Another thing that I find confusing about this topic is the earnings on excess vs the excise tax / penalty. Are they actually two different things or are they two terms for the exact same thing?
Many people online seem to be mistaken when they say that, to paraphrase, "Earnings on excess is 6% of the excess amount." Even the HSA Bank representative to whom I spoke a little while ago mentioned the 6% as probably being used to calculate the earnings on excess amount.
However, per IRS Publication 969, the 6% number seems to be a penalty amount rather than the earnings on excess:
Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.
You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.
- You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
- You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
If I understand it correctly, 6% is the excise tax that is assessed each year that the excess remains in the account. If you want to avoid paying the excise tax, you have to withdraw the excess from the account before the income tax filing deadline.
And still, after sorting out the excise tax part of this equation, I have no idea how to calculate the earnings on excess!!
