HSA Excess Contribution—What Is the Penalty and How to Avoid it
Updated · Jun 28, 2022
If you have exceeded your Health Savings Account (HSA) contribution limit, don't worry!
You have several ways to correct that.
In this article, we discuss what an HSA excess contribution is, the penalties that apply, and how to fix the problem.
What Is an HSA Excess Contribution?
An HSA is a tax-advantaged savings account. You can use it to pay for qualified medical expenses.
An HSA excess contribution is the amount deposited to your account that surpasses the maximum annual limit.
The benefits of an HSA are huge.
Both you and your employer can make contributions with pre-tax dollars. In addition, the balance in your account grows tax-free. Plus, you can withdraw funds for qualified medical expenses.
As long as you follow the HSA rules for 2022, you won't have to pay taxes on the money in your account.
If you exceed the IRS limit, though, you will be subject to a penalty.
First, let’s discuss the maximum HSA contribution for 2022.
Then, we'll move on to the penalties and how to avoid them.
HSA Contribution Limits 2022
The IRS sets the HSA limit and adjusts it each year for inflation.
For 2022, the maximum contribution for individuals is $3,650. For families, the amount is $7,300.
The 2022 HSA contribution limits for individuals over 55 is $1,000. This so-called catch-up contribution continues until the age of 65.
After that, you can enroll in Medicare and won’t be allowed to contribute to your HSA. You can still withdraw funds from the account, though. It’s yours indefinitely.
Sometimes, even if you know how much you can contribute to your HSA, you may accidentally go over the limit.
Imagine the following scenario.
You deposit the entire amount in a lump sum in January. Then, for some reason, you close down your account before the end of the year.
The IRS will see that as an excess contribution.
Because the IRS limit is annual. If you have the account for, say, nine months, the max HSA contribution will be smaller.
Alternatively, an error may occur if there are several contributors. If one of them deposits more than usual without notifying you, and your contribution is the usual amount, the total sum may drive you over the limit.
If you don’t notice and correct the mistake in time, you’ll be subject to a penalty.
What Is the Penalty for Excess HSA Contributions?
If you exceed the 2022 HSA contribution limits, you will have to pay a 6% excise tax on the excess amount.
What’s more, the overcontribution and any earnings you've generated from it will be subject to income tax.
The HSA penalty applies for each year the excess amount remains in your account.
So, what can you do to avoid that?
How to Correct Excess HSA Contributions?
If you’ve made an excess contribution to your HSA, don't panic!
The IRS gives you several options to correct the problem.
You can withdraw the excess amount and the earnings generated from it from your account.
The penalty won't apply if you take out the money before you file your tax return. You’ll still have to pay income tax on it, though.
And don’t forget to report that sum as a distribution on Form 1099-SA.
So, if you have excess funds for 2022, the deadline for withdrawing your HSA contributions will be April 15, 2023.
If you’ve already invested your HSA funds, you can leave them in your account. You’ll have to pay the 6% excise tax, but your money will keep growing tax-free in the meantime.
To avoid future penalties, subtract the excess amount from your contribution the following year.
An HSA excess contribution can be a costly mistake, but it's not the end of the world.
In this article, we outlined what an excess contribution is, the penalties for making one, and how to fix the issue.
So, if you find yourself in this situation, don't panic!
There are several ways to fix the problem.
When will the IRS withdraw from my account in 2022?
Taxes for 2022 are due by April 15, 2023. The IRS should withdraw your tax debt on the due date you selected (provided it’s before the deadline).
That said, it may take seven to 10 days for your payment to go through.
Besides, if you’ve selected a date closer to Tax Day, there may be some delays on the part of the IRS. But, as long as you’ve submitted all forms, selected a due date before the deadline, and have enough money in your account to cover your debt, you don’t have to worry.
Any delays will probably be on the part of the IRS, so it won’t penalize you. Still, you can contact it to ensure it has the right forms and bank account information.
Should I max out my HSA?
The answer to this question depends mainly on your financial situation and your health.
If you can afford it, max out your HSA every year.
As long as you’re within the limits, you can keep the money in your account indefinitely. That way, you’ll have a larger sum for qualified expenses when you need it.
Besides, unlike an FSA, there’s no time limit on when you’ll use the funds. Plus, the account will move with you even if you change your job.
So the benefits of depositing the maximum amount and investing part of it are numerous. That said, if you are struggling to make ends meet, this shouldn’t be a priority.
How much to contribute to my HSA?
When it comes to HSA contributions, there is no one-size-fits-all answer.
If you have high medical bills, you may want to contribute more to your HSA to offset these costs.
If you are healthy and wealthy, it’s still a good idea to contribute as much as you can. After all, your HSA is a safe investment in the future.
Just make sure not to exceed the IRS limits. You can check out the max HSA contribution for 2022 above.
5498-SA vs. 1099-SA—What is the difference?
The 5498-SA form is used to track HSA contributions made by an employer and the account holder. It is for informational purposes only. You don't need to submit it with your tax return documents.
The 1099-SA form, on the other hand, reports distributions made from your HSA. You need to report them to the IRS.
If you’re not sure how to fill in the 1099-SA or 5498-SA form, TurboTax or other tax preparation software can help you with that.
What happens if you contribute too much to 401k?
In 2022, the employer-sponsored 401(k) IRS contribution limit is $20,500.
If you go over the limit, you will be taxed twice on the excess amount—once as taxable income and once when you withdraw the money.
That said, you can correct the error if you catch it before Tax Day. Just notify your plan administrator or HR department.
What happens if I over-contribute to Roth IRA?
If you exceed the Roth IRA annual contribution limit, the IRS will charge you a 6% excise tax on the excess amount.
Just like the HSA excess contribution penalty, this applies for each year the money remains in your account.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.