Tag Archives: Employer Contributions

How to Remove Excess Contributions to an HSA

Overview

The IRS defines a maximum amount that you can contribute to your Health Savings Account each year, appropriately called the HSA Contribution Limit. This amount varies each year (adjusted for inflation) and is impacted by your age, type of insurance, and length of coverage during the year (see: 2017 HSA Contribution Limits). You cannot legally contribute more than the HSA Contribution Limit, but what if you accidentally do? These are called Excess Contributions and they can lead to penalties, paperwork, and headache. We will show you how to remove or apply personal and employer excess contributions and avoid penalty.

What are HSA Excess Contributions?

By definition, an excess contribution results when you over contribute to your HSA for the year. But what is over contribute? The first step is defining your contribution limit for the year. The IRS defines HSA contribution limits by type of insurance coverage: Self-only or Family. For 2017, these amounts are $3,400 and $6,750, respectively. You can also contribute $1,000 more if you are over 55 per the Catch-Up Contribution. These totals assume full year coverage, and your contribution limit is reduced proportionately for partial year coverage.

Once you know how much you can legally contribute, the second step is determining the amount you actually contributed to your HSA. While this sounds simple, there are multiple sources to consider here. When calculating excess contributions, the IRS defines your HSA contributions as:

Amounts contributed for the year include contributions by you, your employer, and any other person. They also include any qualified HSA funding distribution made to your HSA. Any excess contribution remaining at the end of a tax year is subject to the excise tax.

If your HSA contributions exceed your contribution limit, you have an excess contribution. Knowing this value will be key for rectifying the discrepancy.

Why This Happens

There are a few common scenarios that result in Excess Contributions, given the various factors that determine your contribution limit on Form 8889. Here are the most common situations that can lead you to over contributing:

  1. Too many contributions – This is just a simple technical issue of too much money going into your account, likely due to a math error or unexpected contribution. For example, if your contribution limit was $3,400, and each month you contributed $300 to your HSA, you would contribute $3,600 for the year. This leaves $200 in excess that needs to be removed.
  2. Employer contributions – A similar scenario occurs with employer contributions to an HSA. Granted you are quite lucky but perhaps it is unclear how much they will contribute. Or your employer contributes a variable amount based on some factor. Either way, employer contributions count toward your maximum HSA contribution so these must be included in a calculation of Excess Contributions.
  3. Miscalculated your contribution limit – This is the most subtle (and painful) way to over contribute. In this example, you assumed you were allowed to contribute $3,400 to your HSA this year, which you did. You find out that you were only an eligible individual for 10 months, so your contribution limit is really 10/12ths of your max contribution limit. Or, you front loaded your HSA contributions early in the year and then lost HSA eligible insurance. In either case, there is too much in your HSA for the year and you need to remove it.

Excise Tax

The government imposes penalties if you over contribute to your HSA. Per the IRS guidelines:

Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.

So a few important points here. The penalty rate is 6% on the amount of calculated excess contributions. Not sure how 6% was determined but it is very close to an expected rate of return in the market. Either way, the kicker is you must pay this penalty each year the excess contributions remain in your account. So this is the gift that keeps on giving and you must rectify anything over contributed to avoid tax and penalty.

How to Correct Excess Contributions

Luckily, the IRS is lenient on fixing excess HSA contributions. They provide two options of correction: removal or future application. The first removes the HSA contributions in the tax year and avoids a penalty – no harm, no foul. The second “let’s them ride” in the account where they can be applied to a future year’s contribution, but incurs a penalty each year. We will walk through both scenarios below.

Option 1: Remove in the Current Year

This is probably the preferred option. If you catch your mistake before you file your taxes, you can avoid all penalties by removing the excess contributions (and any of their earnings) from your HSA and treating them as normal taxable income. Per the IRS:

You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.
1) You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
2) You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

The IRS spells it out pretty clearly there, but the removal of the excess contributions and the earnings on those excess contributions must occur before your tax due date. The removed is taxable since HSA tax benefits do not apply. Earnings on excess contributions occur if your HSA is invested or earning interest. Removing those seems fair, since those investments shouldn’t have been made in the first place. The IRS solves all of this by saying just remove them, don’t deduct (i.e. pay tax on ) the excess amounts, and declare any earnings as other income. Could be worse.

