The IRS has a terminology problem. The HSA excess contributions for the current year (I call it the "Short-term excess") is treated quite differently from the contributions carried over from the previous year (which I call the "Long-term excess"). Since the IRS uses the same term ("excess") it is no surprise that most taxpayers are quite confused on how to deal with them.
The short-term excess must be withdrawn by the due-date of the return (there's an exception, but I won't deal with that now). The long-term excess cannot be withdrawn in the same way. Instead, you must do one of two things to cut off the infinite carryover:
1. In the next year that you have HDHP coverage, you must reduce your usual HSA contributions so that the carryover plus these usual contributions will be less than the current year annual HSA contribution limit. In this way, the carryover will be put on line 2 (8889) as a personal contribution, and used up (so no more carryover).
2. You make a distribution, and when you receive the 1099-SA and enter it in TurboTax, you declare that the amount equal to the carryover is NOT for qualified medical expenses. This will add the carryover amount to Other Income, and add a 20% penalty, but will cut off the carryover problem.
"it doesn't give me the option to specify which set of contributions to take it out of, the 2023 employer contributions or the 2022 excess retuned/applied to 2023 (personal contribution). " No, it doesn't for the terminology reasons above - you can't treat these excesses the same way, the same name notwithstanding.
"As part of the 2022 excess contribution withdrawal, the HSA custodian gave me the option to have it moved/applied to the 2023 contribution year, which I did. I filed an amended 2022 return and paid taxes. I got a 1099-SA for this withdrawal and the earnings show up in other income. I entered this in TurboTax as contributions personally made not through your employer."
TurboTax makes the income adjustment automatically for excess HSA contributions, either adding it to line 8f of Schedule 1 (1040), or by removing it from line 13 of Schedule 13 of Schedule 1 (1040). Now, I am afraid you may have made a manual adjustment, too, causing you to overpay your tax.
Please check your 2022 tax return and see if there are automatic adjustments (as I just described) by TurboTax as well as manual adjustments by you.
Let me know...
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