Health Savings Accounts (HSAs) offer a tax-advantaged way to save for medical expenses, making them an appealing option for many individuals. However, navigating contribution limits can lead to overfunding. Understanding how to identify and rectify excess contributions is crucial to avoid financial penalties.
This article explains how to recognize signs of HSA overfunding and provides practical steps to address issues from exceeding contribution limits.
HSA Contribution Thresholds
HSAs are subject to annual contribution limits set by the IRS, adjusted for inflation and healthcare cost changes. For 2025, individuals with self-only coverage can contribute up to $4,300, while family coverage allows up to $8,550. 1Internal Revenue Service. Internal Revenue Bulletin: 2024-22 (Rev. Proc. 2024-25)
These limits include contributions from employees, employers, and third parties. Individuals aged 55 and older can contribute an additional $1,000 as a catch-up provision.
Exceeding these limits triggers a 6% excise tax on excess contributions not withdrawn by the tax return due date (including extensions). To avoid overfunding, consider setting up automatic contributions aligned with these limits, particularly if your coverage or employment status changes during the year.
Recognizing Overfunding Indicators
Detecting overfunding requires reviewing account statements and contribution records. Discrepancies between planned and actual contributions may indicate excess funding. If using automatic transfers, ensure they are adjusted to reflect the current year’s limits.
Notifications from your HSA custodian can also flag overfunding. Custodians monitor account activity and may alert you if contributions exceed limits. Employer contributions can complicate matters, especially if you switch jobs mid-year, as contributions from multiple employers might inadvertently breach the limit.
Possible Penalties and Tax Implications
Overfunding an HSA can result in a 6% excise tax on the excess amount, applied annually until the surplus is corrected. Excess contributions aren’t deductible, and if you remove an excess after the tax return due date (including extensions), that distribution is taxable even if used for qualified medical expenses. 2Internal Revenue Service. Publication 969 (2024), Health Savings Accounts and Other Tax-Favored Health Plans
Corrective Steps for Overcontributions
To address an overfunded HSA, first calculate the exact excess amount by reviewing all contributions, including employer and third-party contributions. Withdraw the excess promptly to avoid ongoing penalties. Withdrawing by the tax return due date (including extensions) prevents the 6% excise tax from accruing.
Contact your HSA custodian for guidance on the withdrawal process to ensure compliance with IRS rules. When withdrawing excess funds, request the removal of any associated earnings, as those earnings are included in taxable income for the year you withdraw them. This approach helps maintain the tax-advantaged status of your HSA.
Reporting Requirements
Accurate reporting of HSA contributions is essential for IRS compliance. Each year, HSA holders receive Form 5498-SA from their custodian, which details total contributions. Cross-check these figures with your records and Form W-2 if employer contributions are involved to ensure accuracy. 3Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA (2025)
If you withdraw excess contributions, report the transaction on your tax return using Form 1099-SA, issued by your HSA custodian. This form documents distributions, including corrective withdrawals.
Addressing Employer Contributions
Employer contributions to an HSA can significantly enhance savings but require careful tracking to prevent overfunding. These contributions are reported on Form W-2 in Box 12 with code W, allowing you to calculate total contributions. 4Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2025)
If employer contributions cause overfunding, contact your HR department or benefits administrator. Employers may have protocols to adjust or retract excess amounts, helping to minimize penalties. Resolving these issues benefits both employees and employers by maintaining compliance and avoiding tax liabilities.