Putting too much money in your HSA can happen, but the IRS isn’t happy when it happens. In fact, you’ll be penalized for it unless you catch it and fix it. Here’s how to do that.
HSA Contributions Have Annual Limits
For 2020, you are only allowed to deposit $3,550 in your HSA for individual plans ($7,100 for family coverage). You can make an additional $1,000 contribution if you are 55 or older. You have until July 15, 2020 to fully fund your HSA. Deposits that exceed this limit can incur tax penalties and/or IRS fees. For 2021, individual contributions will increase by $50 to $3,600 for individuals and $7,200 for families.
Excess Contribution Removal
To avoid penalties, you still have a chance to remove the excess funds by your tax filing deadline. This year, the deadline is July 15; it was pushed back due to the Coronavirus). You have to complete the “Excess Contribution Removal Form” and mail it to your HSA administrator.
What Happens if the Excess Contribution Earned Money?
Even if you have corrected the excess contribution before the tax filing deadline without owing any tax penalties, if the excess contribution earned money while in the HSA, you will have to pay taxes on those earnings. Since earnings are usually very small, it isn’t a huge tax issue for most HSA owners. However, the IRS has its own method for calculating earnings so the result might be different than what you may expect.
The IRS imposes a six-percent tax penalty every year if the excess isn’t corrected by your tax-filing deadline. If you don’t want to pay that six percent every year, correct it before the tax deadline. Correct your excess contributions as soon as possible, and remember to account for deposits from employers or family members.
For example, if you are under age 55, you can only contribute a maximum of $3,550 to your HSA for 2020. If your employer places a $500 contribution in your HSA for 2020, you can only deposit up to $3,050 to not exceed the HSA annual limit. If the combined deposits go over the limit, you must remove the excess as well as the earnings on the excess before April 15, 2021 to avoid a penalty. Understand more about your HSA and how it works here.