The way the IRS (well, Congress, the author of the Tax Code) sees it, they gave you two chances to handle the excess contributions:
1. withdraw the excess before the due date of the return, and
2. carry over the excess to a future year when you are eligible to take the carryover as a personal contribution.
If you did not have the opportunity to do either, then the carryover of the excess is cured by only one thing: distributing the excess as a distribution not for qualified medical expenses, So, yes, this means that you will owe income tax again on that amount plus the 20% penalty.
If you don't have much in your HSA or are approaching 65, there are some options to think about.
1. The penalty for a carryover is 6% of the LESSER of the carryover amount or the value in your HSA at the end of the year. This means that once the money in your HSA drops to zero, there will be no more penalty.
2. Once you get to 65 years of age, the 20% penalty goes away, although you will still owe income tax on the amount withdrawn, like you would with an IRA. This will also cut the carryover off.
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