HSA Excess Contributions: What Happens If I Contribute Too Much?
Key takeaways:
Health savings accounts (HSAs) are tax-advantaged accounts that come with annual contribution limits. You can use the money in your HSA to pay for qualified medical expenses tax-free.
If you contribute too much money to your HSA during the year or contribute when you are not enrolled in a high-deductible health plan, you may have to pay a tax penalty.
You can avoid a penalty on excess contributions by withdrawing them before the tax deadline.
Table of contents
A health savings account (HSA) can help you save when you pay for qualified medical expenses tax-free. And every dollar that you contribute to the account lowers the amount of income you pay taxes on for the year.
But there are limits to how much you can contribute to an HSA — and, therefore, how much you can deduct on your tax return. Making excess contributions could result in you paying more in taxes because of penalties. But you can avoid penalties on excess contributions by taking money out of your account before the tax deadline.
If you have unused funds in an HSA at the end of the year, the money will carry over to the following year. There are no penalties for funds leftover in your account from previous years. But, this is different from HSA excess contributions. Your funds carry over to the next year when you don’t use all the money you were allowed to contribute to your account, while excess contributions mean you have contributed more than the allowed amount for the year.
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What is an HSA excess contribution?
Each year, the IRS sets a limit on how much you can contribute to your HSA. An HSA excess contribution is any amount that you deposit in your account over the annual contribution limit.
Your maximum HSA contribution depends on how many months of the year you were HSA-eligible, your age, and the type of HSA you have. And this amount typically increases each year to account for inflation.
For example, the individual HSA contribution limit for 2024 is $4,150. And the family HSA contribution limit is $8,300. These limits are increasing to $4,300 for individual HSAs and $8,550 for family HSAs in 2025. The IRS also allows you to contribute an extra $1,000 — also known as a catch-up contribution — to your account every year if you are 55 or older.
So let’s say you are over 55 years old and you contribute $6,000 to your individual HSA in 2024. Assuming you were eligible to contribute the maximum amount for the year, you will have an excess contribution of $850.
But not everyone is eligible to contribute the maximum amount to their HSA for the year. You can only contribute for the months you were enrolled in a qualified high-deductible health plan (HDHP). If you change your insurance coverage to a plan that’s not HSA-eligible, you can no longer contribute money to your account. However, you can still use the existing funds in your account to pay for qualified medical expenses.
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Is there a penalty for exceeding HSA contribution limits?
Yes, there is a penalty for exceeding the annual HSA contribution limit. This penalty is known as an excise tax. The IRS imposes excise taxes to discourage certain behaviors, such as making excess contributions.
Make the most of your health savings account (HSA). Here are some HSA benefits that you can take advantage of this year.
Qualified medical expenses: You might be surprised to learn that you can use your HSA to pay for these qualified medical expenses tax-free.
HSAs vs. flexible spending accounts (FSAs): While HSAs and FSAs both allow you to pay for qualified medical expenses tax-free, there are a few differences you should consider.
The excise tax for excess HSA contributions is 6% of the total amount over the contribution limit. You use IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to calculate this penalty. This form is included with your 1040, U.S. Individual Income Tax Return when you submit your yearly tax paperwork. You should also attach this form to your 1040-SR, U.S. Tax Return for Seniors and 1040-NR, U.S. Nonresident Alien Income Tax Return if you are required to fill out either of them.
How do HSA excess contributions occur?
Excess contributions occur when the funds added to your HSA exceed the annual limit.
Both you and your employer can contribute money to your HSA. But there are also other people, such as friends and family, who can contribute on your behalf. It’s possible an excess contribution could occur if you’re not tracking all of the contribution sources to your account.
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Or you may have an excess contribution because you added funds to your HSA when you were no longer eligible to make contributions. Although you can use the existing funds in your HSA if you do not have a qualified HDHP, you cannot make contributions to the account.
The last-month rule provides an exception to the standard HSA contribution rules. If you are HSA-eligible on the first day of the last month of the year — typically December 1 — you are considered eligible for the entire year. But here’s the catch: If you use the last-month rule, you must remain eligible for an HSA the entire following year or face taxes and penalties.
Let’s say 34-year-old Lucille becomes eligible for an individual HSA on December 1, 2024.
Under the last-month rule, she qualifies to contribute the maximum amount for 2024 as long as she remains HSA-eligible throughout all of 2025.
How to correct HSA excess contributions to avoid penalties
There are two main ways to correct HSA excess contributions:
Withdraw the excess funds. To avoid a penalty, you can withdraw excess contributions from your account before the deadline to file taxes. If you file for a tax extension, that date is considered the deadline.
