2021:
"I had Blue Cross PPO coverage " - this was an HDHP? Could have been, some PPOs are HDHPs, but many are not.
"since my last day of work was November 30, 2021 and I didn't work a full year." So on December 1, 2021, you were on Medicare? This means HDHP - Jan to Nov, and Dec - Medicare, but Medicare should have sent you a letter detailing the days you were covered by what.
"$4341.63 as a single person" - in 2021, the annual HSA contribution limit was $3,600, plus $1,000 if you were over 55 for the whole year (as I assumed you were), so an annual limit of $4,600.
"I selected Self for 11 months and 'Medicare or None' for 1 month." - This results in a recalculated annual HSA contribution limit of $4,217. Compare to $4341.63, which results in an excess contribution of $125.
"That was when I found out I overpaid and was going to pay 6% in taxes, If TT told me I needed to take the money out then, I answered that I would take it out by April 15, 2022 but apparently forgot to do it. " - NOTE: the 6% is an excise only on excess HSA contributions that are not withdrawn in a timely manner, but are carried over to the next year. This is the first issue: That you said that you would withdraw it to avoid the penalty, but did not do so.
2022:
"Medicare for all of 2022, no HSA contributions at all. I did get another 1099-SA form for what I still had in my HSA, but I received the same message from TT about paying a 6% tax for over-contributing even though I did not contribute." - This suggests that you did not withdraw the excess in Tax Year 2021, after all, tell TurboTax in 2021 that you were going to withdraw the excess. This is because you said that you did not make any 2022 contributions, but you receive the HSA excess error message again in 2022. In fact, the carryover of the excess is treated in the subsequent year as a personal contribution (line 2 form 8889) even though it did not print in 2022 (but it was there).
"I thought it was because I still had money in the HSA." - You now know that the amount of money in the HSA had nothing to do with excess contributions.
"TT made me complete the section about the HSA-HDHP contribution section so I thought I was supposed to select 'Medicare or none' for all months. " - There are several sections like this (month by month listing), so I don't know which one this is.
"other customers were saying TT had an error in it for the same issues." - Unfortunately for TurboTax's reputation, most customers don't understand HSAs very well, and the moment there is a result which they don't understand or like, they hurry here to the Community to cry "Bug! Bug!"). You are a pleasant change, because you WANT to know how the system works and how to fix it.
"I also removed all the money in my HSA account in 2023. " - This was, as we shall see, not the right way to deal with this.
A good deal of the blame falls on the IRS, whose terminology is woefully inadequate in communicating what needs to be done.
In the first year of the excess contribution, you are encouraged to remove the excess by the due date of the return. The IRS should call this a "short-term excess". Once the original due date of the return passes, it should now be called a "long-term excess", and you can't remove the short-term excess in the same way any longer.
To remove a "long-term excess", you can't just withdraw the money out of the account - rather, you must do one of two things: (1) carry over the excess to the next year and "use it up" as a personal contribution (i.e., add it in as a personal contribution under the annual HSA contribution limit as if you contributed it in the subsequent year), or (2) make a withdrawal for non-medical reasons, which distribution will be added to Other Income and in addition penalized 20%. But in either case, the long-term excess will disappear.
By doing what you did, you should have incurred the #2 choice but you did not tell the HSA custodian about this. So, the carryover continues (see 2023).
2023
"Still getting the same message but it is saying I overpaid in 2022 even though I didn't contribute anything in 2022 (or 2023)." - Now you understand that since your short-term excess was not "cured" (i.e., removed by the original due date), and since you have not done the paperwork to cure the long-term excess, the long-term carryover just keeps carrying over until you fix it. This is what the "I overpaid" message means - the long-term carryover is invisibly part of line 2 (8889). Since you did not have unconflicted HDHP coverage in 2023, the long-term excess couldn't be used up so you are in a situation of paying this so-called 6% for ever and ever, or until you hold your nose and make a withdraw for non-medical reasons.
"Apparently I am doing something wrong or the 1099-SA has the wrong code on it, " - Nope, the 1099-SAis right, and now I hope you understand why.
"I have never been this late doing my taxes so I am a little frustrated and stressed. " So let's see if we can fix your issue in the easiest way possible.
"I got another 1099-SA from the HSA account for 2023 indicating what I removed from my account." On what date was this done? In the tax biz, we have fits because something that happened in calendar year 2023 actually happened in tax year 2022. So we never know what you meant unless we ask follow-up questions.
So did you put this 1099-SA into your 2022 return, or are you planning to put it into your 2023 return?
If you put this 1099-SA into the current return (i.e., 2023 tax year), then after you enter the 1099-SA data, tell TurboTax that not all of the distribution was for qualified medical expenses. TurboTax will ask how much was not for qualified medical expenses, and enter that the part of non-medical expenses in an amount equal to the long-term excess. This, you will have satisfied option #2 under 2022. The excess will be added to your Other Income, and a 20% penalty will be added to your return. But now, at long last, the long-term excess will be dispensed with on form 5329, and the long nightmare will be over.
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