Does interest earned on an HSA count toward the annual contribution maximum? If actual contributions are the max $6,750 family limit, will added interest be penalized?

[dmertz · Accepted solution]

No.  Interest earned within the HSA is not a contribution.

[User0]

Does someone have a reference to the pertinent section of the IRS tax code?

[User0]

Thanks dmertz. Makes sense to me. But could you/would you please provide a reference to the pertinent section of the IRS tax code?

[dmertz]

HSAs are covered by section 223 of the US Code:  <a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/223">https://www.law.cornell.edu/uscode/text/26/223</a>

There simply isn't anything the US code that treats interest earned within an HSA as a contribution to the HSA.  Contributions are money that you deposit into the HSA.  Section 223(d)(1)(A)(i) describes contributions as being *cash* that you add to the HSA.

[User0]

Got it. Much appreciated. I was hoping the IRS would be a little more specific as my employer (or someone other than myself) may deposit money to my HSA; and those deposits do count against the maximum allowed contribution. Just wanted to be sure deposits from earnings are treated differently. Thanks again!

[dmertz]

The original question here, as I interpreted it, was about interest earned *within* the HSA, not new deposits of money from any source outside the HSA.  If you deposit cash in your HSA, regardless of the source of that case (other than a rollover of a distribution from an HSA), that deposit *is* a contribution and counts toward your contribution limit.  Contributions include deposits made from payroll deductions under a cafeteria plan provided by your employer or deposits made on your behalf by anyone.

[User0]

Hey dmertz, I think you are absolutely right. Good of you to explain it as you did. I was thinking all deposits are paid by someone. How does the IRS determine which "someone's" deposit counts towards my maximum and which don't? Earnings are deposited as interest or dividends by "someone" (usually an institution). And they are deposited/paid because of the assets that already exist in the HSA account (thus the term "within"?). So those deposits do not count towards my maximum. Other deposits (like my payroll deduction and my employer's) are not made because of assets that already exist in the account. So those deposits count towards my maximum. I hadn't thought of it that way. I just wish the IRS was explicit. Of course, they probably are to someone with more financial background. Cheers

[dmertz]

Interest earned within the HSA is not a "deposit" in the same way the interest earned in a savings account is not a deposit.