This is somewhat complicated but I will try to explain the order in which things should be happening.
It’s too late to remove the excess 2019 contribution as a 2019 excess. What you can do is apply the 2019 excess toward your normal 2020 limit. Then, if you over contribute for 2020, you now have a 2020 excess. It works like this:
Suppose you had a family HDHP, so your 2019 limit was $7000, but you contributed $8000. You have a $1000 excess contribution, and since you did not remove it, you paid the 6% penalty and you paid income tax on the extra $1000 as part of your 2019 return. Now for 2020, that $1000 excess counts as your first 2020 contribution. Then, you contributed the full amount for 2020 which was $7100. That means your total 2020 contributions were $8100, which is another $1000 excess. If you remove that $1000 excess before May 17 as a “return of excess contribution“, you will avoid any additional penalties. That would make your actual 2020 contribution equal to $6100, but you include the 2019 excess as a 2020 contribution so on the tax forms, you end up showing a 2020 contribution of $7100 which is within the limit.
So you are technically removing an excess 2020 contribution, not the excess 2019 contribution. Does that make sense?
The 1099 form can’t be corrected, because you contributed whatever you contributed in 2020. But the return of excess will be reported on your eventual form 5498 and when the IRS puts all the paperwork and all the numbers together, it will make sense to them and they will see what you did and that you have avoided future penalties. When you withdraw the excess 2020 contribution, you must also withdraw the earnings on that contribution. The HSA bank knows this, and as long as you request them to process a return of excess, they will send you the earnings as well. The earnings will be reported as income on your 2021 tax return since they will have been paid you in the 2021 calendar year.
