What to Do if You Overcontribute to Your HSA

The benefits of a health savings account

If you have a HDHP, it can be tough to budget for medical care, with out-of-pocket expenses topping hundreds or even thousands of dollars. Fortunately, you may be eligible to pair your health plan with an HSA. Your HSA saves money on medical by offering three unique tax benefits:

• Tax deduction for contributions: You can score a tax deduction for the money you add to your account, and the money your employer contributes isn't taxable income
• The balance grows tax-free: You can invest the money in your HSA, and you won't owe taxes on your earnings  
• Tax-free account withdrawals: You can take the money out anytime, tax-free, to pay for qualified medical expenses

Another perk of your HSA: The account is portable. You can take your HSA with you when you leave your job, and there is no deadline to spend the money. With so much flexibility, some HSA owners invest the money and plan to use the funds for healthcare expenses in retirement. 

Who can contribute to a health savings account

Every year, the IRS shares updated guidelines for eligibility, including the rules for HSA contributions. Before adding money to your account, you will want to make sure you have an eligible HDHP. 

For 2024, your HDHP must meet the following IRS guidelines:

Minimum deductible: $1,600 (single), $3,200 (family).

Maximum out-of-pocket expenses: $8,050 (single), $16,100 (family)

To qualify, you or your spouse (if you have a family plan) can't have other health insurance, including Medicare plans, and your eligible health insurance must be active for each month you make an HSA contribution. 

Another contribution, individual retirement account (IRA) to HSA rollovers, can only happen once per lifetime, and you must have an eligible HDHP to make the transfer. These IRA-to-HSA rollovers will impact your contribution limit for the year.

Health savings account contribution limits

Once you meet the HSA eligibility guidelines, you can start thinking about how much you can contribute every year. Your HSA contribution limit depends on your age and the type of plan (self-only or family). The HSA contribution limits for 2024 are $4,150 for single individuals and $8,300 for families. If you're 55 or older, you can add $1,000 per year until you’re retired to the above limits. For example, with self-only coverage for 2024, you could contribute a total of $5,150, and those with family plans can save $9,300. But remember, Medicare doesn’t count as an eligible HDHP.

The penalties for excess contributions

With three tax breaks, saving extra money in your HSA could be a savvy move, especially when you're saving and investing for the future, like healthcare in retirement. But padding your HSA with extra cash beyond the limit is a mistake. Here's why, plain and simple: If you deposit more than the yearly limit, you could owe more money at tax time. 

When you blow past the annual limit, you won't get a tax deduction for excess contributions. The extra contributions from your employer will be on your W-2 and become taxable income. To make matters worse, the IRS charges you a hefty 6% excise tax on excess contributions and any money you make from those contributions. 

Fortunately, there are a couple of ways to fix the problem and avoid these costly taxes and penalties. We will cover both of the strategies for what to do if you over-contribute to an HSA.

What to do if you over contribute to your HSA

Mistakes happen. You may be looking at your larger-than-expected HSA balance and thinking, "what happens if I overcontribute to my HSA?" Well, you won’t get a deduction for the excess contributions, the extra deposits from your employer become taxable income, and you will owe excise tax. While this may feel like a colossal error, you have a couple of options to possibly correct it.

Withdraw your excess health savings account contribution

If you find out you over-contributed to your HSA before the tax filing deadline, April 15th for most people, there is still time to correct your mistake. You can avoid a penalty from the IRS if you take the extra money out before filing your taxes. You also have to remove any interest you made from your excess contributions. 

But don't wait too close to the tax deadline; you will need to contact your plan provider to withdraw the funds, which may involve some paperwork, and the removal may not happen immediately. Depending on when you remove the money, you will see the health savings account withdrawal on your 1099-SA for that tax year.

Move your excess health savings account contribution to next year

If you already invested your excess HSA contribution, you might prefer to keep the money in your account, allowing the funds to keep growing. Luckily, there's another way to avoid an excise tax bill. You can roll forward your excess contribution and use part of next year's contribution limit. You may even be able to deduct the contribution in the following year's tax season. 

Pay taxes on excess contributions and earnings

The most expensive choice, leaving the excess HSA money where it is, will likely lead to a higher tax bill, calculated using Form 5329. You will owe taxes on the extra cash your employer contributed, along with a 6% excise tax. If possible, you should consider options one or two before forking over your hard-earned dollars. 

Be proactive with your health savings account

Whether you make HSA contributions or the money comes from your employer, it's easy to go over the limit if you're not careful. To avoid excess contribution penalties, you can start by knowing the annual limits, which may change from year-to-year. If you're making monthly HSA contributions, you can divide your yearly limit by twelve payments to stay on track. 

You may also want to keep an eye on your account balance to meet your goals without going over. Some HSA providers make it easy to check the status through a mobile app, and for other companies, you may need to log in to check the balance from your computer. On top of your annual limit, you will need to make sure your HSA stays eligible for every month you contribute money.

As always, please consult a licensed tax professional for appropriate advice given your individual situation.

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