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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 account holders under self-only health coverage and the other for account holders under family coverage. In 2021, you can contribute up to $3,600 under self-only coverage and $7,200 under family coverage. These contribution limits include contributions to your account from all sources, including your employer. If you are 55 or over, you can contribute an additional $1,000 annually as a “catch-up contribution.”

If you contribute more than your applicable limit, you have three options:

Option #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.

Option #2: 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 example, if you made an excess contribution of $1,000 in 2020 and had family coverage, you would need to stay HSA-eligible through February 2021 to absorb that excess contribution. Here’s how to find this: Divide your 2021 contribution limit by 12 to find your monthly contribution limit ($7,200 / 12 = $600). 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 / $600 = 1.6, which rounds up to 2).

Option #3: 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.

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

For HealthSavings account holders: To remove an excess contribution you made to your HSA, fill out the form below and mail it to the address on the form.

To remove an excess contribution your employer made to your HSA, fill out the form below and mail it to the address on the form.

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