It depends. Please view this Turbo Tax post written by HelenaC. There are two options to consider.
Contact your H.S.A. administrator. The IRS is lenient on fixing excess HSA contributions. They provide two options of correction: removal or future application.
Option 1: The first removes the HSA contributions in the tax year and avoids a penalty – no harm, no foul. You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.
1) You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
2) You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
Option 2: Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6% per year penalty. The mechanism that allows this is the deduction, since next year you won’t actually deposit the contribution (it is already there), you will just deduct it on Form 8889 in 2022.
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Option 3: If you don’t remove the excess contribution from your account, you must include it as taxable income for the year you made it and pay an annual 6% excise tax on the excess contribution and any associated earnings as long as the excess contribution is in your account.
In answer to your question, the $2900 will need to show up as taxable income but there will be an 6% excise tax charged for that this year if you decide to leave it in.
To remove, Turbo Tax will alert you that you have an excess contribution and that you may want to consider withdrawing. Here if you indicate that you will withdraw the excess by April 18, then it will not be taxable. Make sure though that you do this by contacting your administrator.
I hope this helps.
[ Edited 02/23/22| 07:48 PM PST]
@MariaFarr09
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