Is the HSA 6 percent tax on excess contributions ongoing?

[azstephen98]

Under the HSA section of Income, Turbotax 2018 is asking me for Line 48 on Form 5329 from my 2017 return and then telling me I overcontributed to my HSA, presumably for 2018 (which I didn't), and I will be charged 6 percent unless I withdraw it. I thought I paid the 6 percent tax on the 2017 return last year for an over-contribution. Isn't that tax on Line 49 for the 2017 return?  Anyone know what's going on?

[Coleen3]

Did you take out the over-contribution? The 6% is for every year until you take it out.

[azstephen98]

No.  I didn't realize you had to take it out.  Will it go away next year, if I contribute under the maximum this year by that amount?

[Coleen3 · Accepted solution]

If you overcontribute to an HSA, you must remove the funds or be subject to a 6% excise tax for each year it remains in the account. You have two choices, remove the overage or let it ride and pay the penalty.

Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6% per year penalty. The mechanism that allows this is the deduction, since next year you won’t actually deposit the contribution (it is already there), you will just deduct it on Form 8889. As an example, if you have excess contributions in 2018, you can let them sit there until 2019 and then use them as your contribution for 2019. Rolling an excess contribution to a future year is allowed per the IRS Form 969:

Deducting an excess contribution in a later year.

You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the following two amounts.

• Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
• The total excess contributions in your HSA at the beginning of the year.

 https://www.irs.gov/publications/p969#

[dmertz]

Because it is now past the extended due date for your 2017 tax return, removing the excess from the HSA would require you to make a taxable distribution from the HSA (a distribution not used for medical expenses) which would also be subject to an additional 20% tax if you are under age 65.  This would mean double taxation of the money plus 20%.  It will be FAR better if you can apply the excess as part of your 2018 HSA contribution (if you have not already contributed the maximum permissible for 2018) or as a 2019 HSA contribution (if you have not already contributed the maximum permissible for 2019).  If you cannot correct it by applying it as a 2018 contribution you owe a 6% penalty on your 2018 tax return on this excess carried in from 2017.

[azstephen98]

Thank you to everyone for their answers!

[jo12]

My new employer automatically contributed an amount that puts me up at about $4,000 in 2019.  What happens if I just spend the excess $500 this year?  

Also, if that isn't a good idea, then what do I need to do to roll that over into next year without being penalized?  Since it just happened, would I only be taxed on this $500 at 6% annually, for (roughly) 3 months?  So it would only be a $7.50 penalty?  I'm certainly okay with that penalty to avoid any additional hassle. 

[dmertz]

"Spending" the excess $500 contribution for 2019 in 2019 on does not resolve the excess contribution.  You'll still have an excess contribution of $500 subject to a 6%, $30 excess contribution penalty each year until it is resolved.  Since the excess contribution was made through your employer, the excess for 2019 would also be subject to taxation in 2019 and again in the year the excess is corrected if done by a regular distribution after the due date of your 2019 tax return.  The penalty is not prorated.

Resolving the excess in some year after 2019 after the due date of your 2019 tax return would have to be done either by applying the $500 as part of your HSA contribution for that future year or, much less desirably, by making a taxable distribution that is also subject to a 20% early-distribution penalty if done before the age of 65.  You could easily end up paying $240 or more in additional taxes and penalties if you choose not to obtain a return of the $500 excess contribution before the due date of your 2019 tax return.

[jo12]

How do i apply it to 2020?

[dmertz]

jo12, I'm assuming that the $4,000 was all contributed for 2019.  You apply the excess $500 to 2020 by contributing $500 less to your HSA for 2020 than you would otherwise be eligible to contribute.  By doing so you'll still pay income taxes and a 6% penalty on the $500 on on your 2019 tax return, so, assuming, say, a 22% federal tax bracket, an 8% state tax bracket and a 6% penalty, it could still end up costing you something like $180 over correcting the excess by a return of excess contribution before the due date of your 2019 tax return.  It makes no sense to me that you would not correct the excess by a return of contribution before the due date of your 2019 tax return.

[jo12]

What do I have to do to execute a return of contribution?

[dmertz]

Contact the HSA administrator and inquire about their procedure for obtaining a return of excess contribution.