"If you fail to remain an eligible individual during any of the testing periods, discussed earlier, "
The two testing periods discussed earlier were for (1) using the last-month rule, and (2) a qualified funding distribution, neither of which applies to you.
In your case, you have an excess contribution that you are unable to withdraw (a not too uncommon occurrence).
The excess that you are unable to withdraw will carry over to the next year. Normally, this would reduce your HSA limit next year, but this would matter only if you were still eligible to contribute.
NOTE: you would have to withdraw all contributions, both yours and your employers.
So you have two choices:
1. Arrange things so that you do not have FSA coverage next year. This would allow you to resume contributions to the HSA in the subsequent year, and "use up" the carryover of the excess. You will need to sit down with your benefits people and see if you can get out of the FSA...in writing.
Note: the carry over will be done automatically by TurboTax and will cause a 6% penalty.
2. Make a distribution from the HSA for the amount of the carried over excess (i.e., call the HSA custodian). The excess would be added to your income for tax year 2023, along with a 20% penalty. Once, however, you have done this, the carry over is done with.
I don't know your specific situation, but I would investigate asking to be removed from the FSA (If possible) and going full-tilt into the HSA. Not only is the contribution limit for the HSA much higher, but you don't have any "use it or lose it" rules for the HSA. Instead, the HSA becomes a unique piggybank wherein all money going in is tax-free and all money spent out of it on qualified medical expenses is also tax free...AND all earnings in the HSA are tax-free. There is hardly any better deal tax-wise in the Tax Code. You know that you will eventually have to spend money on medical stuff, and it's nice to know that you have that tax-free medical expense piggybank there.
P.S. The HSA belongs to you, not your employer...so even if you leave your employer, you take it with you.
PPS, It's odd that your employer would offer HDHP health insurance coverage AND an FSA...is it possible that they are on the way to dropping the FSA?
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