Deductions & credits

@Jhayden

"Any thoughts on why TT seems to want to put me in an endless loop and not be ok with me saying we'll remove the excess contribution?"

Please do not blame TurboTax, these are the rules under which HSAs are handled by the IRS.

As Thomas noted above, excess contributions have to be returned by the due date of the tax year for which the excess was generated. Usually this works out OK because you discover the excess after the end of the tax year as you are doing your return, which is before the due date of the return (we hope). And if you file for an extension, that just moves the due date of the return (and the date to withdraw the excess) to October 15th.

You are correct that the 6% penalty is based on the lesser of the amount of the excess or the value of your HSA at the end of the year. 

You have two choices:

1. Accept the 6% penalty every year until your HSA value runs to zero (remember the HSA custodian may be charging you maintenance fees), or

2. Ask your HSA custodian for a distribution equal to the excess which you will NOT spend on qualified medical expenses. When you enter the 1099-SA next year, then this will be added to your Other Income (line 8 on Schedule 1(1040) as well as have a 20% penalty - but the long-running excess will finally be cut off.

You will have to look at your spending plans for your HSA as well as the maintenance fees and number of years in which you might be expected to pay the 6% penalty, and work out which choice is better for you.