I have been trying to figure out how to get the never ending penalty out of my taxes for a couple of years. I had thought I had corrected our family contribution this year, but I found out that we are both on individual plans and that didn't apply.
So, the way to clear this is to do a non-qualified withdrawal from the plan. The administrator should have a form for correcting over-contributions. The key in all of this is that the administrator should issue a 1099-SA form with the 2 box checked showing the amount plus earned interest (I haven't got mine yet so this is theoretical).
The hard part is that TurboTax gives you ZERO clue or documentation on how this comes back out. I finally did way more research into IRS docs than I should have had to do after buying TurboTax and figured out where the correction should be entered in the IRS form. The problem is that everybody including myself expects the "interview" to ask the question about this.
I finally found a new trick with TurboTax. I went to the form display and selected the line where I thought the correction should go (in this case for 2021 Form 8889 line 14b) and right clicked on the cell and selected "Data Source". That selection popped up a box that explained that the data came from a smart worksheet. Then I located that worksheet and right clicked on the worksheet and selected "Data Source". This popped up a box pointing to form 1099-SA Box 1 (when box C distribution code is 2).
So that's my theory and how I developed it. To get the excess contribution out of your return you need to have the 1099-SA form for withdrawal with the proper indication. This is entered separately in TurboTax in the income section which is why it doesn't appear in any of the dialogs or helps.
According to my administrator I'm not going to get my form until well after the filing deadline. At this point I'm just going to file and pay the penalty again and then hopefully submit an amendment.
I hope this answers the original poster's question. I have seen this question a lot and the answer seems to get danced around in the forums and the application is worse than unhelpful ["O I'll withdraw the excess. Check. Psych - it's too late]. A mention of the 1099-SA for excess contributions would be really helpful by Turbotax in that particular spot.
