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Upon leaving my previous employer my HSA custodian started dinging me with a monthly "administrative billing fee". I've taken no non-qualified distributions from the HSA but received a 1099-SA with a gross distribution dollar amount matching the amount of the monthly fees for the year. My gut reaction is that the fees probably shouldn't be counted as unqualified distributions and the following section from IRS publication 969, p9 (2013 version link) seems to suggest I'm right to question this practice:

TIP: HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA.

Is the monthly "administrative billing fee" imposed by my HSA custodian mischaracterized as a gross distribution, subject to the 20% penalty?

UPDATE: My HSA administration sent a corrected 1099-SA that corrected the monthly fee being counted as an unqualified distribution.

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@Spig

You are correct that the Custodian should NOT be reporting administrative fees as a normal distribution. Fees should be excluded from distribution reporting entirely. Continue to contact them until they confirm that they are posting a corrected 1099-SA or you receive one.

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The form and instructions prompt the question, what does box 3 indicate? enter image description here

  • Box 3 has code 1, normal distribution. However I think they are counting the fees incorrectly as unqualified distributions. – Spig Mar 8 '14 at 19:52
  • Why do you think that if Box 3 is correct? Counting how? – JTP - Apologise to Monica Mar 8 '14 at 21:38
  • I don't think Box 3 is correct. The only monies taken from the account the whole year was administrative fees, which I believe shouldn't be marked as non-qualified distributions. – Spig Mar 8 '14 at 22:18
  • But your question is whether it would be subject to penalty. And the choices, while not ideal, only have one that would have no consequence, and that's "1 normal distribution." Anything else would be an issue. – JTP - Apologise to Monica Mar 8 '14 at 22:56
  • Sorry if I'm coming across poorly. As things stand now I get that I owe the penalty because my HSA custodian categorized the fees as a "normal distribution" and I'm looking for more evidence that they did so incorrectly beyond the tip in pub 969. I've sent a letter to the custodian stating my position and requested a corrected 1099-SA so we'll see how it goes. It's not much money but it's kinda insult to the injury of a no-value-added monthly service fee. – Spig Mar 11 '14 at 15:04

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