An HSA contribution over the limit costs the employee tax every year until it is fixed.
Excess contributions usually come from a job change, Medicare enrollment, or a family coverage change that nobody caught. The employee owes a 6 percent excise tax each year the excess stays in the account, and employer money over the limit counts as income. Fixing it is simple if it happens before the tax filing deadline.
Tax on the excess, and on the years it lingers.
The rules come from Section 223 and Section 4973, and the IRS explains them in Publication 969.
The Excise Tax
A 6 percent excise tax applies to excess contributions for each tax year the excess remains in the account. It is figured on Form 5329.
Employer Money Counts
Excess contributions made by the employer are included in the employee’s gross income. If the amount is not already in W-2 box 1, the employee reports it as other income. Excess contributions are not deductible.
Where It Comes From
Common causes are going on Medicare, moving from family to self-only coverage, double contributions after changing jobs, and contributions to an HSA while not eligible because of other coverage.
Withdraw it by the filing deadline.
The employee, not the employer, usually does the correcting.
Withdraw the Excess
An employee can avoid the excise tax on an excess by withdrawing it by the due date of the return for the year, including extensions.
Include the Earnings
The earnings on the excess have to come out too, and they are reported as other income for the year of the withdrawal.
Or Absorb It Later
An excess left in the account can be used up by contributing less in a later year, which allows a limited deduction. The excise tax still applies for the year the excess remained.
Two traps that catch employees who did nothing wrong.
Both come up often at age 65 and at year-end.
Medicare Enrollment
Beginning with the first month an employee is enrolled in Medicare, the HSA contribution limit is zero. Coverage that starts retroactively counts, so contributions made in the retroactive period become excess.
The Last-Month Rule
An employee who is eligible on December 1 can contribute the full-year limit, but must stay eligible through the end of the following year. Failing that, the extra amount becomes income plus an additional 10 percent tax.
What Employers Can Do
Remind employees age 64 and older about the Medicare rule, review payroll contributions against the limit at year-end, and report employer contributions accurately on the W-2 in box 12 with code W.
Medicare enrollment and HSA contributions → HSA eligibility and employer contributions →
What employers ask about excess HSA contributions.
Can the employer take the money back?
Generally the account belongs to the employee. The employee asks the HSA custodian to withdraw an excess. A tax adviser can say whether any narrow exception applies to a mistake.
Does the 6 percent tax repeat?
Yes, it applies for each year the excess stays in the account. Withdrawing it by the filing deadline avoids it for that year.
Does this affect the employer?
The employer reports contributions and may have comparability problems if contributions were uneven. Getting the payroll amounts right is the best protection.
Related guides.
Medicare Enrollment and HSAs
What changes at age 65.
HSA Comparability Rules
Treating employees equally.
HSA, FSA and Section 125 Limits
The annual dollar limits.
Tell us how your HSA contributions are set up.
We’ll tell you where contributions can drift past the limit, what to remind employees about, and how to set payroll controls. No cost, and no obligation.
Your HSA custodian
How contributions run through payroll
Employees age 64 or older
Any recent plan or coverage changes
Rough answers are fine. We build the numbers from there.
Laws and rules referenced
IRS Publication 969 — Health savings accounts: excess contributions, withdrawal, Medicare enrollment and the testing period.
26 U.S.C. § 223 — Health savings accounts: contribution limits and eligibility.
26 U.S.C. § 4973 — Excise tax on excess contributions to certain tax-favored accounts.
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