What Happens If You Go Over Your HSA Contribution Limit?

Health Savings Accounts (HSAs) offer tax advantages for medical expenses, but exceeding IRS contribution limits can lead to financial consequences. Understanding the implications of overcontributing helps avoid unnecessary taxes and penalties.

Consequences on Tax Return

Exceeding the annual HSA contribution limit increases taxable income. The IRS does not allow excess contributions to be deducted, so any amount over the limit must be added back to taxable income.

The excess is reported on IRS Form 5329, which tracks additional taxes on qualified plans, including HSAs. If unreported, the IRS may detect the discrepancy through Form 5498-SA, which HSA providers submit. If identified, the IRS may require an amended return, leading to additional interest and penalties.

Employer contributions also count toward the limit. If total contributions exceed the cap, the overage is taxable income. This can be especially problematic if excess contributions came from payroll deductions, as they may have been excluded from taxable wages, requiring an adjustment to the W-2.

Penalties on Excess Funds

Excess HSA contributions are subject to a 6% excise tax for each year they remain in the account. This penalty applies annually until the excess is corrected. If unaddressed, penalties can accumulate over multiple years. Unlike some tax penalties that may be waived for first-time errors, the IRS does not offer general relief unless the funds are withdrawn within the designated time frame.

Withdrawing Excess Contributions

Removing excess contributions is the best way to avoid ongoing penalties. The IRS allows account holders to withdraw excess funds without incurring the 6% excise tax if done before the tax filing deadline, including extensions. For most taxpayers, this deadline is April 15 of the following year, though those who file for an extension may have until October 15.

Any earnings generated while the funds were in the account must also be withdrawn. Failing to do so means the earnings remain taxable and could trigger additional reporting requirements. The HSA provider will issue a corrected Form 1099-SA reflecting the withdrawal, and the amount must be reported as income for the year in which the contribution was made.

If an excess contribution is discovered after filing a tax return, the only option is to remove the funds as a regular distribution. If not used for qualified medical expenses, this withdrawal is subject to income tax and a 20% penalty. Monitoring contributions throughout the year is key, especially for those receiving contributions from both an employer and a personal account.

Impact on Future Limits

Exceeding the contribution cap in one year can create complications in future tax periods if not corrected. The IRS does not adjust future contribution limits to offset prior overages, meaning the annual limits continue to apply. If the excess remains in the account, it reduces the available contribution room for the following year, potentially leading to further penalties.

For individuals who lose HSA eligibility—such as by switching to a non-high-deductible health plan (HDHP)—unresolved excess contributions pose an even greater issue. Once HSA eligibility is lost, new contributions are no longer allowed. Any excess from a prior year cannot be offset by future deposits, leaving the account holder subject to continued penalties.

Repeated Overcontributions

Consistently exceeding the HSA contribution limit leads to compounding tax issues. While a one-time mistake can often be corrected, repeated overages may draw IRS scrutiny, increasing the risk of audits or additional penalties.

Beyond tax consequences, repeated overcontributions can disrupt long-term financial planning for healthcare expenses. Since excess funds are subject to ongoing excise taxes, failing to address the issue reduces the long-term savings potential of an HSA. This is especially problematic for those relying on their HSA for future medical costs, as penalties and tax liabilities can diminish funds that would otherwise be available for qualified expenses.