Deductions & credits

You are ineligible to contribute to an HSA if you have "other" medical coverage.  A typical HRA will cover the employee, spouse, and dependents, so that counts as "other" coverage and disqualifies you from making HSA contributions.  If the HRA was "frozen" so that it couldn't be used for expenses, then it is not "other coverage" for as long as it is frozen, but that means giving up the HRA which is probably free money, so you need to think if you really want to do that.

You need to contact your employer to stop your ongoing HSA contributions, but they don't "reclassify" the prior contributions as wages.  Nothing changes about the past wages, W-2, etc., you just need to change your contributions going forward.

For 2021, if you were enrolled in a self-only HDHP, your contribution limit was $300 per month, or $600 per month if enrolled in a family HDHP.  Eligibility is determined by your coverage on the first day of each month (and I am assuming you are under age 55).  So you need to get a calendar and figure out how many months you were eligible to make contributions and what your dollar limit was.  If you contributed over the dollar limit, that's an excess contribution.  It is too late to remove the excess contribution to avoid a penalty, so what will happen is you will file an amended 2021 return showing the excess contribution.  It gets added back to your taxable income, plus a 6% penalty.  (The penalty is based on the amount of excess or the account balance at the end of the year, whichever is less, so if you have been spending the account as you go, you might not actually owe much penalty.)

(Also note that your limit is a dollar amount, not based on time.  If you were covered by a family HDHP for 4 months before the HRA started, your limit would be $2400. If you contributed $300 per month for 6 months, including months after the HRA started, your limit would be $1800 and you would not be over.)

For 2022, we need to consider if you already filed a return, are late but have an extension, or are late with no extension.  Here I will assume you already filed your 2022 return.  If it is one of the other two, post back because your actions and options may be different. 

For 2022, your contribution limit was zero, assuming you were covered by the HRA all year.  It is too late to withdraw the excess funds without penalty.  You will file an amended return to report the excess contributions.  They will be added back to your income tax, plus a 6% penalty on the cumulative excess contributions (from 2021+2022).  As before, the penalty is based on the amount of excess or the account balance at the end of the year, whichever is lower, so if you have been spending the account as you go, you might owe less than you expect.

For 2023 you need to first, stop the excess contributions.  Second, contact the HSA bank and ask for a "return of excess contributions"--but you can only get a return of the 2023 contributions, it is too late to return any of the prior year contributions.  It sounds like that would be about $1500 for 2023 so far.  At tax time, that amount will be added back to your taxable income, but you won't be charged an additional penalty.

However, on your 2023 tax return, you will be charged another 6% penalty on the remaining balance of excess contributions from 2021 and 2022.  There are 3 ways to avoid this penalty.

1. Spend the HSA for qualified medical expenses.  (The penalty is based on the amount of excess or the account balance at the end of the year, whichever is lower, so if you spend the funds on qualifying care, the penalty will be lower.)
2. Withdraw the excess funds not for qualified expenses.  You will pay income tax plus a 20% penalty, but you will stop the ongoing 6% penalty.
3. Become eligible again to make HSA contributions, and use your new eligibility to "use up" the prior excess.  For example, suppose your wife changed her insurance so that you were eligible.  Your limit for 2023 could be as high as $3850 for self HDHP and $7750 for a family HDHP.  You would apply your excess against the new limit to "use up" the excess.

Now, a bit more detail about 2023.  If your wife freezes the HRA, and if you are eligible to make HSA contributions on 12/31/23, and if you remain eligible to make HSA contributions for all of 2024, then you can use the "last month rule" to contribute the maximum amount to your HSA in 2023 as if you were eligible all year even though you were not.  

If you decide the HRA is pretty good and you don't want to freeze it, then you need to look at your financial circumstances to determine the best way to handle the excess.  If you will spend your HSA down to zero in the next 3-4 years, paying 6% per year on the excess as it dwindles may likely be cheaper than paying 44% tax on a non-qualified withdrawal (22% income tax marginal rate plus 20% penalty). 

Lastly, because you will owe tax payments on your amended return, the IRS will likely assess interest and a late payment penalty.  If your tax provider wants to include the penalty and interest, I would suggest to them that you don't pay the interest and penalties up front but wait for the IRS to bill you.  Once you get the bill, you can apply for a waiver of the penalty for cause, or as an administrative waiver if you are a first-timer (never paid a penalty before).  By law the interest can't be waived, but if they waive the penalty, they will recalculate the interest to be a little lower.