1. IF the employer will withdraw the money, that's fine. Not all employers will do this, because they might claim that they had no way of knowing that she was not eligible. NOTE, this means that her employer has to withdraw the money, not your daughter. If her employer does this, then they would have to issue a corrected W-2 (one with no code W in box 12).
2. It makes no difference if the contributions were from her employer or from her by payroll deduction, in terms of making a carryover.
NOTE: if you decide that your daughter will withdraw part or all of the excess. then your daughter must call her HSA custodian and ask for "a withdrawal of excess contributions" (use these words), so that the HSA custodian can keep their paperwork straight. There is often an online form for doing this on the custodian's website.
The difference on whether your daughter pays income tax on the excess is subtle.
IF THE EMPLOYER withdraws the money, then your daughter should get a corrected W-2. In this case, she pays no income tax because it is never listed as income on her W-2.
BUT AS IS MORE LIKELY, your daughter ends up withdrawing the amount of the excess and has to pay income tax on it...but think about it - your daughter has more income in this case, so she is actually better off. Her income will be her Box 1 amount plus the excess. Yes, she if paying tax on it, but so what, she has more money in the end.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
