I made an excess contribution to my HSA in 2018, which was caused by Medicare being activated March 1, 2018. I paid $16 in penalty in 2018 on the excess. The problem did not get corrected in my 2019 or 2020 taxes, so $16 has been paid out for two more years. I have been trying to resolve this issue and to find the proper tax professional to answer this question. My HSA fund manager has stated that they can only compute the effective gain/loss up through October 15, 2019. They state that I now must contact a tax adviser and that I cannot use the “Excess Contribution” method. I gather from the comments below, I should take a non-qualified distribution of the $296 in 2020, plus an additional amount that would more than cover any gain that would have resulted. It is understood that this would cause a tax event in 2020. I’m unsure as to whether this distribution would stop the flagging of an excess contribution in TurboTax and the $16 tax event warning. My other option appears to be to spend down the HSA account to $0 and avoid inheriting an HSA. I think the comment about not inheriting another HSA is indicative of the warnings posted on the HSA manager’s site about spending the Core account value into a negative tax situation. This is why they are recommending that good tax advice be pursued. I'm unsure as to whether my stated approach is an iron-clad solution.
