HSA Contributions But No HDHP

[mlm361]

I signed up for an HSA for 2025 with my employer but was unaware that I needed an HDHP to do so - I did not have an HDHP for all of 2025 while my HSA was active. My employer contributed $1,500 throughout 2025 (as shown on my W-2) but I contributed nothing. As I was going through TurboTax for my taxes this year, I got the error message saying I over-exceeded my contributions for 2025 and was going to be taxed 6%. But when I checked with my HSA provider, they said that I hadn't and there was no issue with my account.

I'm new to HSAs and when TurboTax gave me the option to withdrawal the amount, I accidentally answered "No", accepting the 6% tax. But then TurboTax sent me on a repetitive loop asking about my HDHP status. I filled out "None" on the form asking about my HDHP coverage month-by-month and that allowed me to proceed with my filing, but now I'm worried that I'll still be charged the 6% tax even though my HSA provider said I didn't exceed with the employer contributions. What do I do?

[MindyB]

If you did not have a  High Deductible Health Plan (HDHP), your HSA provider is not correct. The reason your HSA provider says "no issue" is that they only look at the annual contribution limit set by the IRS ($4,150 for individuals in 2025). Since your employer only put in $1,500, you are well under that "ceiling." However, your eligibility to contribute even $1 depends entirely on having a HDHP. 

Any amount put into an HSA while ineligible is considered an excess contribution, which is the $1,500 your employer contributed. The IRS charges a 6% excise tax on that excess every single year it remains in the account.

Your options are to check the box to withdraw the excess funds, and contact your HSA provider to do so, or pay the penalty.  The penalty will be applicable every year the money stays in the account.

For some more information, see Basics of Health Savings Accounts

[mlm361]

I see - thank you for the clarification. I unfortunately already filed my taxes having checked the box refusing to withdraw. However, I'm in contact with my HSA provider now to withdraw the contributions. 

From what I understand, if they withdraw the amount before April 15th then the 6% tax won't apply? And if the amount isn't withdrawn by the deadline and I have to pay the tax, will I have to complete additional documentation for my 2026 taxes?

[DaveF1006 · Accepted solution]

Yes, you are correct. if you withdraw the excess contributions and the earnings (interest) generated by that excess before the tax filing deadline (April 15, 2026), the 6% excise tax does not apply.

You’ve already filed, so here’s what to expect with your paperwork.

1. For 2025 (Now): If you successfully withdraw the money by April 15th, I suggest that you amend your 2025 return (Form 1040-X). Why? Because your current return says you didn't withdraw the money. By amending, you report the earnings as "Other Income" and ensure the IRS knows the excess is gone so they don't send you a bill for the 6% later.

For 2026 (Next Year): Your HSA provider will issue a Form 1099-SA in early 2027.

1. This form will show the distribution you’re making right now. 
2. It will likely have a Distribution Code 2, which tells the IRS: "This was a withdrawal of excess contributions."
3. This will be reported on Form 8889 in your return. 

Here are the steps to amend in Turbo Tax:

Here are the exact steps to navigate TurboTax Online for this specific HSA correction.  If you are using the TurboTax Desktop version, I have outlined the procedure at the bottom of this post.

1. Start the Amendment

1. Sign In: Open your 2025 return in TurboTax. 
2. Locate Amend: On the "Tax Home" screen, scroll down to "Your tax returns & documents" and select "Amend (change) return."
3. Select Year: Choose "Amend using TurboTax Online" for the 2025 tax year.
4. Wait for the $0: Your refund/balance due tracker will reset to $0. This is normal; it only tracks the changes from this point forward.

2. Correct the HSA Contribution (Form 8889)

TurboTax needs to know you are withdrawing the money to stop the penalty.

1. Go to Federal > Deductions & Credits. 
2. Find Medical and select HSA, MSA Contributions.
3. Step through the interview. When it asks about your 2025 contributions, ensure the amounts match what you actually contributed (the over-amount).
4. The Key Screen: TurboTax will eventually say, "If you don't withdraw [Amount] by April 15, 2026, you’ll pay a tax penalty."
5. The Correct Answer: It will ask, "Did you/Will you withdraw the excess contribution by April 15, 2026?" Select YES.Note: This is the magic button. Selecting "Yes" removes the 6% penalty from Form 5329 and updates Form 8889.

3. Report the "Earnings" (Interest)

If your HSA provider told you that you earned interest (e.g., $5.00) on that excess money, you must report it as income.

1. Go to Federal > Wages & Income.
2. Scroll to Less Common Income > Miscellaneous Income.
3. Select Other reportable income.
4. Description: "HSA Excess Contribution Earnings"
5. Amount: Enter the exact earnings amount provided by your bank.

4. Provide the Explanation

TurboTax will ask you why you are amending (this goes on Form 1040-X).

Enter: "Withdrew excess HSA contributions of $[Amount] plus earnings of $[Amount] before the April 15 deadline to avoid the 6% excise tax. Updated Form 8889 and removed Form 5329 penalty."

Dont' start amending until your return is accepted by the IRS. Also if you wish to amend, and you are using TurboTax software, here is how to access the amend portion of the software.

1. In the top menu, select Federal Taxes (or Personal if using Home & Business).
2. Select Other Tax Situations.
3. Scroll down to Other Tax Forms and click Start or Update next to Amend a Return.
4. Follow the on-screen instructions. TurboTax will ask, "Did you already file your return?" Select Yes.

Once you begin to amend, go through the same steps I outlined above.

[Mike9241]

The $ 1,500 will become taxable income because it was an employer contribution, which would have been tax-free had you had an HDHP, but without one, it's taxable and will show up on line 8f of Schedule 1.