If you told the HSA custodian that you had an excess contribution of $600 (even though the actual excess contribution was only $25), they will be reporting on Form 1099-SA that you obtained a return of $600 of contribution, which is technically incorrect, although they have no way of knowing that. Because the tax code permits only truly excess contributions to be returned, what you actually received was a return of the $25 excess contribution, adjusted for investment gain or loss, plus a regular distribution of $575.
Getting the HSA custodian to accept back the $525 (adjusted for investment gain or loss) as a return of mistaken distribution could be a challenge. Upon in forming them that only $25 was actually the amount of excess contribution eligible to be returned, they should at least correct their coding of the distribution to show a return of excess contribution of $25 (with the amount distributed being adjusted for investment gain or loss) and a regular distribution of the remainder or the original distribution, resulting in you receiving two Forms 1099-SA. You could then apply the distributed remainder against qualified medical expenses to make that portion nontaxable.
