@Chena
@Dasstc
No, the earnings on the excess does not have to come out. That procedure only applies if you are withdrawing the excess before the tax filing deadline of the year in question. Now, you just withdraw an extra amount not for qualified medical expenses and pay the 20% penalty.
Let me try and explain it this way. If you made an excess contribution in 2019, you could withdraw it before the tax deadline for that years tax return (October 15, 2020). To withdraw the excess, you have to make it as if the excess was never contributed, and that means withdrawing the earnings as well. However, since you left the excess in the account, it did happen, and as a result, you paid tax plus a 6% penalty, ongoing until you remove the excess. You can't withdraw it "as if it never happened", it's too late. The 6% penalties, and the 20% penalty, are more than the tax you would have paid on the earnings. The earnings (if any, most HSAs don't pay much) stay in the account and don't have to be removed.
