HSA Excess Contribution Removal: Steps, Penalties, and Tax Implications
Learn how to manage HSA excess contributions effectively, understand tax implications, and explore removal options to avoid penalties.
Health Savings Accounts (HSAs) offer a tax-advantaged way to save for medical expenses, but exceeding contribution limits can lead to financial consequences if not properly addressed. Managing and rectifying excess contributions is essential to avoid penalties and additional taxes.
Identifying and Calculating Excess
To determine if you’ve exceeded your HSA contribution limit, refer to the annual limits set by the IRS. For 2024, the limits are $3,850 for individuals and $7,750 for families, including personal and employer contributions. Individuals aged 55 and older can contribute an additional $1,000. Add all contributions made during the tax year and compare them to these limits to identify any excess.
If contributions exceed the limit, calculate the excess by subtracting the allowable amount from the total contributions. For instance, if $4,000 was contributed in 2024, the excess would be $150. Accurate record-keeping is crucial, especially for payroll deductions, which are often pre-tax and can complicate calculations.
Tax Ramifications
Excess contributions are not tax-deductible and must be included in taxable income, increasing your tax liability. This is reported on Form 8889, submitted with your tax return. Additionally, any earnings on the excess are taxable and must be reported as “other income.” For example, if $150 in excess contributions generates $10 in earnings, $160 would need to be added to taxable income.
Penalties for Not Removing
Unaddressed excess contributions incur a 6% excise tax annually until resolved. For example, a $500 excess results in a $30 penalty each year it remains uncorrected. This can also attract IRS scrutiny, potentially leading to audits.
Removal Options
To correct excess contributions, withdraw the excess amount and any earnings before the tax filing deadline, including extensions. This “corrective distribution” avoids the 6% excise tax. Alternatively, the excess can be applied to the following year’s limit, reducing that year’s contribution room. Careful planning is necessary to prevent future excesses.
Reporting Requirements
After correcting excess contributions, proper reporting is essential. Use Form 8889 to detail HSA contributions, distributions, and corrective actions. Attach this form to your Form 1040. If excess contributions were withdrawn, report them on Line 14 of Form 8889. Any earnings on the excess must be reported as income on your Form 1040. For those carrying forward excess contributions, document this on the next year’s Form 8889 to avoid further complications. Retain detailed records of contributions and corrective actions, as these may be needed in case of an audit.