Excess Health Savings Account (HSA) Contributions
The IRS annual contribution limits for HSAs for 2024 are $4,150 for individual coverage and $8,300 for family coverage. Individuals age 55+ can contribute an additional $1,000 per year as a “catch-up” contribution. These limits are based on inflation and generally increase by moderate amounts every year.
Excess contributions also include any amount in excess of the pro-rated monthly amount for an individual who was only eligible to make HSA contributions for a portion of the full tax year (such as for someone who turns 65 mid-year with disqualifying Medicare coverage).
Excess contributions are not tax-deductible and must be reported as "Other Income" on an individual’s tax return. Excess contributions made by an employer must be included in gross income (Box 1 of Form W-2).
6% Excise Tax
If excess contributions are left in an HSA, a 6% excise tax must be paid on the contributions. For example, if an excess contribution of $100 was made, the penalty tax would be $6.00. If an excess contribution of $1,000 was made, the penalty tax would be $60.
Importantly, the excise tax applies to each tax year the excess contribution remains in the account. This means the 6% excise tax applies annually until the excess contributions are withdrawn from the account. Alternatively, a reduction in future year contributions may be made to offset a prior year’s excess contribution.
IRS Form 5329 (Additional Taxes on Qualified Plans and Other Tax-Favored Accounts) is used to calculate and report the excise tax.
Withdrawing Excess Contributions
Some or all of the excess contributions may be withdrawn to avoid paying the excise tax. The following conditions must be met:
- Same Tax Year: Withdrawals of excess contributions must be made by the due date (including extensions) of the federal tax return for the year the contributions were made.
- Interest Withdrawn: Net income attributable to the excess/withdrawn contributions (interest) must also be withdrawn and included in the earnings in "Other Income" on the tax return for the year the contributions and earnings withdrawals are made.
- Report as Income: Income taxes must be paid on the withdrawn amounts (contributions and earnings). Withdrawn excess contributions should be reported as “Other Income” on the tax return.
The Process of Withdrawing Contributions
Essentially every HSA vendor has a mechanism for withdrawing excess contributions (both employee contributions and employer contributions). Typically, an individual must inform the HSA administrator as it is not their responsibility to police contribution amounts. Most withdrawal transactions simply require the completion of a special form.
Vita Flex HSA account holders should contact Vita (firstname.lastname@example.org) to request the form.
It is critical that excess contributions be withdrawn within the same tax year as deposited. There is no way to avoid the 6% excise tax if excess contributions are not withdrawn within the same tax year.
Excess funds withdrawn will be listed on as a distribution (Box 1) for the tax year in which the distribution was taken. Earnings on excess contributions withdrawn will also be reported (Box 2 and included in Box 1). Form 5498-SA will report the market value of your HSA at the end of the calendar year, the total contributions made within the calendar year, and the total contributions for the tax year through the tax filing deadline. Both IRS forms are typically generated by the HSA vendor and should be retained for record keeping purposes but are not required to submit to the IRS. Lastly, any excess contributions made by an employer should be included in gross income (Box 1 of Form W-2).
To read more about eligibility restrictions for HSA contributions, please review the HSA Fact Sheet.