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We need a "go directly to ERISA Attorney, do not pass go, do not collect $200" card for these situations...

Yes, this is a common mistake. Probably many are making the mistake all the time who don't even know about it. The good news is you don't need your employer's blessing to undo the $500 ER HSA contribution. You can simply take the corrective distribution directly from the HSA custodian. The HSA is an individually-owned account, so it's not controlled by your employer. You can simply inform the custodian that the $500 was ineligible excess contributions to process the corrective distribution. That will avoid the 6% excise tax for the excess contributions. Here's an overview of how to handle (the relevant cites are at the bottom of the post if you need them)-- https://www.newfront.com/blog/correcting-excess-hsa-contributions Corrective Distribution by Tax Filing Deadline To avoid a 6% excise tax on the excess contributions, the employee must work directly with the HSA custodian to take a corrective distribution of the excess contributions, adjusted for earnings. The earnings portion of the corrective distribution is included in the employee’s gross income, but there are no additional taxes. In other words, neither the 6% excise tax nor the 20% additional tax for non-medical distributions will apply. Note: Where the excess contribution was made pre-tax through payroll and not reported as income on the Form W-2, the excess contribution itself must also be reported as “Other Income” on the individual tax return. Where the excess contribution was made outside of payroll, the individual cannot claim a deduction for the excess contribution amount. The general rule is the employee must take the corrective distribution by the tax filing deadline (typically April 15), or the later deadline if filing for an extension (typically October 15), to avoid the 6% excise tax. The corrective distribution is reported on Line 14b of the Form 8889 filed with the individual income tax return. It is also reported as an excess contribution distribution (Code 2) in Box 3 of the Form 1099-SA provided by the HSA custodian. There is a special rule outlined in the IRS Form 8889 Instructions providing individuals the opportunity to take a corrective distribution up to six months after the due date of the return, including extensions. Under that special rule, employees can work with their personal tax advisor to file an amended return with the statement “Filed pursuant to section 301.9100-2” entered at the top. This may also require additional changes to the Form 5329 to reflect that the corrective distribution will avoid the previously applicable 6% excise tax. As to your employer being adamant that your spouse's general purpose health FSA is not disqualifying coverage for you, here's an easy cite you can provide them to confirm they are incorrect-- https://www.newfront.com/blog/hsa-interaction-health-fsa-2 IRS Notice 2005-86: https://www.irs.gov/pub/irs-drop/n-05-86.pdf Interaction Between HSAs and Health FSAs Section 223(a) allows a deduction for contributions to an HSA for an “eligible individual” for any month during the taxable year. An “eligible individual” is defined in § 223(c)(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.” In addition to coverage under an HDHP, § 223(c)(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223(c)(2)(C) also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer.