you file a 1040-x
on the 8889 worksheet you originally indicated you removed the excess before the due date like on line 12B so that the 5329 was not generated. Now leave 12B blank because it wasn't removed by the due date. in this year you withdraw the 2019 excess + earnings thereon. talk to the administrator so they can figure out the amount of earnings that has to be withdrawn. the earnings are taxable in the year withdrawn. the excess is taxable in 2019. also find out how they'll code the removal - code 2 for excess or code 5 for prohibited. one commentator in 2019 stated that it was unclear if you took out the excess after the due date as to whether that would be a nonqualified distribution subject to a 20% penalty. I don't agree but it's best to check. if it's going to get coded as prohibited, you may want to consider the next option.
the Code actually allows you to leave in the excess but then the amount taken out of your paychecks or contributed personally has to be reduced so you don't end up over-contributing for 2020. That would generate an additional penalty. if you leave the excess in and don't otherwise over-contribute for 2020, you get a deduction for the excess contribution left in subject to whatever the limits are for 2020. example 1. assume spouse over contributed in 2019 $3500. since it was not withdrawn by the due date the excess becomes income for 2019 and you pay a 6% penalty. she leaves the excess in for 2020 and otherwise makes no HSA contribution in 2020. also assume shes allowed a contribution maximum of $3500 for 2020. that $3500 excess now becomes an allowable HSA contribution for 2020. in addition it's considered her personal contribution so you get a tax deduction for the $3500.
from IRS Publication 969
Deducting an excess contribution in a later year.
You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the
following two amounts.
• Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
• The total excess contributions in your HSA at the beginning of the year.
Amounts contributed for the year include contributions
by you, your employer, and any other person. They also
include any qualified HSA funding distribution made to
your HSA. Any excess contribution remaining at the end
of a tax year is subject to the excise tax. See Form 5329.
example 2. the 2019 $3500 excess is not withdrawn by the due date of the 2020 return. in addition, she makes another excess contribution of $2000 for 2020 and doesn't withdraw that by the 2021 due date. you now have $5500 of excess contributions subject to the 6% penalty
example 3. same as 3 but she only withdraws the 2020 excess contribution by the due date. that $3500 from 2019 remains an excess and would be subject to the penalty.
