Tax Deadline is April 15: Here’s What to Do if You Made HSA Excess Contributions

Health saving accounts (HSAs) are great for cutting medical costs by allowing pre-tax contributions up until April 15 each year. Rules and limitations apply to HSAs that could prove costly if not followed, one of the bigger stipulations being how much you are allowed to contribute each year.

Excess contributions to your HSAs can be rolled back, allowing you to avoid getting penalized. As we near the tax deadline, this information should prove useful if you put too much money into your health spending account and want to learn more about how the IRS defines excess.

What are HSA Excess Contributions?

The Internal Revenue Service (IRS) mandates how much individuals and families can contribute to their HSAs each year; anything more will put you into a penalty. The limits for your 2018 tax deductions are:

• • Individuals, $3,450;
  • Families, $6,900; and,
  • $1,000 extra if you are over 55 through Catch-Up Contribution program.

These totals are based on a full year of coverage, with your contribution limit being reduced proportionally for a partial year of coverage. Amounts will vary each year and are adjusted for inflation. Your age, type of coverage and how long you have been with your plan also impact your contribution limit.

Putting more than the allowed limit leads to an excess contribution tax penalty, causing you more paperwork and headaches than you already experience during tax season.

How Are Excess HSA Contributions Taxed?

If you forgot to pull back the excess amounts placed in your HSA, you will face a penalty. Per IRS guidelines, you must pay a 6% excise tax on excess contributions (See IRS Form 5329: Additional Taxes on Qualified Plans). Anyone who exceeds their limit must include this as taxable income when filing their taxes.

What to Do if You Made Excess HSA Contributions

You have two options if you exceed contribution limits in your HSA. One, you can pay the excess tax and leave things as they are, or two, pull out the surplus amount before the April 15 deadline.

Paying the additional tax may be suitable for those who may need those excess amounts to offset anticipated healthcare costs. However, if you want to avoid the unnecessary expenditure, mail your completed Excess Contribution Removal Form to your HSA plan administrator.

Any earnings your overage accrued will be taxed in accordance with IRS rules, although most people would barely notice the tax given the fact most HSAs earn very little unless you are contributing millions.

Can HSA Contributions Be Changed During the Year?

One benefit of HSAs is your ability to change contribution limits during the plan year. Provided your changes will not exceed the IRS mandated amounts, you can contact your plan administrator to make these changes (if self-contributing) or the human resources department of your employer.

For our current clients, your plan administrator can go over the benefits of adding or subtracting contribution amounts during your plan year.

How to Maximize HSA Contributions Moving Forward

Because HSAs offer three attractive tax benefits, namely pre-tax contributions, tax-free earnings and tax-free withdrawals, you are enthusiastic about maximizing your annual HSA contributions.

To get the most out of your current contributions without being taxed, try these tips:

• • Always contribute up to your maximum limit.
  • If you and your spouse are over 55, you may open a second HSA where you can make a $1,000 Catch-Up Contribution.
  • Take advantage of health discounts. Why wipe out your account to pay full price for health care when discounts on prescriptions, vision, and healthcare exist?
  • Always know what expenses are eligible. You can find that list by downloading an updated IRS Publication 502.

HSA contributions are great for those who anticipate needing health care throughout the year. Just remember to address any excess contributions before the April 15 deadline to avoid penalties.

Have other HSA contribution questions? Contact your CPA if filing your taxes soon. Remember, the deadline for filing taxes and pulling out excess HSA contributions is April 15.