On January 1st 2025 I opened an HSA with Fidelity and made a contribution of $4300 for 2025 tax year, thinking I had a qualifying HDHP. Well, it turned out it is NOT a qualifying HDHP and therefore I was ineligible to contribute. The money is sitting in the HSA, I have not made any withdrawals. I have already had income tax withheld on the money I contributed (i.e have not made any deductions with the contributed money).
How should I proceed to avoid tax penalties?
I called Fidelity and they advised me to submit to them a "Return of Excess Contributions" form. I assume the whole contribution I made is considered excess. After this I would get a 1099-SA with "code 2" and a calculated profit/loss made on the contribution, and this should be filed with my 2025 taxes.
My understanding is that the returned $4300 excess contribution would avoid the 6% excise penalty, however it would be considered a "distribution", which would be subjected to income tax. However I already had income tax withheld on that money. So I would essentially be double taxed? Please help me understand.
