Health savings accounts allow you to save money for healthcare-related expenses on a tax-advantaged basis. Similar to individual retirement accounts (IRAs), the IRS limits annual contribution limits to an HSA. Saving over the limit will result in an HSA excess contribution. In that scenario, there are two things you can do to correct excess contributions to an HSA. A financial advisor can help you figure out how to deal with excess contributions in health savings accounts. Find one using SmartAsset’s free financial advisor matching service.
What Is a Health Savings Account?
A health savings account or HSA is a tax-advantaged plan that’s designed to help you save for future healthcare needs. HSAs are available with high deductible health plans. You may have access to an HSA through your employer’s health insurance plan or coverage your purchase yourself if you’re self-employed.
These plans offer a triple tax benefit, in the form of:
- Tax-deductible contributions
- Tax-deferred growth
- Tax-free withdrawals when distributions are used to pay for qualified medical expenses
A 20% penalty applies when taking money from an HSA for any purpose other than qualified healthcare expenses before age 65. Once you turn 65, you can withdraw money from an HSA for any purpose but you’ll pay ordinary income tax on the distribution.
HSA Contribution Limits
Both employers and employees can make HSA contributions each year, according to the limits set by the IRS. HSA contribution limits are determined by the type of coverage. There are limits for individual plans and family plans. Here’s how the limits compare:
- Individual plan limit (2021): $3,600
- Family plan limit (2021): $7,200
- Individual plan limit (2022): $3,650
- Family plan limit (2022): $7,300
Catch-up contributions are also allowed for savers aged 50 and older. The catch-up contribution limit for HSAs is the same as the catch-up contribution limit for IRAs: $1,000.
What Is an HSA Excess Contribution?
Excess HSA contributions are contributions that exceed the annual limit allowed by the IRS. This includes contributions over the limit made by yourself or your employer. For example, say you have individual HSA coverage. You contribute $4,000 to your plan for the year but you’re not 50 or older. The $350 you contribute over the $3,650 that’s allowed would be considered an excess HSA contribution.
There are different reasons why an HSA excess contribution might occur. Typically, it can be chalked up to one of the following:
- Failing to keep track of employer contributions while also making contributions yourself
- Miscalculating the amount needed to max out your contribution for the year
- Making irregular contributions, without keeping a running tally of how much you’ve saved on a year-to-date basis
- Combined contributions exceeding the limit because you’ve saved in multiple plans during the year (for example, as the result of a job change)
- Changes in eligibility or plan status, i.e. switching from a family plan to individual coverage
Regardless of how excess contributions happen, they can add a wrinkle to your tax filing for the year. So it’s important to know what to do if you add up your HSA contributions and realize that you’ve gone over the limit.
How to Correct HSA Excess Contributions
Any excess HSA contributions are subject to regular income tax and a 6% excise tax each year until they’re corrected. If you find that you’ve over-saved in your HSA for the year, there are two ways you can handle this situation.
- Remove excess contributions and the net income from those contributions before filing your federal income tax return for the year
- Leave the excess HSA contributions where they are and carry them forward to a future tax year
With the first option, you’d need to be able to withdraw any contributions over the allowed limit before the tax filing deadline. You can also choose this option if you’ve filed a tax extension so you have more time to get your return in. You’ll have to pay income tax on the excess amount removed from your HSA if you go this route. But you can avoid the 6% excise tax if you take out all of the excess contributions.
In the second scenario, you don’t have to go through the trouble of removing excess contributions from your HSA. Instead, you can deduct some or all of the excess contributions made and apply them to a future year’s contribution limit. If you choose this option, you’ll owe 6% excise tax on any excess contributions that are not rolled over to a future year. Again, you’ll need to do this before the tax filing deadline, including the extension deadline if you requested more time to file.
Between the two, simply removing HSA excess contributions is usually the easiest way to go in terms of tax filing. In either case, you’ll need to work with your HSA custodian to correct excess contributions. They can determine what amount of excess funds to report to the IRS, which you’ll need when you file your tax return. If you’re removing excess contributions, those are reported on Form 1099-SA as a distribution in Box 1. In Box 2, you’ll see earnings on excess contributions that are withdrawn.
Avoiding HSA Excess Contributions
If you’d rather avoid the headache of dealing with excess contributions to an HSA, planning ahead can help. Specifically, you can:
- Understand your coverage type and annual contribution limits
- Use an HSA contribution calculator to determine how much you can save per month without exceeding the annual limit
- Ask your employer how much they’ll contribute to the plan on your behalf for the year
Keeping track of your contributions to date is also important if you anticipate a change in your plan status or a job change. If you move to a new company midway through the year, for example, you’d want to know how much you saved in your previous employer’s HSA to determine how much room you have left to save in your new HSA if you have one.
Earnings don’t count toward your annual HSA contribution limit, only the money you or your employer adds to the plan. So another way to make the most of your plan is to choose your investments carefully in order to generate the best returns possible, based on your goals and risk tolerance. Talking to a financial advisor can help you decide which HSA investment offerings make the most sense for you.
The Bottom Line
Making an HSA excess contribution isn’t the end of the world, but it can mean having to adjust your tax filing to account for those contributions. If you’re unsure how much you can contribute to your plan for the year or how much you’ve contributed so far, reaching out to your benefits coordinator or HSA plan administrator is a good place to start. From there, you can plan your strategy for managing HSA contributions each year.
Retirement Planning Tips
- If you have access to an HSA it’s important to review your investment options carefully. Mutual funds and exchange-traded funds (ETFs) are typical offerings with HSA plans but they aren’t all alike. Specifically, consider the performance of each fund and the expense ratio you’ll pay to own it. This can help you to choose the right funds for diversification while also managing fees.
- Consider talking to a financial advisor about how to correct or avoid excess HSA contributions or whether an HSA might be right for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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