It's not clear to me your situation, but please note the following.
1. Contributions made through your employer (i.e., the code W amount in box 12 on your W-2) is removed from Wages in boxes 1, 3, and 5. NOTE: this is called the "employer" contribution and includes BOTH what the employer contributed AND what you contributed through payroll deduction.
2. For this reason, the moment employer contributions are determined to be in excess by TurboTax, the excess amount is added to Other Income on Schedule 1 (1040). This is true whether you withdraw the excess or carry it over to next year. You are not allowed to keep the tax benefit of the excess contributions (i.e., the part of removed from Box 1 and therefore removed from your income) in any case.
3. Withdrawing the excess by the due date of the return (including extensions) in effect undoes the contribution. The addition of the excess is not a punishment for the excess, it is simply not letting you get a tax benefit for the amount of the excess that was removed form Wages in boxes 1, 3, and 5 on your W-2.
4. If you choose to carry over the excess to the next year, the amount REMAINS in your HSA to be spent. However, this reduces your annual HSA contribution limit for the next year (this is not at all clear from the 8889). So, in essence, it's as if it is contributed to your HSA next year, and you pay on 6% for this fudge. However, because of this reduction in the annual HSA contribution limit, you MUST reduce your planned HSA contributions for that next year. If you were planning to contribute the full amount you think you are entitled to next year, you must reduce your contributions by the amount of the carry over in order to not generate another excess contribution situation next year.
5. "But how do you report this in Turbo tax? " (referring to the "rollover")
When TurboTax tells you that you have an excess, then tell TurboTax that you are not going to withdraw the excess. TurboTax will say that it will be taxed (this year, on form 5329) 6%. If you use TurboTax next year, it will pace this amount in the Carryover Worksheet, so that TurboTax knows to reduce your annual HSA contribution limit next year.
And while we don't normally refer you to other websites that we don't own, you might read this article by The Motley Fool (this is a serious website, despite the name) which describes HSAs as superior to 401(k)s (and by extension (403(b)s ). Qualified plans like 401s and HSAs have their strengths and disadvantages, but the fact that contributions that you make to an HSA are tax-free, and the money you take out for medical expenses at any point in the future (contributions plus the earnings!) are also tax-free. There is virtually no other tax program that escapes taxation on the way in and on the way out.
It's just important to know the rules.
@MariaFarr09
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