Health savings account (HSA) contributions that exceed an individual’s maximum contribution amount (or that are made by or on behalf of an individual who is not HSA-eligible) are considered “excess contributions.” Excess contributions are not deductible by the HSA owner. Excess employer contributions (including employee pre-tax contributions through a cafeteria plan) are included in the employee’s gross income. In addition, a 6% excise tax is imposed on the HSA owner for all excess contributions.
Corrective Distributions
The 6% excise tax can be avoided if the HSA owner withdraws the excess contributions for a taxable year by the deadline (including extensions) for filing their federal income tax return for the year. The excess contributions will be treated as if they had not been made if the HSA owner:
Does not claim an exclusion from income for the withdrawn contributions; and
Withdraws any income earned on the excess contributions and includes the earnings in “other income” on their tax return.
Note that if an individual filed their tax return timely without withdrawing the excess contributions, they can still make a corrective withdrawal no later than six months after the due date of their tax return (excluding extensions) and file an amended tax return showing the necessary changes.
Future Years
The 6% excise tax is cumulative and will continue in future years if a corrective withdrawal is not made. For each year, the HSA owner must pay excise tax on the total of all excess contributions in the account. However, if HSA contributions for any year are less than the maximum limit for that year, the amount subject to the excise tax is reduced (for that year and subsequent years) by the difference between the maximum limit for the year and the amount contributed.
Compliance Details
Tax Rules
An excess contribution is any amount contributed to an individual’s HSA that exceeds his or her contribution limit for the year.
Excess contributions must be included in the HSA owner’s gross income at tax time. They are also subject to a 6%excise tax.
The excise tax can be avoided if the excess contributions (and related earnings) are distributed by the owner’s tax return deadline for the year.
Tax Reporting
HSA owners report distributions and contributions (regardless of source) on IRS Form 8889, which is filed with their Form 1040.
If an excess contribution is not included in Box 1 of Form W-2, an HSA owner must report the excess as “other income” on their tax return.
Excess contribution taxes and penalties can be calculated using Part VII of Form 5329.
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