Since dollars in your HSA are fungible, it is very difficult to determine exactly which investment they were put into and from where they should be removed. This makes it difficult to determine the exact earnings for the dollars specifically declared excess contributions. Thus, the IRS permits an “average” determination of the gains of the HSA during that time, and the pro rata share of those average gains that can be attributed to excess contributions.

Forms for Removing Excess Contributions

You will need to specifically inform your HSA trustee of a correction and that you wish to remove an excess contribution to your HSA. This triggers them to classify the transaction separately, as opposed to a normal withdrawal for qualified medical expenses. They will proceed to file an additional Form 1099-SA showing the excess contribution being distributed from the HSA with a distribution code of “2”. Be sure to remove and identify any earnings on the excess contribution as well. This form will be provided to you to indicate 1) a distribution from the account that 2) was for excess contributions. The form will look something like this:

hsa-form-1099-sa-completed-excess-contribution-for-2016

The other thing that should occur is your HSA trustee will correct your Form 5498-SA which shows HSA contributions for the year. While they initially would have included your excess contribution (they didn’t know it was excess), once you alert them and withdraw it, they will remove it from Form 5498-SA. That means that your Form 5498-SA will be accurate for the year and should not include any excess contributions.

Option 2: Apply to a Future Year

Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6% per year penalty. The mechanism that allows this is the deduction, since next year you won’t actually deposit the contribution (it is already there), you will just deduct it on Form 8889. As an example, if you have excess contributions in 2016, you can let them sit there until 2017 and then use them as your contribution for 2017. Rolling an excess contribution to a future year is allowed per the IRS Form 969:

You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the following two amounts:
1) Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.
2) The total excess contributions in your HSA at the beginning of the year.

So the IRS allows you to roll forward excess contributions and not remove them, but apply them to future periods. You can’t apply more than you have in excess and you can’t apply more than that year’s HSA contribution limit. The downside to this plan is that you must pay the 6% excise tax on the excess contribution for each year it remains in your account as excess (i.e. not applied).

Removal Deadline

To avoid penalty, you must remove excess HSA contributions in the year that they occur. This must be done before your tax filing deadline. Note that this includes extensions, so filing an extension on your taxes increases the amount of time you have to remove the excess. If you elect to apply the over contribution to a subsequent tax year’s HSA, the deadline is the same. While you will eat the 6% penalty the first year, you have until you file your taxes to declare the excess a contribution and deduct it from your taxes.

Excess Employer Contributions to an HSA

While employer contributions are normally a great thing, they can cause some pain should they become excessive (hah!). Since employer contributions to your Health Savings Account count toward your yearly contribution limit, you must factor them into your limit. Three situations can arise from employer contributions:

  1. Employer and Employee over contribute – If both you and your employer contribute to your HSA, the onus is on you to not over contribute. Thus any over contribution is from the employee and the employer cannot claw back their contribution (see next section).
  2. Employer alone over contributes – In this case, the employer can file to have the contributions (and earnings) returned by December 31st. If they fail to do this, the excess amounts will be filed as income on the W-2 and the excess will need to be removed by the employee.
  3. Employer contributes to ineligible individual – The unlikely event that an employee is not eligible but receives HSA contributions functions much like the above example. If it is caught by December 31st, it can be recovered, but after that it becomes wages and the monies do not function as an HSA (just a regular account).

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How Do Employer Contributions Affect My HSA Limit?

A common question readers have is how employer contributions to a Health Savings Account work and how they affect their HSA contribution limit for a year. HSA’s are very flexible in that basically anyone can contribute to your HSA (see: Who Can Contribute to a Health Savings Account), including yourself, your family, others on your behalf, and your employer. However, some differences exists for those contributions made by your employer in terms of taxation, reporting, and contribution limit.

Do employer contributions to HSA count towards maximum?

The short answer is yes, employer contributions count towards your HSA maximum contribution limit for the year. Looking at HSA tax Form 8889 shows you how this occurs:

form_8889_line_9_employer_contributions


The above Form 8889 was prepared quickly using EasyForm8889.com.

