Don't worry, you are not stuck.
When you are in the HSA interview and an excess in contributions is detected, then the excess is immediately and automatically added back to Other Income if the contributions that were in excess were from the code W amount , i.e., "employer contributions". These are not necessarily from the employer but are added to your contributions by means of payroll deduction - the reason they are called "employer contributions" is because they are treated the same way. The code W amount is removed from Wages in boxes 1, 3, and 5 before the W-2 is printed, hence the employer contributions in excess must be added back to income.
OK, so the 1099-SA with a distribution code of 2 in box 3 doesn't need to add the excess to income, because it already got done. The only income that this 1099-SA adds to your income is the earnings in box 2.
So on the 1099-SA:
1. Box 1 excess amount
2. Box 2 earnings amount
3. Box 3 distribution code
When box 3 is '2', then box 2 is added to income, and box 1 is ignored.
When box 3 is '1', then box2 is normally empty (and ignored anyway), and box 1 is added to income IF YOU SAY THAT IT WAS NOT FOR QUALIFIED MEDICAL EXPENSES. Of course, it is usually for qualified medical expenses, so the box 1 amount is transferred to the appropriate line on the 8889.
Does this work for you?
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