Deduct the excess contribution in a later year. If you miss the deadline to correct your HSA contribution for the tax year, you may be able to deduct it in a later year. Contact your HSA administrator for assistance and report the deduction on Form 5329.
Let’s look at the first option. Let’s say Jerry made excess contributions in 2024. He has until April 15, 2025 (the deadline to file taxes) to withdraw them from his HSA. If he does not resolve the issue before that date, he could then file for an extension, which would give him an additional 6 months to withdraw the excess funds. This would allow him to avoid a penalty. But since excess contributions are not tax deductible, the amount he withdraws would get added back to his taxable income for 2024.
He’ll also need to withdraw any interest earned on the contributions. (Interest earned on HSA contributions is tax-free, unless it’s earned on excess contributions.) The interest earned on the excess contributions must then go on Jerry’s tax return as “other income.”
Can an employer take back excess HSA contributions?
Employers can take back excess HSA contributions from HSA custodians. A custodian is the financial institution that manages an HSA account. Employers can do this to correct excess contributions before the end of the year. If an HSA custodian returns excess contributions, the funds are then considered income.
How does an HSA affect my tax return?
HSA contributions are tax deductible. This means they can lower the amount of money, or income, you pay taxes on for the year. Any interest earned on the contributions is also tax-free.
So let’s say, for example, Regina’s taxable income for 2024 is $75,000. But she contributes $4,000 to her HSA for the year. This lowers her taxable income to $71,000.
Rather than working like regular HSA contributions, excess contributions cause you to pay more taxes for the year if they’re not corrected. The total excess amount will be taxable and will cause you to have to pay an excise tax.
Do I have to report HSA excess contributions on my taxes?
Yes, you have to report HSA excess contributions when you file your taxes. You will see the total amount of your excess contributions for the year on IRS Form 8889, Health Savings Accounts (HSAs). This amount is taxable income.
If the excess contributions are from your employer, they will include them in your wages when they report them on your W-2.
Do I need a corrected W-2 for excess HSA contributions if my employer doesn’t report them?
If your employer doesn’t include your excess contributions in box 1 of your W-2, you do not need a corrected W-2. You can report the excess HSA contributions as “other income” on Schedule 1 of your Form 1040.
How to avoid excess HSA contributions
You can avoid making excess contributions by tracking how much you put in your HSA throughout the year.
If you contribute through an employer, you can track your contributions on your check stubs. And make sure you understand your employer’s contribution policy. You do not want your combined contributions to cause you to exceed the annual limit.
Consolidating all of your existing HSAs will also help you track your contributions. If you have an HSA with a financial institution and one with your employer, you need to track contributions to both of the accounts diligently. Be careful that your combined contributions to these accounts do not exceed the annual limit.
Frequently asked questions
You can only contribute to an HSA if you meet certain requirements, including being enrolled in an HDHP. If you contribute to your HSA when you don’t have an HDHP, you'll have to pay a penalty called an excise tax. This tax is 6% of the amount you contributed.
After you turn 65, you can withdraw HSA funds to pay for nonqualified medical expenses without a penalty. However, you’ll still have to pay ordinary income taxes on the amount you withdraw.
The bottom line
If you contribute too much money to your health savings account (HSA), you may face additional taxes and penalties. But you can avoid a tax penalty by withdrawing the total amount of excess contributions from your HSA before the tax deadline.
In general, it is important to track your HSA contributions throughout the year to avoid excess contributions.
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References
Internal Revenue Service. (2023). Form 1040: U.S. individual income tax return.
Internal Revenue Service. (2023). Form 1040-SR: U.S. tax return for seniors.
Internal Revenue Service. (2023). Form 5329: Additional taxes on qualified plans (including IRAs) and other tax-favored accounts.
Internal Revenue Service. (2023). Instructions for Form 5329: Additional taxes on qualified plans (including IRAs) and other tax-favored accounts.
Internal Revenue Service. (2024). About form 1040-NR, U.S. nonresident alien income tax return.
Internal Revenue Service. (2024). About form W-2, wage and tax statement.
Internal Revenue Service. (2024). Get an extension to file your tax return.
Internal Revenue Service. (2024). Instructions for form 8889 (2023).
Internal Revenue Service. (2024). Instructions for schedule I (form 1041) (2023).
Internal Revenue Service. (2024). Publication 525 (2023), taxable and nontaxable income.
Internal Revenue Service. (2024). Publication 969 (2023), health savings accounts and other tax-favored health plans.
This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
