How To Remove An Excess HSA Contribution
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.
If you’ve gone over the annual contribution limit for your HSA, don’t worry! You have two options for removing your excess contribution.
1. Remove the excess contributions and any attributable earnings before filing that year’s income taxes.
This is the easier and simpler way to reverse excess contributions.
If you became HSA-eligible on January 1st and had self-only coverage, your 2018 annual contribution limit is $3,450. If you contributed $3,000 to your HSA in January but then lost eligibility on August 20, you were HSA-eligible for 8 months (remember, you stay eligible through the end of the month even if you lose eligibility during that month).
Your prorated contribution limit is $2,300 ($3,450 x 8 months eligible / 12 months in the year). Before you file that year’s income taxes, you need to remove the extra $700 ($3,000 – $2,300) from your account, along with any earnings attributed to that $700 (the earnings shouldn’t be more than a few dollars). Also, you need to include the $700 and any attributable earnings as taxable income for 2018. Your HSA provider can help you with this; if you’re a HealthSavings customer, here’s the form to fill out.
If you contributed through your employer’s healthcare plan, you’ll want to work with your employer to make sure your W-2 gets updated to reflect your contribution changes.
If you don’t fix your excess contribution by the time you file that year’s income taxes, you have another option:
2. Count that excess contribution as a contribution for the following year.
For this option, you have to pay a 6% tax on the excess contribution.
Using the example above, you made $700 (plus any attributable earnings) of excess contributions in 2018. In this scenario, you would then have to subtract that amount from your 2019 contribution limit after paying the 6% tax on it.
Note: In this scenario, you need to stay HSA-eligible long enough in the following year to absorb the excess contribution. Using the numbers above, you’d need to stay HSA-eligible for 3 months in 2019 to absorb the 2018 excess contribution of $700 and attributable earnings ($3,450 contribution limit / 12 months = $288 per month, $288 x 3 months = $863).
This calculation assumes the 2019 contribution limit is the same as 2018.
If you choose not to correct an excess contribution, you have to pay a 6% tax on the excess contribution and any attributable earnings every year the excess contribution is in your HSA.
Remember: Transfers or rollovers of one HSA into another don’t count against your contribution limit. Learn more about HSA transfers and rollovers.