How to Calculate Earnings on Excess HSA Contributions
Ensure your Health Savings Account remains compliant after an over-contribution by properly accounting for the net income attributable to the excess funds.
A Health Savings Account (HSA) offers a way to save for medical expenses with tax advantages, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified costs. Contributing more than the federally allowed annual limit creates an “excess contribution.” This overage can negate the tax benefits if not handled correctly, so you must withdraw the excess amount and any earnings it generated before the tax filing deadline to avoid penalties.
Identifying and Correcting the Excess Contribution
The Internal Revenue Service (IRS) sets annual limits on HSA contributions. For 2024, the limit for self-only health coverage is $4,150, and for family coverage, it is $8,300. Individuals age 55 or older can make an additional “catch-up” contribution of $1,000. Any amount contributed beyond these thresholds is an excess contribution.
The deadline for withdrawing the excess contribution and its earnings is the due date of your federal income tax return, typically April 15. If you file for an extension, your deadline to correct the excess contribution is also extended, usually to October 15.
Failing to withdraw the excess amount and its earnings by this deadline has consequences. The IRS imposes a 6% excise tax on the excess for each year it remains in the account, which is reported on Form 5329. This tax applies annually until the excess is fully removed.
Information Needed to Calculate Earnings
To calculate the earnings on your excess contribution, you must gather specific data from your HSA administrator, found on account statements or your online portal. You will need the date the excess contribution was deposited and the fair market value (FMV) of your HSA immediately before the funds were added. You must also determine the FMV of the account right before you make the corrective withdrawal and account for any other HSA activity that occurred during this period.
The Calculation Method for Net Income Attributable
The earnings generated by an over-contribution are termed “Net Income Attributable” (NIA). The IRS provides a specific formula in Publication 969 to calculate this amount. The calculation determines the portion of your account’s investment growth or loss tied to the excess funds during the “computation period,” which begins just before the excess contribution was made and ends just before it is removed.
The formula is: Net Income = Excess Contribution × (Adjusted Closing Balance – Adjusted Opening Balance) / Adjusted Opening Balance. The Adjusted Opening Balance is the fair market value (FMV) of the HSA right before the excess contribution was made, plus the amount of that excess contribution. The Adjusted Closing Balance is the account’s value immediately before the corrective withdrawal, plus the value of any distributions taken during the computation period.
For example, you mistakenly contributed an extra $1,000 when your HSA’s value was $9,000. Your adjusted opening balance is $10,000 ($9,000 + $1,000). You later decide to withdraw the excess when the account value has grown to $10,500, with no other transactions occurring. The NIA would be $1,000 × (($10,500 – $10,000) / $10,000), which equals $50. You would need to withdraw $1,050.
If your investments experienced a loss during the computation period, the calculation could result in a negative number. In this scenario, the amount to withdraw would be the original excess contribution minus the calculated net loss. Many HSA custodians will perform this calculation for you upon request.
Reporting the Withdrawal on Your Tax Return
After withdrawing the total amount, you must report it correctly on your tax return. The earnings portion of the withdrawal is taxable income for the year in which you receive the funds, while the principal amount of the excess contribution is not taxable.
Your HSA administrator will issue Form 1099-SA to report the withdrawal. For a corrective distribution, the gross distribution amount in Box 1 will include both the excess contribution and the earnings. A distribution code of “2” in Box 3 signifies an excess contribution to the IRS.
When you file your taxes, you must report the taxable earnings on the “Other income” line of your Form 1040. You will also file Form 8889. Do not include the corrective distribution of the excess principal when calculating your total distributions for the year on this form.