. It's definitely not BS. I was extremely skeptical too, especially after spending hours trying to reach someone at the IRS. The service navigates all the prompts and holds your place in line, then calls you when an actual human agent is on the line. I went from wasting entire afternoons on hold to having a real conversation with an IRS representative who answered my specific HSA distribution questions. The peace of mind was absolutely worth it.

Ohhh thats a really good point! I don't think she mentioned anything about earnings on the excess amount. How would she know if there were any earnings? Would that show up separately on the 1099-SA or would she need to calculate that somehow?

The earnings should be included in the gross distribution amount on the 1099-SA, but it won't be separated out specifically as "earnings." Your friend would need to contact her HSA provider to get a breakdown of how much of the distributed amount was the excess contribution versus earnings on that excess. Usually the HSA administrator calculates this when processing an excess contribution withdrawal. Once she has that information, only the earnings portion would be reported as taxable income on her 2022 return (usually on Form 1040, line 8 - Other Income). The principal amount (the actual excess contribution) isn't taxable since it was removed before the deadline.

This happened to me - I reported excess HSA contributions on Form 5329 AND withdrew them, basically double-correcting the error. Ended up having to file an amended return because I essentially paid tax on money that shouldn't have been taxed. What a nightmare!