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Posted on Monday, May 13, 2024 in Health Savings Accounts

What Happens if You Contribute Too Much to Your Health Savings Account?

What is an HSA Excess Contribution?

A Health Savings Account (HSA) is a tax-advantaged savings account that allows individuals to save money for qualified medical expenses. It is available to individuals who have a high-deductible health plan. Contributions made to an HSA are tax-deductible and can be used to pay for a wide range of medical expenses. However, there are limits to how much you can contribute to your HSA each year.

An HSA excess contribution occurs when you contribute more money to your HSA than the maximum allowed by the Internal Revenue Service (IRS). The IRS sets annual limits on HSA contributions to prevent individuals from using the account as a tax shelter. If you contribute more than the allowed amount, you may face penalties and have to take corrective measures to avoid further consequences.

Is there a Penalty for Exceeding HSA Contribution Limits?

Yes, there is a penalty for exceeding HSA contribution limits. If you contribute more than the allowed amount to your HSA, the excess contribution is considered an excess accumulation. The IRS imposes a 6% excise tax on any excess accumulation in your HSA. This tax is applied each year until the excess amount is withdrawn from the account.

The excise tax is in addition to any income tax you may owe on the excess contribution. It is important to note that the penalty is not automatically imposed by the IRS. It is your responsibility to report and correct any excess contributions to avoid the penalty. Failing to do so can result in unnecessary financial consequences.

How do Excess HSA Contributions Occur?

Excess HSA contributions can occur for various reasons. The most common reason is a misunderstanding of the contribution limits. Each year, the IRS sets the maximum amount that individuals can contribute to their HSA. If you contribute more than these limits, you will have an excess contribution.

Another reason for excess contributions is when multiple individuals contribute to the same HSA. For example, if both you and your employer contribute to your HSA, it is essential to coordinate your contributions to ensure they do not exceed the limits. Failure to coordinate contributions can result in excess contributions and potential penalties.

Additionally, if you have a mid-year change in your health plan, such as switching from a high-deductible health plan to a non-qualified plan, you may inadvertently make excess contributions. It is crucial to understand how changes in your health plan can affect your HSA contributions to avoid any unintended excess contributions.

How to Correct HSA Excess Contributions

If you discover that you have made excess contributions to your HSA, it is important to take corrective measures promptly. The IRS allows you to correct excess contributions and avoid penalties if you meet certain conditions.

To correct excess contributions, you must remove the excess amount and any earnings attributable to it from your HSA by the tax filing deadline, including any extensions.

To remove the excess contribution, you need to request a distribution from your HSA provider. This distribution must be reported on your tax return for the year the excess contribution was made. You will also need to include Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to calculate and report the excise tax on the excess contribution.

It is crucial to work closely with your HSA provider and tax advisor when correcting excess contributions. They can guide you through the process and ensure that you complete all necessary forms and documentation accurately. By taking the appropriate corrective measures, you can avoid unnecessary penalties and maintain the tax advantages of your HSA.

How to Avoid Excess Contributions

To avoid excess contributions to your HSA, it is crucial to understand the contribution limits set by the IRS. Stay informed about the annual contribution limits and any changes that may occur. Be sure to adjust your contributions accordingly to avoid exceeding these limits.

If you have multiple individuals contributing to the same HSA, coordinate your contributions to ensure they do not exceed the annual limits. Communicate with your employer or any other contributors to your HSA to avoid any overlap in contributions. Regularly review your HSA statements to track your contributions and ensure they remain within the allowable limits.

Lastly, if you have a mid-year change in your health plan, consult with your HSA provider and tax advisor to understand how it may impact your contributions. Be proactive in adjusting your contributions if necessary to prevent excess contributions. By staying informed and taking necessary precautions, you can avoid the complications and penalties associated with excess HSA contributions.

Do I Have to Report HSA Excess Contributions on My Taxes?

Yes, you have to report HSA excess contributions on your taxes. If you make excess contributions to your HSA, you must report them on your tax return for the year in which the excess contribution was made. You will also need to include Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to calculate and report the excise tax on the excess contribution.

Reporting excess contributions ensures that the IRS is aware of the situation and can apply the appropriate penalties. It is essential to accurately report any excess contributions and pay any associated taxes and penalties to avoid any further complications. Failure to report excess contributions can result in an audit or other consequences from the IRS.

Conclusion

Contributing too much to your HSA can have financial consequences. Excess HSA contributions can result in penalties, including a 6% excise tax on the excess amount. It is crucial to understand the contribution limits set by the IRS and take appropriate measures to avoid exceeding them. If you do make excess contributions, it is important to correct them promptly to avoid ongoing penalties.

To avoid excess contributions, stay informed about the annual contribution limits and coordinate your contributions if multiple individuals contribute to the same HSA. If you have a mid-year change in your health plan, be aware of how it may affect your HSA contributions. Report any excess contributions on your tax return and pay any associated taxes and penalties to ensure compliance with IRS regulations.

By understanding the rules and regulations surrounding HSA contributions and taking proactive steps to avoid excess contributions, you can make the most of your HSA while avoiding unnecessary penalties. Consult with your HSA provider and tax advisor to ensure you stay on track and maintain the tax advantages of your HSA.

Get more information about HSAs at the First National Bank HSA Help Center.