Overcontributing to a Health Savings Account (HSA) can happen, typically when you change jobs. This can happen if your new employer is not informed of the contributions you’ve already made via your previous employer, provided their payroll software has the capacity to accommodate this information. It’s worth noting that excess contributions to an HSA are unlikely with a single employer, as the payroll software should automatically halt contributions once the maximum limit is reached.

What to do if you overcontribute to an HSA

If you do overcontribute to an HSA, there are a few things you can do to rectify the situation. Here are three options:

Option 1: Treat distribution as withdrawal

If you had spending from the HSA during the year, you can treat distributions as a withdrawal of the excess. To do this, you will need to:

  • Report the excess and earnings withdrawn on Form 8889, line 14b.
  • Report the excess and earnings withdrawn on Form 5329 to avoid being penalized.
  • Report the excess and earnings withdrawn as “other income” on your tax return.

For the remaining excess not withdrawn, please follow option 2, future year method.

Option 2: Rollover to next year

Another option is to simply let the excess stay in your account for the current year, pay a 6% penalty, and treat it as part of your contribution for the next year. Be sure to adjust your next year’s contribution amount so that the total does not exceed the limit.

Note: You will also need to add the excess (plus any earnings on it) to your current year’s income. You can then deduct the excess in the following year, up to the amount that fits the maximum limit.

For example, let’s say you contribute $3,950 to your HSA in 2023, but the maximum contribution limit is $3,850. You would have $100 of excess contributions. If you choose to use the future year method, you would pay a 6% penalty on the excess, which is $6. You would then add the $100 (plus any earnings on it) to your 2023 income. In 2024, you could deduct $100 from your taxable income.

Here are the steps involved in the future year method:

  1. Let the excess contributions stay in your HSA account.
  2. Pay a 6% penalty on the excess contributions.
  3. Add the excess contributions (plus any earnings on it) to your current year’s income.
  4. Adjust your next year’s contribution amount so that the total does not exceed the limit.
  5. Deduct the excess contributions in the following year, up to the amount that fits the maximum limit.

Option 3: Actual withdrawal

The third option is to contact your HSA trustee to have the excess plus earnings withdrawn. This is the most straightforward option, but it may also be the most time-consuming, and sometimes costly as some HSA trustees charge a fee for the service.

Which option is right for you?

The best option for you will depend on your individual circumstances. If you have already spent the excess contributions, then the withdrawal method may be the best option for you. If you have not spent the excess contributions, then you may want to consider the future year method or correcting the contribution.

References:

  1. Instructions for Form 8889.
  2. Instructions for Form 5329.

I hope this information is helpful. Please let me know if you have any other questions.