Can We Add Ad Hoc More Money In/hsa

The federal government recognizes the strain of healthcare costs on Americans. To assistance ease this burden they created tools like Health Savings Accounts (HSAs), which allow healthcare consumers on loftier deductible health plans to set aside tax-free money to pay for medical expenses. But, equally with any tax-advantaged fiscal tool, there is a limit on how much account holders can contribute to their HSAs every year.

If y'all get over the annual contribution limit, the IRS can penalize you. Fortunately, in that location are two different ways to handle HSA excess contributions which tin aid you avoid paying a penalty.

What is an HSA Excess Contribution?

In 2022, the maximum contribution limits for HSAs were $iii,650 for individuals and $7,300 for families. Business relationship holders historic period 55 and above tin contribute an additional $ane,000 per yr as a "catch-up" contribution. These limits are based on inflation, and generally increase by moderate amounts every year.

To maximize your tax savings, you lot want to contribute up to the limit, but no more. Any amount over the limit is an HSA excess contribution.

What is the Penalty?

When you surpass the maximum contribution limits, the penalty you lot pay depends on the amount of the backlog contribution. Generally, the IRS punishment equals 6 percent of your backlog contributions. For example, if you have a $100 excess contribution, your fine would exist $6.00. If you contributed $1,000 over, it would be $60.

This penalisation is called an "excise tax," and applies to each tax year the excess contribution remains in your account. This ways you will incur the 6 percent excise revenue enhancement every year until yous remove it from the account or apply information technology to a hereafter year.

What Causes HSA Excess Contributions?

Nigh people contribute the same amount to their HSA on a weekly or monthly basis, or with each paycheck. Simply dissever the contribution limit by the number of contributions to figure out how much yous can put in. However, there are some circumstances that could put you over the limit:

Multiple contributors. Anyone can contribute to your HSA account, including a friend, a relative or your employer. Since the almanac limit applies to the full sum, you accept to likewise keep rails of contributions made by others or risk going over the limit. This is especially important if your employer makes contributions.

Incorrect calculations. Even with digital calculators, people tin make mistakes. If you miscalculate the size of your regular contributions, you can cease up going over the limit. Information technology pays to double-check your calculations each pay period to make sure you're still on target. You can e'er adjust your contributions at any fourth dimension for any reason throughout the year.

Irregular contributions. HSA contributions don't have to be on a regular basis. You can contribute any time you want, which some people adopt over having the contribution taken out of their paycheck. Others may vary the size of their contributions based on their cash catamenia at any given time. If y'all take one of these approaches, be sure to track your contributions closely.

Eligibility bug. Well-nigh people automatically summate their regular contributions based on the assumption of a year's eligibility. But if you're new to your visitor, yous may accept an introductory period before you become eligible to open an HSA account. Or, perhaps you contributed a large office of the maximum limit early on in the year (called front-loading) and then lost your HSA eligibility before the finish of the twelvemonth. Either situation makes you eligible for less than the full year, which can cause an HSA backlog contribution. Contribution limits tin also alter depending on an updated coverage status, due to union, divorce, new child, etc.

How to Correct HSA Excess Contributions

As mentioned, the IRS provides two means of correcting over-contributions. The first involves removing the excess from the account in the tax year that it occurred. This means yous have until your tax due date to brand the correction. You must also remove whatsoever earnings on your backlog contributions. The second method involves applying your HSA backlog contributions to the post-obit year.

Removing Excess Contributions

For most people, the removal method volition exist the preferred option. Information technology is relatively simple to do, and it takes care of the problem in one case and for all. It allows you to avoid paying a penalty every bit long as 3 criteria are met. Y'all must:

Withdraw the excess contributions no afterwards than the due date of your tax render for the year the contributions were fabricated. These withdrawals will be considered taxable income.
Take out any income earned on the withdrawn contributions during the year they were made. This will too exist taxable income.
Include the earnings in "Other Income" on the revenue enhancement render for the year you lot withdraw the contributions and earnings.

You can withdraw some or all of the excess contributions, but you volition have to pay the excise tax on any that you leave in the account.

When removing excess contributions from your account, you must inform your HSA trustee. If you don't, they won't know to do it. The excess funds that were withdrawn will be listed on Course 1099-SA as a distribution, in Box 1, for the revenue enhancement year in which the distribution was taken. Earnings on excess contributions withdrawn will be in Box 2 and included in Box 1. Form 5498-SA will written report the marketplace value of your HSA at the end of the calendar twelvemonth, the total contributions made within the calendar year, and the full contributions for the taxation year through the tax filing deadline, typically April fifteen. The account owner should retain Form 5498-SA for tape keeping purposes, but is not required to submit it to the IRS.

Time to come Twelvemonth Selection

The 2nd manner to avert the HSA excess contributions penalty is through the "future year method." It involves deducting some or all of your HSA excess contributions and applying them to a future twelvemonth. The IRS does not let you lot to apply more than than y'all have in excess. It'due south also important to keep in heed that moving the excess to the following twelvemonth counts towards the future year's annual contribution limit.

The future yr method is more complicated than the removal method, especially if you have earnings from any of the excess contributions. If you opt to curl forrard some, but not all, of the excess contributions, you will owe the vi percent tax on whatsoever that are not applied to a future yr. Both methods must be completed before your tax filing deadline or you volition be charged the excise tax. Consider filing an extension on your taxes to give you lot more time.

This article does not constitute tax or legal advice and should not be relied upon every bit instructions to complete your Country or Federal taxation return. If you lot take specific questions on how to report excess HSA contributions or distributions on your tax render, delight consult a qualified tax or legal counselor.

DataPath, Inc. is a leading provider of HSA management solutions for third party administrators.