What is best way to fix that we kept contributing family amount to HSA after wife got a separate health plan?

[thecovert]

For 2023 my wife and I were on same family health plan, so we contributed the full family contribution amount to my HSA. However in 2024, halfway through the year she got a new job with health insurance. I didn't take this into account and kept contributing the full family amount. What is the best way to handle this year and last years returns?

[dmertz]

For the excess contributions made for 2025, you have until the due date of your 2025 tax return, including extensions, to request and obtain an explicit return of the excess contribution.

With regard to an excess contribution made for 2024, it's too late to request a return of excess contribution before the due date of your 2024 tax return.  If there was an excess contribution for 2024, your 2024 tax return should already have included Form 5329 to show this excess contribution and pay the penalty and on Schedule 1 include the excess as income if deducted from your wages or not deduct the excess if you personally deposited the contribution.  If your filed 2024 tax return does not reflect the excess contribution, you need to amend your 2024 tax return.

With regard to an 2024 excess carrying forward, this would again be subject to a 6% penalty on your 2025 tax return unless you obtain an ordinary distribution from the HSA and make it taxable (and potentially subject to a 20% early-distribution penalty) by not applying it to qualified medical expenses.  If it would be subject to the 20% early-distribution penalty and you will be eligible to apply the excess as part of your HSA contribution for 2026, it would be better to just pay the 6% penalty for 2025 and reduce your new 2026 HSA contributions so as to absorb the excess toward part of your 2026 contribution limit and deduct it on your 2026 Schedule 1.

[Opus 17]

More information is needed.  

Are you talking about 2025, 2024 or both?

Who owns the HSA?  An HSA is owned by one person only, there are no joint or family HSAs.  Are you the owner, or your wife, or do you each have accounts.  How much was contributed to each account?

Are you or your wife or both age 55 or older?

How were you covered in 2024 and 2025?  If you were covered by a family HDHP, then you can contribute up to the family limit even though your wife has other coverage (such as, you kept the family plan at your job so your wife would have secondary coverage).  However, if you downgraded your coverage to single, then your limit is reduced.

We can give more specific help if you can answer these questions. 

[thecovert]

Thanks for the responses!

Just to clarify some details: for the first half of 2024, my wife was on my health plan. For the second half of the year, in August, she got a new job so we removed her from my health plan since she got health insurance through her new company. Since I had my account setup to autopay, we contributed the full family amount to the HSA plan in my name for 2024. 

For 2025, we just kept contributing to my HSA plan.

She does not have her own HSA plan. We are both under 55. This is after tax dollars since neither of our employers offers company-sponsored HSA plans.

[Opus 17]

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@thecovert wrote:

Thanks for the responses!

Just to clarify some details: for the first half of 2024, my wife was on my health plan. For the second half of the year, in August, she got a new job so we removed her from my health plan since she got health insurance through her new company. Since I had my account setup to autopay, we contributed the full family amount to the HSA plan in my name for 2024. 

For 2025, we just kept contributing to my HSA plan.

She does not have her own HSA plan. We are both under 55. This is after tax dollars since neither of our employers offers company-sponsored HSA plans.

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When you removed your wife from your insurance, did you keep your insurance set up as a family plan (self + spouse or self + kids), or did you downgrade your plan to single coverage?

[Opus 17]

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@thecovert wrote:

Just to clarify some details: for the first half of 2024, my wife was on my health plan. For the second half of the year, in August, she got a new job so we removed her from my health plan since she got health insurance through her new company. Since I had my account setup to autopay, we contributed the full family amount to the HSA plan in my name for 2024. 

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Now that I have some time, let me answer more fully without waiting for your answer.  

If you did not downgrade your coverage to single, and kept a family plan, then you can use the family limit to contribute to your account even though your spouse also has other coverage.  What counts is your coverage.  Your contribution limit would be $8300 for 2024 and $8550 for 2025.

If you did downgrade your coverage to a single HDHP, your contribution limit is reduced.  Your contribution limit is determined month by month, based on your insurance coverage on the first day of each month.

For this answer I will assume that your wife started her new job in August 2024 and you downgraded your coverage effective September 1.  That means your limit for 2024 was 8/12ths of the family limit plus 4/12ths of the single limit.  

That's $8300 ÷ 12 = $691.66 per month x 8 month = $5533, plus $4150 ÷ 12 =$345.83 per month x 4 months = $1383, for a total 2024 limit of $6916.

If you contributed the full $8300, you have an excess contribution of $1384.  It is too late to use the special "removal of excess contribution" procedure.  You must file an amended tax return for 2024, declare the excess contribution, and pay a 6% penalty.  You also lose the tax deduction on the $1384, so you will pay some extra income tax besides the penalty.  When asked if you had qualifying insurance all year, answer NO, then check the boxes for family HDHP for the months you were covered by a family plan and check the box for single HDHP for the months you were covered by a single HDHP.  Turbotax will calculate the excess and assess the penalty.

Then for 2025, your contribution limit with single coverage is $4300.  Because you have an excess of $1384, what you want to do is reduce your 2025 contribution to $2916.  That way, you can "use up" the excess from 2024 by applying it to your 2025 limit.

So you need to look at your 2025 contributions and remove everything except $2916.  (If you contributed $8550, remove $5634.  Contact the HSA bank and ask for a special procedure to remove excess contributions, this is not a regular withdrawal.  You must also withdraw any interest earned on the excess contribution, the bank will do this for you.  You have until April 15, 2026 to remove the excess.  If you perform the removal before Dec 31, 2025, you should get a statement showing the earnings as taxable income that you will include on your tax return.  If you perform the removal after January 1, the attributed interest is still taxable on your 2025 return, because that's when the contributions were made.  You will manually add the interest income to your tax return. 

Then going forward, this will clear the excess, you won't pay a penalty, and you can contribute $4400 for 2026.