Usually, excess HSA contributions are withdrawn before the deadline of the tax return.
However, if you made an excess HSA contribution in a prior year and didn't withdraw it before the deadline, you are no longer able to withdraw the excess contribution. The excess contribution counts as a contribution in future years, which can continue to create penalties in future years as well if it continues to exceed your allowable contribution amount.
Here are a few options for getting rid of an excess contribution that's continuing to accrue penalties year after year:
- You can simply take a nonqualified withdrawal of the excess amount. This distribution will be taxable and subject to a 20% penalty.
- You can take qualified withdrawals (for medical expenses) that take your HSA balance to $0. The penalty is assessed on the lower of your excess contribution or your HSA balance at the end of the tax year. By drawing the account down to $0, you will have no more penalty assessed.
- You can change your health insurance plan back to an HDHP that is HSA-eligible again. This will allow you to use up the excess contribution.
[Edited on 3/8/2022 | 8:15PM,20 PST]
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