What Is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged account designed to help individuals with high-deductible health plans (HDHPs) save money for qualified medical expenses. Contributions to an HSA are tax-deductible or made pre-tax, funds grow tax-free, and withdrawals used for eligible medical expenses are tax-free. This unique triple tax benefit makes HSAs a valuable tool for managing healthcare costs.
Annual Contribution Limits and Catch-Up Contributions
The IRS sets annual limits on how much you can contribute to your HSA. These limits typically adjust each year based on inflation. For example, in 2023, the individual limit was $3,850 and the family limit was $7,750. Individuals aged 55 or older can contribute an additional $1,000 as a catch-up contribution.
What Are Excess Contributions?
Excess contributions occur when the total amount contributed to your HSA in a tax year—by you, your employer, or others—exceeds the IRS’s contribution limits. This can happen due to miscalculations, multiple employers contributing, or misunderstanding of the limits. Excess contributions do not qualify for the tax benefits afforded to legitimate contributions and may trigger penalties.
Why Are Excess Contributions an Issue?
Since HSAs offer significant tax advantages, the IRS strictly enforces contribution limits. When excess contributions remain in an HSA, they are subject to a 6% excise tax for each year they remain in the account. Additionally, any earnings generated from these excess funds may be subject to regular income tax if withdrawn.
How to Identify Excess Contributions
To determine if you have excess contributions, compare all contributions to your HSA—including those from your employer or spouse—against the IRS limits for the tax year. Your HSA custodian provides Form 5498-SA annually, which reports total contributions to the IRS and to you. Reviewing your account statements and Form 5498-SA helps ensure you haven’t surpassed the allowed limits.
How to Correct Excess Contributions
The IRS allows you to correct excess contributions before the tax filing deadline (usually April 15) by withdrawing the excess amount plus any earnings on those funds. This withdrawal avoids the 6% excise tax penalty. If you miss the deadline, the penalty applies annually until the excess is removed.
Sometimes, excess contributions can be applied toward the following year’s contribution limit, but this requires careful planning and consultation with a tax professional.
Example Scenario
If you contributed $4,000 in 2023 but the IRS individual limit was $3,850, you have a $150 excess. If you do not withdraw the excess and its earnings by tax day, you’ll face a 6% penalty on the $150 ($9) every year the excess remains in your HSA.
Who Is Most Affected?
Anyone with an HSA can inadvertently make excess contributions, especially if:
- You or your employer contribute multiple times throughout the year.
- You switch jobs or insurance plans mid-year.
- Multiple family members contribute to an HSA combined with your own contributions.
Tips to Prevent Excess Contributions
- Track all contributions from yourself, your employer, and others.
- Stay updated on annual IRS contribution limits.
- Use your HSA provider’s online tools or calculators.
- Consult a tax advisor if you anticipate complex contributions.
Common Misunderstandings About Excess Contributions
- Misconception: Excess contributions are harmless extra funds.
Fact: They can trigger ongoing penalties and taxes. - Misconception: Only your personal deposits count toward the limit.
Fact: Employer and other third-party contributions count too. - Misconception: You can withdraw the excess at any time to avoid penalties.
Fact: Withdrawals of excess and earnings must occur before the tax filing deadline to bypass penalties.
Frequently Asked Questions
Q: What if I miss the tax deadline to remove excess contributions?
You face a 6% excise tax on the excess amount annually until it is withdrawn, plus income tax on any earnings.
Q: Are earnings on excess contributions taxable when withdrawn?
Yes, earnings on excess contributions are subject to regular income tax when withdrawn.
Q: Can employers fix excess contributions they made?
Yes, employers can return excess contributions they made to an employee’s HSA to help correct the issue.
Q: Does the IRS track excess HSA contributions?
Yes, contributions are reported on Form 5498-SA by the HSA custodian. The IRS uses this to verify contribution amounts against your tax return.
For the latest IRS guidance on HSAs, visit the IRS Health Savings Accounts page.
Sources
- IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, 2023 PDF
- IRS Health Savings Accounts (HSAs) official page: https://www.irs.gov/health-savings-accounts-hsas
- Investopedia, “Health Savings Account (HSA)” https://www.investopedia.com/terms/h/healthsavingsaccount.asp
- NerdWallet, “Health Savings Account (HSA) Contribution Limits” https://www.nerdwallet.com/article/health/health-savings-account-contribution-limits