HSAs: Excess Contributions & Rollovers
Penalties on Excess Contributions
Current law mandates a penalty if you, or your employer, contribute in excess of your limit for the tax year. You will be penalized with a 6% excise tax on the entire amount that is over the limit.
The IRS will also treat amounts in excess as income. The tax responsibility will be yours, even if your employer made that excess contribution.
The 6% penalty tax will be waived if a distribution of the excess (including its earnings) is made to the account holder in a timely manner. The easiest way to do this is to write an HSA check to yourself, in the amount of the excess, before December 31 of the relevant tax year. The earnings on the excess will be taxable on distribution.
If you can prove the check to yourself is a reimbursement for out-of-pocket qualified medical expenses in the second year, you may not have to pay any tax on that amount. You’ll need receipts to back this up, naturally.
Avoid a Tax Penalty
It’s up to you to monitor your HSA contributions and make sure they don’t exceed your legal limit. Use the Contribution Calculator and make sure you know what your limit is. Then pay attention. A monthly number-check, at the same time you balance your checkbook, ought to be enough — it will take only an additional minute or two.
What About Rollovers from Other Accounts?
If you had an MSA (the ancestor of the HSA, which was available only to the self-employed), you can roll over accumulated funds from that account into your HSA, without paying a tax or penalty. Rollovers do not count towards your contribution limit, but you do not get an additional deduction for them in the current tax year.
An HSA may accept only one rollover per year.
Under current law, rollovers from an IRA, HRA, or other health reimbursement plan from an employer or flexible spending arrangement are not allowed without a penalty. In other words, you cannot empty your IRA and put the money directly into your HSA.