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melarnett
New Member

Penalty for HSA overage if under next year?

My employer has been inconsistent with HSA deposits over the years. Some years my HSA has been over the limit and some years under. Does the 6% penalty apply every time you're over, or will I avoid the penalty by being under limit the next year basically making up for it?

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Accepted Solutions
dmertz
Level 15

Penalty for HSA overage if under next year?

Unused amounts of the contributions limit are not carried forward from year to year; each year's limit stands on its own.  This means that you cannot over-contribute in a following year to make up for under-contributing the previous year.  Any year that you over-contribute you have an excess contribution subject to a 6% penalty each year that the excess contribution remains in the account.

To eliminate the excess in a following year, you can treat the excess a part of your contribution for the following year so that the sum of the excess and your additional contributions for the following year remain under the limit for the following year.  Otherwise, you can obtain a return of excess contribution before the due date of the tax return for the year for which the excess contribution was made, or, if it's too late for that, obtain a taxable distribution from the HSA of the excess.  A taxable distribution is one that you do not apply to qualified medical expenses and is subject to a 20% early-distribution penalty unless made after you reach age 65.

Keep in mind, though, that you only have an excess contribution if the amount contributed *for* a particular year is over the limit.  Contributions for a particular year can be made up until the regular due date of the tax return for that year, so if your employer designates to the HSA custodian that the contributions made between January and early April of the following year are for the previous year, the contributions count toward your previous year's contribution limit.  Your employer should inform you that this has been done so that after entering into TurboTax the code W amount from box 12 of your W-2 you can indicate to TurboTax that part of the code W amount was for the previous year.  When the employer properly designates the year of the contribution, this will be reflected on the Form 5498-SA sent to you and the IRS and should agree with the way that you reported the contributions on your respective tax returns.

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1 Reply
dmertz
Level 15

Penalty for HSA overage if under next year?

Unused amounts of the contributions limit are not carried forward from year to year; each year's limit stands on its own.  This means that you cannot over-contribute in a following year to make up for under-contributing the previous year.  Any year that you over-contribute you have an excess contribution subject to a 6% penalty each year that the excess contribution remains in the account.

To eliminate the excess in a following year, you can treat the excess a part of your contribution for the following year so that the sum of the excess and your additional contributions for the following year remain under the limit for the following year.  Otherwise, you can obtain a return of excess contribution before the due date of the tax return for the year for which the excess contribution was made, or, if it's too late for that, obtain a taxable distribution from the HSA of the excess.  A taxable distribution is one that you do not apply to qualified medical expenses and is subject to a 20% early-distribution penalty unless made after you reach age 65.

Keep in mind, though, that you only have an excess contribution if the amount contributed *for* a particular year is over the limit.  Contributions for a particular year can be made up until the regular due date of the tax return for that year, so if your employer designates to the HSA custodian that the contributions made between January and early April of the following year are for the previous year, the contributions count toward your previous year's contribution limit.  Your employer should inform you that this has been done so that after entering into TurboTax the code W amount from box 12 of your W-2 you can indicate to TurboTax that part of the code W amount was for the previous year.  When the employer properly designates the year of the contribution, this will be reflected on the Form 5498-SA sent to you and the IRS and should agree with the way that you reported the contributions on your respective tax returns.

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