by Roy Ramthun, “Mr. HSA”
One of the better things about a Health Savings Account (HSA) is you don’t have to figure out how much to contribute before the beginning of the calendar year, and you can change your mind during the year. You can even wait until the year is over to figure out how much to contribute.
In the latter case, it is in your interest to figure out how much you spent on health care expenses out-of-pocket during the prior calendar year and make sure that you contribute at least enough to your HSA to cover all of your out-of-pocket expenses from that year, if you are able and assuming that you haven’t already hit the limit for the prior year.
Remember that any unused funds in your HSA roll over from year to year, so you can continue to grow your account balance and use the funds for qualified medical expenses in the future.
To make sure you’re making the most of your HSA, it’s important to understand the contribution rules and guidelines. Whether you make the contributions or the money comes from your employer, it’s easy to go over the limit if you’re not careful.
To avoid excess contribution penalties, you can start by knowing the annual limits, which may change from year-to-year. For 2022, the limit was $3,650 for individuals and $7,300 for families. The limits rose to $3,850 for individuals and $7,750 for families for 2023. If you’re 55 or older, you can contribute an additional $1,000 as a catch-up contribution.
It’s important to note that these limits apply to both you and your employer’s contributions combined. So, if your employer contributes $1,000 to your HSA, you can only contribute enough to reach but not exceed the limit for that year.
This is all well and good for people who were eligible to contribute to their HSA for all of 2022. But what if you gained or lost your insurance coverage sometime during 2022? That could affect your HSA contribution limit for 2022 as well.
To avoid over-contributing, it’s important to keep track of your contributions throughout the year and communicate with your employer about any contributions they make on your behalf. If you do accidentally over-contribute, be sure to withdraw the excess amount as soon as possible to minimize the penalties.
For example, if you find that you contributed too much to your HSA for 2022, you still have some time to correct the error before any taxes or penalties are assessed. But the deadline for finalizing your HSA contributions for 2022 is a little less than one month away – April 18, 2023 (the income tax filing deadline for 2022).
Now is the perfect time to adjust your contributions up (if you can) or down (if you need to). After April 18, you won’t be able to add new money to your HSA for 2022, although you could still deposit money for 2023 if you are eligible to do so.
So, what happens if you accidentally over-contribute to your HSA, and you don’t withdraw the money by April 18? Unfortunately, it can result in some costly consequences.
First, you won’t get a tax deduction for the extra money you contributed. Second, you will have to pay income tax on the extra money. Finally, the excess contributions and any money you make on those extra contributions will be subject to a 6% excise tax.
You will need to withdraw the excess amount to avoid additional penalties. Again, you can avoid all these taxes and penalties if you withdraw the extra money before the tax filing deadline (i.e., April 18).
But don’t wait too long because you will need to contact your HSA administrator to withdraw the funds, which may involve some paperwork, and that might not happen immediately. You also need to make sure that your HSA administrator codes your withdrawal properly as a “withdrawal of excess contributions.”
If you just withdraw the extra money on your own without contacting your HSA administrator, they will still report the higher amount as your contributions for the tax year (which could trigger the penalties described earlier) and your withdrawal will become taxable as income plus a 20 percent penalty because the money wasn’t used for eligible health care expenses.
Make sure to check the two tax forms you receive – Form 5498-SA and Form 1099-SA — to make sure they match your records and they accurately reflect the actions you took. Also note that some of the actions taken may not be reflected until next year’s tax forms are sent out.
Luckily, if you have to withdraw excess contributions, you can turn right around and re-deposit them for the current tax year, if you are still eligible and haven’t already reached the contribution limit for the new year.
Making last minute changes is never fun, especially during “tax season” which is often stressful enough without them. Checking your account balance at least monthly should help you avoid these tricky situations in the future or give you more time to make adjustments along the way. Doing so will help you avoid taxes and penalties that negate the tax savings your HSA offers.