[Note added by RalphH1 later: As Opus 17 (who thankfully caught this) clarifies, my advice here applies to a regular HSA excess contribution, as I failed to consider Log_Lady's "Last Month Rule" circumstances. So anyone with an excess resulting from failure to meet the Last Month Rule test (in the following year) should skip my post and read Opus 17's very helpful one below instead!]
The lingering amount of 2021’s excess contribution (to stop the ongoing 6% penalties) will need to be a non-qualified distribution. After you tell TurboTax the excess amount (from line 48 of last year’s Form 5329), the program should advise you to withdraw it, and allow you to check a box indicating exactly how much of it you plan to take out.
If you do it this way, you can then choose to empty out the remaining funds in your HSA account whenever you wish. There’s no rush, as the lack of a high-deductible health plan only means you cannot make any contributions. But you can still have the account, and take qualified or non-qualified distributions going forward, as you normally would with an HSA.
Of course, as Fangxial pointed out, there’s a 20% penalty on this year’s withdrawal, so spending the whole account down to $0 during 2023 instead — assuming you have enough medical expenses — might be a better way to wrap things up. Bgkr, Opus 17 and others also provided some very helpful and thorough info on this earlier in the thread, but don’t hesitate to re-post here if any additional clarification is needed!
(@Log_Lady)
[Edited 2/18/23 | 6:30 am PST]
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