Joined Nov 2005
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Forum Thread
Overcontributing to an HSA
September 4, 2021 at
08:07 AM
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It seems I accidentally overcontributed to our HSA this year, already. Our benefits are through my wife and so is the HSA, and her employer contributes a lump sum every year. It appears they upped their contribution (7/1, by $2500 over last year) and this past week's withdrawal from my wife's check put us $125 over the limit of $7200 for 2021. I will have her refile to remove the contributions.
I realize this is a penalty, but the verbage is kind of odd so I'm not sure how to interpret it. Here's what one site says:
Currently, the IRS penalty equals 6 percent of your excess contributions. For example, if you have a $100 excess contribution, your fine would be $6.00; if you contributed $1,000 over, it would be $60.
This penalty is called an "excise tax," and applies to each tax year the excess contribution remains in your account. This means you will incur the 6 percent excise tax every year until you remove it from the account or apply it to a future year.
OK, so 6% it is. But, what about the second paragraph? Does that mean I have to withdraw the overage? Does it mean that next year we just contribute $125 less and call it even? If I withdraw it, must it just be a plain cash out (pay a penalty) or can it be for eligible expenses? (and I'll note, I could cash the entire account out now with eligible expenses I just choose not to)
For what it's worth, we treat the HSA like an IRA, so in 6 years we have yet to make a withdrawal.
I realize this is a penalty, but the verbage is kind of odd so I'm not sure how to interpret it. Here's what one site says:
Currently, the IRS penalty equals 6 percent of your excess contributions. For example, if you have a $100 excess contribution, your fine would be $6.00; if you contributed $1,000 over, it would be $60.
This penalty is called an "excise tax," and applies to each tax year the excess contribution remains in your account. This means you will incur the 6 percent excise tax every year until you remove it from the account or apply it to a future year.
OK, so 6% it is. But, what about the second paragraph? Does that mean I have to withdraw the overage? Does it mean that next year we just contribute $125 less and call it even? If I withdraw it, must it just be a plain cash out (pay a penalty) or can it be for eligible expenses? (and I'll note, I could cash the entire account out now with eligible expenses I just choose not to)
For what it's worth, we treat the HSA like an IRA, so in 6 years we have yet to make a withdrawal.
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Buy sunglasses with the funds is what I meant.
For every $100 in excess contribution you will incur a $6 penalty. The $6 penalty will be charged every year the excess $100 remains in your HSA account.
While I am not sure when the IRS considers a second year to have elapsed, unless you move that excess contribution to count against NEXT years limit, the IRS will continue to charge you the 6% excise tax every year.
For every $100 in excess contribution you will incur a $6 penalty. The $6 penalty will be charged every year the excess $100 remains in your HSA account.
While I am not sure when the IRS considers a second year to have elapsed, unless you move that excess contribution to count against NEXT years limit, the IRS will continue to charge you the 6% excise tax every year.
Looking into it more, it seems that some account providers offer a mechanism for withdrawing the excess contribution, but then I guess the employer needs to be notified such that the W2 can be corrected to reflect the actual withholding (they wouldn't know that the contribution was corrected otherwise). This makes sense in the grand scheme of things since HSA contributions through the employer are pretax. If the W2 is corrected (and the money withdrawn) then come tax time that money will now be taxable by default, thus fixing the situation.
What doesn't make sense is how HSA and 401k, etc both have annual limits, but with a 401k if you try to overcontribute, your paycheck contributions will simply stop whereas with the HSA, they'll just keep dumping them in.
Looking into it more, it seems that some account providers offer a mechanism for withdrawing the excess contribution, but then I guess the employer needs to be notified such that the W2 can be corrected to reflect the actual withholding (they wouldn't know that the contribution was corrected otherwise). This makes sense in the grand scheme of things since HSA contributions through the employer are pretax. If the W2 is corrected (and the money withdrawn) then come tax time that money will now be taxable by default, thus fixing the situation.
What doesn't make sense is how HSA and 401k, etc both have annual limits, but with a 401k if you try to overcontribute, your paycheck contributions will simply stop whereas with the HSA, they'll just keep dumping them in.
Call customer service for whoever manages your HSA.