"When TurboTax asked me to enter the amount I planned on retrieving before the 2022 tax deadline, it would not allow me to entered the total amount of $5110 because that exceeded the HSA amount of $4250 shown on my W2. "
Actually, you could not withdraw the $860 because you had to do that before the due date of the 2021 return. After that date it is too late, you have to fix this another way.
As for the $860 that keeps carrying over to the next year, let me ask you: do you have any money left in your HSA? I ask this because you can no longer contribute to an HSA (as you know), so eventually, your HSA will run out of money.
The 6% penalty is actually 6% of the lesser of the amount of the excess that is carried over OR the amount in your HSA at the end of the previous year. So when your HSA is empty, your penalty drops to zero (because 6% of zero is zero).
So tell us if you are out of money (or almost out) in the HSA, at which point the whole discussion is finished.
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