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What happens when I contribute too much to my HSA?

2 min read • January 31, 2019
30 sec brief

An excess HSA contribution is more than $3,500 for individuals and $7,000 for families in 2019. You will have to pay an extra 6 percent excise tax on your excess amount. This tax applies every year until you withdraw the extra amount.

Learning about health savings accounts, or HSAs, is like joining a secret society. Signing up is the first step toward special tax benefits. These perks can help you save on taxes and medical expenses. The only downside is there are some strict rules to follow. One of the most important is your annual contribution limit. Here’s a look at the contribution rules — and what to do if you break them.

The benefits of health savings accounts

When it comes to HSAs and their contribution limits, you may be wondering why it matters. The reason why the IRS sets annual limits is because HSAs offer three tax benefits:

  1. You can deduct your HSA contributions.
  2. If you invest your HSA money, the earnings grow tax-free.
  3. You can withdraw your HSA money, tax-free, for qualified medical expenses.

As if those perks weren’t enough, your HSA is portable if you leave your job. Even better, there is no deadline to use the money.

You may have noticed tax-advantaged accounts, like your 401(k), Roth IRA, or 529 plan, have contribution limits. Otherwise, folks would get away with major tax savings — more than the IRS would like. Your HSA is no different. Even when you get tax breaks, the IRS is still eager for their share.

If you aren’t sure about this year’s limit, check with your HSA plan provider.

What happens if I contribute too much to my health savings account?

It’s easy to get so excited by the tax savings, you put too much into your HSA. The problem is, your excess contributions won’t be tax-deductible. The same rule applies to deposits from your employer that go over the annual limit.

The second — and more severe — penalty is you will have to pay an extra 6 percent excise tax on your excess amount. This tax applies every year until you withdraw the extra amount.  

Tip: You will receive a copy of Form 5498-SA from your HSA provider. You can see your total contributions in Box 2. If your employer contributed money into your HSA for you, you will find that in Box 12 of your W-2.

How to avoid tax penalties for excess contributions

The best way to avoid trouble is by sticking to the annual HSA contribution limit. But mistakes do happen. The good news is, there are ways to avoid the 6 percent excise tax.

Once you realize your mistake, you have two options:

1. You need to withdraw your excess contributions by your tax deadline — including extensions.

2. If you earned money from your excess contributions, you need to withdraw that too. Also, you have to include these earnings as taxable income on your return.

Pay attention to your annual HSA contribution limits

There’s nothing fun about dealing with excess HSA contributions. While it’s far from a worst-case tax scenario — it’s better to avoid it altogether. The best way to steer clear of trouble with the IRS is to make note of the annual HSA contribution limit in January. From there, you can track your progress every month. That way, you can make sure you don’t risk over contributing.

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Lively

We are HSA Experts! Lively is a Health Savings Account (HSA) platform for employers and individuals. A 401(k) for healthcare.

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