So you are saying that you had excess contributions on your 2019 return on your 2019 return, did not withdraw the excess by July 15, 2020, and paid the 6% penalty on form 5329?
In tax year 2020, did you contribute the full amount you were allowed ($7,100)? The amount from 2019 carried over to 2020 and reduced your HSA contribution limit for 2020, so the $7,100 contribution would have again been in excess.
There are two ways to fix this: the simple way and the expensive way.
The simple way is to reduce your contributions in 2021 to account for the fact that your HSA contribution limit needs to be reduced by that carryover. If you do, then the carryover will be used up as part of 2021 and it will disappear.
Unfortunately, since the original excess was made in 2019 and the time to return that excess ended on July 15, 2020, you can't cure the excess by returning the 2020 excess by April 15, 2021, because it's the 2019 excess that is the problem.
The expensive solution you can do anytime: take a distribution from your HSA for the amount of the excess, and then tell TurboTax that you did NOT spend it on qualified medical expenses. This amount will be added to your income on line 8 of Schedule 1 (1040), AND a 20% penalty will be added to your return...but at least the excess will stop rolling over year over year (at 6% a year).
The simple solution is the better solution, but it means that you have to make changes now, to reduce your HSA contributions so that you contribute less than you usually do.
Is that clear?
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