I didn't elect to withdraw the $34 excess contribution to my HSA in 2020. I'm now retired and can't contribute. How can I withdraw it now to avoid the ongoing tax?

[Opus 17]

You're stuck with the penalty for 2021, because it's too late to make a withdrawal and you can't withdraw the excess 2020 contribution after October 2021.

For 2022, simply withdraw $34 more than you need for medical expenses.  That will zero out the penalty when you report it on your 2022 tax return, but you will pay income tax (plus a 20% penalty if under age 65) on that $34 instead of paying 6% per year.

[MarilynG1]

Since you didn't withdraw your 2020 Excess HSA Contribution before tax filing deadline in 2021, as @Opus17 suggests, withdraw the excess amount in addition to what is needed for medical expenses.

The penalty on the carryover is 6% of the smaller of the carryover OR the balance in your HSA. So when your HSA balance goes to zero, then there will be no more penalty anyway.

The $34 will be added to 'Other Income' and assessed the 20% penalty. 

Click this link for more info on Excess HSA Contribution.

[Edited 02/25/2022 6:06 pm]

[dmertz]

The 20% penalty only applies if you are under age 65.

[tysvol]

I requested a distribution today from my HSA custodian. Will they know it doesn't qualify as a medical reimbursement but a refund of overpayment?  What form should I expect to receive from them early 2023 for the 2022 tax year?

[Opus 17]

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@tysvol wrote:

I requested a distribution today from my HSA custodian. Will they know it doesn't qualify as a medical reimbursement but a refund of overpayment?  What form should I expect to receive from them early 2023 for the 2022 tax year?

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The HSA custodian doesn't know or care.  In January 2023, you will get a 1099-SA that shows your combined total of all distributions.  When you enter this in Turbotax, the program will ask did you use it all for medical expenses, answer no.  The program will then ask what your qualifying medical expenses were.  When the program detects the excess withdrawal, it will place that on form 5329, where it will be balanced out against the prior excess contribution you have been carrying.