So, you realized you contributed too much to your Health Savings Account. The good news is this can be remedied, but you will need to follow several steps and act quickly as there is a deadline before additional taxes may be due.
What is the annual HSA contribution limit?
The IRS sets the maximum allowable contribution to HSA plans annually. For 2022, this is set at $3,650 for self-only plans and $7,300 for families. For those 55 and older, an additional $1,000 catch-up contribution is available.
How did the over contribution occur?
There are a few common reasons excess HSA contributions occur. These include eligibility issues or changes to your eligibility status during the year, multiple contributors as a result of a job change, or both spouses being eligible to contribute to HSA plans. While both spouses may be independently eligible to contribute to their respective HSA plans, the IRS treats married couples as a single tax unit and the family limit applies across all contributors.
For example, say you and your spouse are both age 40. Your children are dependents on your family coverage plan and your spouse has self-only coverage. During the year, you contribute $5,000 and your employer contributes $1,000 to your HSA. Your spouse contributes $3,000 to their HSA. This results in total contributions of $9,000 between your two accounts. The result is an excess contribution of $1,700 and the need to make a corrective distribution.
This is because, while the family plan coverage contribution limit for 2022 is $7,300, you must consider any contributions made to your spouse’s self-only plan and reduce your contribution by that amount. Additionally, any employer contributions made to either plan must be factored in. Said another way, the combined contributions made to you and your spouse’s HSA plans may not exceed $7,300 for calendar year 2022.
An over contribution occurred – now what?
Your first step will be to determine how much you over contributed to your HSA. It is important to catch this quickly as the deadline to correct the issue is the tax filing deadline (including extensions) of the year following the over contribution. If this is not done, you will need to include the excess contribution as taxable income for that year and the excess contribution will be subject to an excise tax of 6% each year until corrected.
Over contributions are most often caught when preparing your tax return. If you contribute to your HSA plan via payroll deductions, the W2 you receive from your employer(s) will indicate how much you contributed to your HSA plan in Box 12, next to Code W. Review all W2s you personally receive and calculate the total amount contributed. If you contribute to your HSA plan directly, your contribution amount will be included on Form 5498-SA, which is issued by the plan custodian/trustee.
Next, you will need to contact your employer and/or plan administrator to notify them that an over contribution has occurred and inform them of the amount. The plan administrator will then distribute the excess contribution plus any earnings attributed to the excess contribution. This is often done by completing a HSA distribution request form, indicating ‘excess contribution’ as the reason for the distribution request.
A second option is to leave the excess contributions in the account and apply them to a future year. This option may seem simpler, but the downside to doing so is the 6% excise tax will apply and you must reduce your future year HSA contribution by the amount carried forward.
What does the over contribution mean for taxes?
If the excess contributions are distributed prior to the tax filing deadline, you will need to indicate that the excess contributions have been withdrawn when preparing your tax return, and no 6% excise tax will apply.
Your plan custodian/trustee will issue a 1099-SA which will need to be included on the tax return for the year in which the distribution occurred. This form will show the gross distribution and any earnings attributable to the excess contribution. You will receive this form in the January following the year of the corrective distribution. Note, any earnings attributable to the excess amount contributed will be taxable in the year distributed.
If the over contribution is not corrected prior to the tax filing deadline, the 6% excise tax will apply each year until corrected. Additionally, you will not be able to process the withdrawal as a return of excess contribution. You will either need to apply the excess contribution to a future tax year or complete a distribution equal to the excess amount contributed. With the latter, taxes and penalties will often apply, highlighting the importance of correcting the excess contribution prior to the tax filing deadline whenever possible.
Highlighting the importance of regular attention
If possible, it is best to catch this issue before it takes place. Periodically reviewing your year-to-date HSA contributions is not only a great way to make sure you are on track to maximize your contribution for the year, but it can also prevent over contributions from occurring in the first place. Contact us if you have any questions about over contributing to your HSA.