If you have single HDPD coverage and are were under age 55 in 2016, you have an excess contribution of $116.74 to your HSA that is subject to a 6% penalty each year that the excess remains. By entering the full amount of your contributions, either by the amount with code W in box 12 of your W-2, as a separate contribution by you, or a combination of the two, TurboTax will automatically prepare Form 5329 Part VII to calculate and report the $7 penalty.
You can resolve the excess by requesting a return of contribution of the $116.74 before the due date of your 2016 tax return, eliminating the excess for 2016, or you can choose to keep the excess for 2016 and pay the income tax on it for 2016, pay the $7 penalty, and resolve the excess in 2017 either by applying the $116.74 as part of your HSA contribution for 2017 (assuming you are eligible) or by making a taxable distribution in 2017 of the $116.74. However, if you make a taxable distribution, not only will you have paid income tax twice on this money, the distribution will also be subject to a 20%, $23 early-distribution penalty, so this is a bad option. If you instead make a return of contribution by the due date of your 2016 tax return, the $116.74 will only be taxed once and will not be subject to penalty.
Regardless of what you do, the HSA custodian will report on Form 5498 to you and the IRS the entire $3466.74 for 2016. Unless the IRS later receives a 2017 Form 1099-SA reporting the distribution of the excess, the IRS will detect the excess even if you don't report it, and will bill you for the tax deficiency. They'll also expect your 2017 tax return to show the excess and it's resolution or penalty for 2017. The IRS may not detect the excess quickly, resulting in you accruing $7 penalties each year until the excess is resolved; there is no statute of limitations unless you file Form 5329 Part VII.
