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How To Remove An Excess HSA Contribution

How To Remove An Excess HSA Contribution

If you contribute too much to your HSA, you could have to pay a tax penalty if you don’t act promptly. Here’s what to do if you ever make an excess HSA contribution.

The IRS sets contribution limits for HSAs each year: one for accountholders under self-only health coverage and the other for accountholders under family coverage. In 2018, you can contribute up to $3,450 under self-only coverage and $6,900 under family coverage. If you are 55 or over, you can contribute an additional $1,000 annually as a “catch-up contribution.”

These contribution limits include contributions to your account from all sources, including your employer. If you contribute more than your applicable limit, you have three options:

  1. The best way to handle an excess contribution is to withdraw it from your account and include it as taxable income for that year. You must do this by the due date (including extensions) of that year’s tax return. Also, you must withdraw any income earned on the excess contribution from your HSA and include the earnings in “Other income” on that year’s tax return.

If you choose this option, you don’t have to pay any tax penalty on your excess contribution.

 

  1. If you don’t remove an excess contribution by your tax return filing deadline, you must include it as taxable income for the year you made it and pay a 6% excise tax on the excess contribution and any associated earnings. However, if you reduce your HSA contribution for the next year by the amount of the excess contribution, you won’t have to pay the excise tax in following years.

For this option, you just have to stay HSA-eligible long enough the following year to absorb the previous year’s excess contribution (you need to be able to contribute at least as much to your HSA as the previous year’s excess contribution).

For example, if you made an excess contribution of $1,000 in 2017 and had family coverage, you would need to stay HSA-eligible through February 2018 to absorb that excess contribution. Here’s how to find this: Divide your annual contribution limit by 12 to find your monthly contribution limit ($6,900 / 12 = $575). Then, divide your excess contribution by the monthly contribution limit and round up to the nearest whole number to see how many months you need to stay eligible for ($1,000 / $575 = 1.74, which rounds up to 2).

 

  1. If you don’t remove the excess contribution from your account, you must include it as taxable income for the year you made it and pay an annual 6% excise tax on the excess contribution and any associated earnings as long as the excess contribution is in your account.

This is the most complicated and costly option.

Remember, transfers or rollovers of one HSA into another don’t count against your contribution limit. Learn more about HSA transfers and rollovers.

 

For HealthSavings accountholders: To remove an excess contribution you made to your HSA, fill out this form and mail or fax it to the address on the form. To remove an excess contribution your employer made to your HSA, fill out this form and mail or fax it to the listed address.

In 2018, the IRS changed the Family contribution limit from $6,900 to $6,850, then back to $6,900. If you contributed $6,900 to your HSA, then got $50 as a distribution when the contribution limit changed for the first time, the rules below don’t apply to you. Your distribution rules are here.

Author: James Denison