HSA Excess Contribution/Non Qualifed Distribution

[Guest Phips]

I have a client that did not understand how an HSA works and has some problems that I am trying to fix and am looking for suggestions on the correct treatment on how to fix it. An individual that setup an HSA (family coverage) contributed approximately 9,000 to his HSA. Apparently what he was doing after making an initial contribution of 5,000, was paying some medical expense that was reimbursed by insurance and then depositing the insurance check back into his HSA. The balance of his account after doing all this is approximately 1,000.

It looks to me like I have an excess contribution problem and there is not enough money in the account to pull out the full amount of the excess contribution and any remaining balance would be subject to the 6% excise penalty. Then it looks like I have a distribution that does not qualify as they are reimbursable by insurance. I am thinking this would be taxable and subject to a 10% penalty. It also seems to me that to finally pull out the remaining excess contribution, part of the following years regular contribution would have to be pulled not for medical expense but as an excess contribution.

Any suggestions or thoughts would be appreciated.