1) Correct, you need to file Form 5329 with Form 1040-X to report and pay the 6% penalty
2) There is nothing to amend your California tax return. I'm not aware of any state that has a separate penalty for excess HSA contributions.
3) The 6% penalty for 2023 is only on the excess, not the interest. In 2023 TurboTax, enter exactly the amount of the excess as the amount of your excess contribution carried in from 2022.
4) The correction in 2024 is made by obtaining a taxable distribution (a distribution not claimed as used for medical expenses) of exactly the amount of the excess, no adjustment for investment gain or loss. There will be no 6% penalty for 2024 but the distribution will be subject to ordinary federal income tax and, if you are under age 65, a 20% additional tax. California does not tax any HSA distributions because California treats the HSA as if it was an ordinary savings account. The taxable HSA distribution is subtracted from federal AGI on Schedule CA Section B line 8f column B.
5) The taxable distribution should be equal to the amount of the excess contribution with no adjustment for investment gain or loss.
6) The only way to avoid the 20% additional tax is to not take a taxable distribution before age 65. The only way to correct this excess without taking a taxable distribution would be to again qualify to make an HSA contribution and apply the excess as part of the HSA contribution for that year.
This answer has been verified for accuracy by an Intuit expert employee
