Accidentally Contributed to HSA? Steps to Fix Excess Contributions

Making contributions to a Health Savings Account (HSA) is a practical way to save for medical expenses while enjoying tax advantages. However, exceeding the IRS-set contribution limits can lead to tax penalties and complications if not addressed promptly. Understanding how to handle excess contributions is essential to maintain the benefits of your HSA without unnecessary costs.

Health Coverage Requirements

To qualify for an HSA, individuals must be enrolled in a High Deductible Health Plan (HDHP). For 2024, the IRS defines an HDHP as having a minimum deductible of $1,600 for self-only coverage and $3,200 for family coverage, with maximum out-of-pocket expenses capped at $8,050 and $16,100, respectively. Individuals cannot be covered by any non-HDHP health plan, except for dental, vision, and preventive care, ensuring HSAs are reserved for those with high deductibles. Additionally, individuals cannot be enrolled in Medicare or be claimed as a dependent on someone else’s tax return to maintain eligibility.

If an employee switches from an HDHP to a non-qualifying plan mid-year, they must prorate their HSA contributions based on the months they were eligible. This prevents over-contribution and potential tax penalties.

Maximum Contribution Limits

For 2024, the annual HSA contribution limit is $4,150 for individuals with self-only coverage and $8,300 for family coverage. These limits are adjusted annually for inflation, so staying updated is crucial to avoid exceeding them. Individuals aged 55 and older can contribute an additional $1,000 as a catch-up provision to boost their healthcare savings before retirement.

Employer contributions count toward these limits. For instance, if an employer contributes $1,500 to an employee’s HSA, the employee must ensure their personal contributions do not exceed $2,650 for self-only coverage or $6,800 for family coverage to remain within the limits.

Withdrawing Excess Amounts

If you exceed the HSA contribution limit, withdrawing the excess amount promptly can prevent penalties. The IRS allows excess contributions to be withdrawn before the tax filing deadline, typically April 15th. Any earnings on the excess amount must also be withdrawn. Failure to do so results in a 6% excise tax on the excess, applied annually until corrected.

To withdraw excess contributions, notify your HSA custodian, who will assist with the process. Keep documentation for tax reporting purposes. When filing taxes, use Form 8889 to report HSA contributions and withdrawals, ensuring the withdrawn excess is accurately recorded to avoid discrepancies with the IRS.

Employer Reporting

Employers play a key role in ensuring accurate HSA contributions and tax compliance. They must report HSA contributions on employees’ W-2 forms, specifically in Box 12 with code W, which includes both employee and employer contributions. Discrepancies in reporting can lead to tax issues for employees.

Employers must maintain accurate records of all HSA contributions and reconcile these with payroll systems. Consulting IRS Publication 969 provides guidance on contribution limits and reporting requirements, helping prevent errors and ensuring smooth year-end reporting.

Adjusting Tax Returns

Correcting excess HSA contributions may require adjustments to your tax return. If excess contributions are not withdrawn by the tax filing deadline, they must be reported on Form 5329, which calculates the 6% excise tax. This form is filed with your regular tax return, and the excise tax continues to apply annually until the excess is withdrawn or absorbed into future limits.

If excess contributions are discovered after filing your tax return, an amended return may be necessary. Use Form 1040-X to correct your filing, including updated information on contributions, earnings, and penalties. For example, if you failed to report $500 in excess contributions, your amended return should reflect this amount and the corresponding excise tax on Form 5329.

When amending your return, include supporting documentation, such as a corrected Form 8889 and records of withdrawals from your HSA custodian. This ensures accuracy and reduces the chances of IRS scrutiny. Consulting IRS Publication 969 or working with a tax professional can simplify the process, especially for complex cases involving multiple years of excess contributions or employer reporting errors.