Health Savings Accounts (HSAs) are a favorite of ours because you get an above-the-line tax deduction for contributing regardless of whether or not you itemize. Furthermore, the assets are able to grow tax-free so long as they are ultimately used for qualified health expenses. It is like getting the best of both worlds between traditional and Roth IRA contributions.
We recommend that if you are eligible for an HSA, you prioritize funding it to the maximum allowed each year. In 2022, this maximum amount is $3,650 for individuals and $7,300 for families. The additional allowed catch-up contributions for those over the age of 55 is $1,000, which has remained unchanged since 2009. Both spouses participating in a family plan are eligible for the catch-up contribution.
Reasons for Excess Contributions
There are several reasons why you either might not be allowed to contribute the full amount or may accidentally over-contribute.
First, while the health insurance covers everyone on the plan, Health Savings Accounts (HSAs) are individually owned. Most married couples have a family plan, and one spouse owns the HSA. They contribute the family maximum to that one HSA and then spend their joint medical expenses out of it. However, if both spouses want to take advantage of the catch-up provision, then each spouse needs to open their own HSA.
Coordinating the use of the family limit across your two HSAs can be tricky. One common reason for excess contributions is miscommunication between the spouses on how much each person is contributing.
Second, many employers contribute to their employees’ HSAs. The employer and employee share the contribution limit, but the employer’s contributions (or employee’s payroll deferrals) are excluded from income whereas the employee’s after-tax contributions are tax deductible. Tax-wise, both contribution methods amount to the same effect.
Because it can be hard to figure out how much your employer has contributed, this is another common reason for excess contributions.
Third, if you have a qualifying high-deductible health plan for the entire year, then you are permitted the entire HSA contribution limit. However, if you only have HSA-eligible health insurance for part of the year, then you are only permitted to contribute to the HSA for that portion.
Similarly, if you change your health insurance plan from individual to family or from family to individual part way through the year, your HSA contribution limit is prorated based on the number of months you had each type of plan.
For this reason, sometimes there is an accidental excess contribution. Changes of insurance, marriages, or widowing may all make previous HSA contributions now excessive.
Fourth, there is a second rule governing contribution limits called the “last-month rule.” If you are eligible for a High-Deductible Health Plan on December 1, you are allowed to contribute to the HSA as though you had been eligible for the whole year assuming you will remain eligible for a “testing period” of a full calendar year. This means you must keep the High-Deductible Health Plan for the full upcoming year.
If you change your health insurance after contributing to an HSA using the last-month rule, you may find that you have an excess contribution you need to correct.
How to Fix an Excess Contribution
Regardless of the reason for the excess contribution, the solution is the same.
Calculate the amount that you were allowed to contribute. For complex cases, IRS Publication 969 has some worksheets and examples that can assist.
Then, figure the amount you over-contributed.
Finally, call your custodian and ask them to undo the contribution. They will likely provide you with an “Excess Contribution Removal Form.” You can find HSA Bank’s form here (2022 version).
IRS Publication 969 states that excess contributions are not deductible. Excess contributions made by your employer are included in your gross income and those excess contributions must be reported as “Other income” on your tax return if not included in box 1 of Form W-2.
It goes on to say that a 6% excise tax applies to each tax year the excess contribution remains in the HSA. However,
You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.
- You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
- You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
In this way, you should strive to correct mistakes prior to your tax filing deadline. However, fixing excess contributions even more promptly can help minimize tax owed on the earnings portion that needs to be withdrawn.
If you realize you made excess contributions to your HSA after the filing deadline (or extension) of the relevant tax year, you will most likely have to pay the excise tax on the excess contributions. The excise tax can be calculated using Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.
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