What to Do If You Overcontribute to HSA: Helpful Tips and Guidance

Health Savings Accounts (HSAs) are a great way to save for medical expenses while enjoying tax benefits. However, if you overcontribute to your HSA, you may face some penalties. It's essential to know what steps to take if you find yourself in this situation.

Here's what you need to do if you overcontribute to your HSA:

1. Understand the Contribution Limit: Each year, the IRS sets a limit on how much you can contribute to your HSA. For 2021, the limit for individuals is $3,600, and for families, it's $7,200.
2. Identify the Overcontribution: Check your HSA contributions to see if you have exceeded the annual limit. If you have, you need to take action to correct the error.
3. Correcting the Overcontribution: If you realize you have overcontributed to your HSA, you should withdraw the excess amount before the tax filing deadline for that year.
4. Pay Taxes on the Excess: If you don't correct the overcontribution in time, you will have to pay taxes on the excess amount, along with a 6% excise tax penalty.
5. File IRS Form 5329: When you file your taxes, you will need to complete IRS Form 5329 to report the excess contributions and calculate the penalty.
6. Prevent Future Overcontributions: To avoid overcontributing in the future, keep track of your HSA contributions throughout the year and adjust as needed to stay within the annual limits.

Remember, it's essential to be aware of the contribution limits and take prompt action if you find yourself in a situation where you have overcontributed to your HSA. By following these steps, you can rectify the error and minimize any penalties.

Health Savings Accounts (HSAs) provide an excellent opportunity for individuals and families to save for healthcare costs while enjoying favorable tax treatment. But what if you accidentally contribute more than the allowed limit? It's important to know how to address overcontributions to avoid unnecessary penalties.