I was covered under a high deductible plan but also by my parents’ plan. I didn’t realize my employer would be putting money in an HSA for me. I tried to request a distribution for ineligible contribution from my HSA but the HSA custodian wouldn’t release the money to me since my employer put it in. What are my options?

Add Excess Contributions to Income

It sounds like you had excess employer contributions in 2018. Often this occurs when an employer contributes more than your contribution limit for the year. It also occurs when you receive contributions but are HSA ineligible, like in your case due to multiple insurance coverage. This isn’t the worst thing in the world as it is free money, and all you need to do is add it to income to pay taxes on it. Per Form 969:

As you can see, you just add the excess contributions to income and leave the employer contributions in the HSA.

Excess Contributions made by your employer are included in your gross income.

By paying tax on them and keeping them in your HSA, this fulfills their original intent of the contribution being used for qualified medical expenses. The downside here is you have less flexibility on your post tax dollars (compared to if they were in your pocket), but it was free money to begin with.

Note: If you need help preparing your HSA tax form 8889, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.