How Are Excess HSA Contributions Taxed? - Everything You Need to Know

Health Savings Accounts (HSAs) are a great way to save for medical expenses while also enjoying tax benefits. However, sometimes individuals may contribute more than the allowable limit to their HSA account. So, what happens if you make excess HSA contributions? Let's delve into how excess HSA contributions are taxed.

When individuals contribute more than the limit set by the IRS to their HSA, the excess contributions are subject to taxation. Here's what you need to know:

• Excess HSA contributions are considered as taxable income in the year they are made.
• If you realize you have made excess contributions, it's best to withdraw the extra amount before the tax filing deadline to avoid penalties.
• The withdrawn excess contributions are not subject to the 20% excise tax that applies to excess HSA contributions left in the account.
• Failure to correct excess contributions in time may lead to penalties and additional taxes.

It's important to stay informed about the rules and limits of HSA contributions to avoid any tax-related issues. Consult with a tax advisor or financial planner if you have questions about excess HSA contributions.

Understanding how excess contributions to your Health Savings Account (HSA) can affect your finances is crucial. If you're unaware, contributing over the IRS annual limits leads to a 6% excise tax on the excess amount, compounding any penalties if not addressed promptly.