My sincerest apologies - in my test, I added the $4,150 as a personal contribution, where as you had it as an "employer" contribution (i.e., through your W-2).
So did you actually contribute the $4,150 through your employer?
If not, then make a personal contribution of $4,150, and my scenario will work.
But if you have already made this contribution through your employer, then we are stuck in terms of justifying that 1099-SA that you have.
So, what to do?
In any case, you will carry over the $3,650 to 2025, and then use it up as a personal contribution.
As for the $3,650 that you withdrew this year, make up a spreadsheet, and as much as possible pay current year medical expenses (call this X) with that $3,650. Document this in case any one ever asks. Then, when you enter the 1099-SA, change the distribution code to 1 and say that X was for qualified medical expenses while the remainder will be taxed and penalized.
The IRS has never made very clear the idea of taking a distribution BEFORE you incur medical expenses, then paying the expenses off. What the IRS as made clear is that you can take distributions to reimburse yourself for prior year medical expenses - but only those expenses incurred after the HSA was created (generally, the first time money was put in the HSA).
So if you plan to have a lot of medical expenses this year, or if you had a lot of medical expenses in the past that were paid by you with after-tax dollars (i.e., not reimbursed by insurance or the HSA) that were incurred AFTER your HSA was first funded, then you can make this work.
Otherwise, you will have to bite the bullet, and realize that your 1099-SA was just a mistake, which you will have to pay for if you are ever audited.
So tell me about your recent or soon-to-be medical expenses.
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