Note: I started out with the last month rule, but that doesn't apply here because she is not eligible at any time in 2025, even if she is enrolled in an HDHP for the last month. So I had to start over.
1. All contributions made by payroll deduction, whether employer or employee, are considered "employer contributions" under the tax code, because your wife agrees to a voluntary reduction in salary and the employer contributes the difference for her. Contributions that are considered excess are not tax-free and must be added back to her taxable income--the software will do this automatically if you indicate she did not have eligible coverage.
Then, if the remaining excess contribution are not removed in a timely manner (before the April 15, 2026 filing deadline) there is a 6% penalty, charged on the amount of excess contributions or the balance in the account, whichever is lower. So spending the account for qualified medical costs lowers the potential penalty or the amount she has to withdraw.
2. There is nothing in the tax code that requires the employer share to be repaid to the employer. The withdrawn excess goes to your wife. I can't rule out the possibility of a contractual obligation between your spouse and the employer to repay ineligible funds, but I have never actually seen this..
4. Contributions and withdrawals have separate rules. Once money is in an HSA, it is tax-free to spend for qualified medical costs, no matter how it got in the account.
3. This is tricky. It depends on when the open enrollment period is and how generous the incentives are. If the open enrollment period is January 1, then she could enroll in a different plan for August-December and then change to the HSA plan in January. Or, if the incentives are generous and you don't mind doing a little extra accounting, she can enroll in the HSA-eligible plan in August and make whatever contributions she wants, and you will withdraw the excess later. If she can't change her enrollment until later in 2026 due to the company's plan year, it might be better to enroll in the HSA eligible plan now so you get the benefit for all of 2026, even though you will have an issue to deal with on your 2025 tax return.
At tax time, since all contributions for 2025 will be considered ineligible, the contributions will be added back to her taxable income no matter what you do with the money in the account.
But you have two options for the excess contributions that remain in the account.
She can withdraw the excess contributions by April 15, 2026. Or, if she has spent funds on medical expenses (and this is a new account that did not have funds from prior years), she can withdraw the balance remaining as of December 31, 2025 (money contributed in 2026 can stay, of course). Whatever amount you ask for, this is a special withdrawal of excess contribution, not a regular withdrawal, and may require a special form. The HSA bank will return the amount plus any earnings (interest) that are attributed to the excess. The earnings are taxable interest on your 2025 tax return, even if they are not withdrawn until 2026.
To clarify here, if she has more than one HSA account in her name, all the balances are combined for these calculations (but accounts in your name are ignored). If she started the year with zero balance, contributed the single maximum of $4300, and spent $1000, so that the balance on 12/31/25 is $3300, then she needs to remove $3300, or pay a 6% penalty on $3300. She does not have to withdraw $4300 that she does not have.
However, if she started the year with a balance of $3000 in an HSA with the first employer, contributed $4300 in 2025, and spent $1000, then the entire $4300 is considered excess and must be removed or pay the penalty.
Or, she can leave the excess in the account and pay a 6% penalty. Then, adjust her contributions for 2026 to use up the excess. For example, suppose she has single coverage and contributed $3000 in 2025. The 2026 limit will be $4400. If she arranges her 2026 contributions to be $1400 (or less), then the 2025 excess will be considered part of her 2026 contributions. There is probably not much advantage to leaving the money in the account and paying the penalty unless you have it invested in something that pays better than 6%, but it is an option.
If the incentives are particular generous, I would probably enroll in the HSA-eligible plan in August, and make at least the minimum contribution needed to qualify for the employer match. Wait and see what your expenses are, and decide in January whether to pay the 6% and carry the excess contributions forward to use up in 2026, or withdraw it for your 2025 tax return.
5. I don't want to get into specifics of forms because your software will handle this all. If you need to look at the forms, you can download the forms and instructions. Employer and employee payroll contributions will be recorded in box 12 of her W-2s with code W, and will be picked up automatically by any software. she will need to separately report any direct, out of pocket contributions (even if they are later removed). When she indicates she was not covered by an eligible plan, her tax return will include a form 8889 to calculate her eligible contributions (zero) and the taxable income add-back, which will be reported on schedule 1 line 8f as additional taxable income.
Withdrawals will be reported to you on a 1099-SA. Enter it on your tax return and indicate in the interview that it was all used for qualified expenses. This will also show up on form 8889.
If the corrective withdrawal is made in 2025, she should get a separate 1099-SA for the removal of excess, with code 2 in box 3 instead of code 1. If the corrective withdrawal is made during 2026, she will get that 1099-SA at the end of 2026. But, she still reports the corrective withdrawal in the software so that is cancels the penalty. And the attributed interest is reported on the 2025 tax return. Go to the page for bank interest, enter the amount, and check the box for "I did not get a 1099-INT for this interest."
Whether or not a corrective withdrawal is made, the excess contribution will flow from form 8889 to form 5329, where you will either report the timely removal of the excess, or you will pay the 6% penalty. If the removal occurs between 1/1/26 and 4/15/26, you can still report the removal to cancel the penalty even though you won't receive a 1099-SA until the end of 2026.
