Please keep your followups together with your original question. It is very distracting otherwise and you may get the wrong answers or the same experts might not see your issues.
Are you using Turbotax? It will handle the majority of the situation for you.
When you report the ineligible contributions, they are added back to your taxable income (you lose the tax deduction). You will owe some additional tax.
Then, any penalty is based on the amount of ineligible contributions, or the amount left over in the account as of 12/31/23, whichever is less. (Note that once you contribute money to an HSA, it can be used to pay medical expenses tax-free, even if the contribution was not eligible.)
So, your steps for the remaining excess are:
1. Contact the HSA bank to remove the remaining $650 of excess contributions, plus their earnings. The earnings are reported on the amended return as "other income" for 2023 (on schedule 1, line 8z, to be specific). You must include as the explanation for your amended return "Filed pursuant to section 301.9100-2." The withdrawal of the excess contribution is not a non-qualified distribution, and the withdrawal of the earnings are "other income."
2. You could leave the money in the account. You would be assessed a 6% penalty ($39). This may make sense if you plan to spend the account down to zero for medical expenses this year, or you have already spent the account (after 1/1/24) and have nothing left to withdraw.
3. Leave the money in the account and pay the 6% penalty. Make a $650 withdrawal and don't use it for medical expenses. When you report this on your 2024 tax return, you will pay income tax, but if you are age 65 or older there is no additional penalty, and you don't need to remove the earnings. (Or, suppose your medical expenses are $5000, you would withdraw $5650, and tell Turbotax you used $5000 for medical expenses and $650 not for medical expenses.)