HSA Employer Contributions are entered on Line 9 of IRS Form 8889, so whatever your employer contributes to your HSA goes there. Line 12 is where the employer contribution actually affects your HSA contribution limit, since it subtracts the employer contribution from Line 8 which is a “running total” of your contribution limit up until that point. The result is compared to Line 2, your actual HSA contribution, and the smaller is reported on Line 13 which carries over as your deduction to Form 1040. So the net effect of this comparison is that employer contributions reduce your contribution limit from Line 3.

Are employer HSA contributions taxable?

For the account holder, if made directly to your HSA, Employer Contributions are not taxable to you. As you can see above, the amount flows into Form 8889 on Line 9 and then onto Form 1040 Line 25, which is in fact a deduction. So the employer contributions are reducing the possible tax deduction, but of course, this is free money. You can’t receive an employer contribution and then take a deduction for it. How the employer contributes matters, though. If your employer were to simply write a check and say “here is your HSA contribution”, this would be treated as a “bonus” or regular income and taxed. It would be wise to coordinate with the employer as it would be to both of your benefits.

For employers managing a corporation, HSA contributions are a deductible expense so are treated preferentially and reduce your tax liability. For S-Corps and Partnerships, the contribution is treated as a distribution which is claimed by the recipient, but not the business.


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HSA Employer contributions found on W2

HSA contributions from your employer are shown on Box 12 of your W2 with code “W”. They will take one of the available Box 12 spaces, mark a “W” to indicate HSA, and enter the amount in the box to the right. If only your employer contributed to your HSA, this is easy and you are done.

w2_hsa_employer_contributions_box_12

However, one confusing aspect of this is that your personal contributions made to your HSA may show here if they were withheld from your paycheck. These are called “cafeteria plan” contributions and should in fact be put on Form 8889 on Line 9, not Line 2. This is a common mistake, but looking at Form 8889 Line 2 you can see that these cafeteria plan contributions are excluded and instead go on Line 9 (employer contributions):

form_8889_line_2_cafeteria_plan_contributions


The above Form 8889 was prepared quickly using EasyForm8889.com.

HSA contributions: employee vs. employer

The main difference between employee and employer contributions is who is paying for them. Of course, free money is free money, so if you can get employer contributions, do it! Another difference is how they get into your Health Savings Account: employer contributions should be directly deposited, whereas you will contribute your HSA contributions manually. Note the exception here is if you make cafeteria plan contributions, which are withheld from your paycheck (see above). Additionally, employer contributions go on Line 9 of IRS tax form 8889, whereas personal contributions go on Line 2.

On the other hand, there are many similarities between employee and employer contributions. Both types of contribution count toward your HSA maximum contribution limit. This occurs in different sections of Form 8889, but eventually they make there way to Line 13 which is your HSA deduction that flows to Form 1040. Both types of contribution go into your Health Savings Account and are yours forever, and you may spend them on whatever qualified medical expense you want. Your employer will never see how they were spent and cannot claw back those contributions.

HSA employer contribution limits for 2016

The maximum amount your employer can contribute to your HSA is calculated in the same manner as your personal contribution limit. For 2016, the HSA maximum contribution limit is $3,350 / $6,750 for single / family coverage. In addition there is a $1,000 catch up limit applied to those over 55 years old. So between your personal and employer contributions, you cannot exceed this limit. If you are on single coverage and your employer contributes $3,350 to your HSA, you can make $0 in personal contributions for the year without over contributing. However, if you are 56 years old with single coverage and your employer contributes $3,350, you could make a personal $1,000 contribution for a total of $4,350 as part of the 55+ additional catch up contribution.

Who can Contribute to a Health Savings Account?

This is a fairly frequent question from readers who ask, “Who can contribute to an HSA?” or “Who can contribute to my HSA?” These questions take a couple of forms and includes some assumptions, so we will first explain the basics and move to the specifics.

You must have an HSA for anyone to contribute to it

First things first, you must at least open and have a Health Savings Account to be able to contribute to it. Contributing isn’t just some earmark/declaration you make when you file taxes; instead, HSA contributions go to an actual bank account, just like what you might use for checking and savings. This bank account is yours forever and is designated for qualified medical expenses. At retirement age, you can use the account for whatever you like.

You must have HSA eligible insurance in the year to have HSA contributions

A second requirement of contributing to your HSA is that you have HSA eligible health insurance during the year you wish to contribute. This also applies to employer or other contributions (see below) you may receive. You must have a high deductible health plan (HDHP) that meets that year’s HSA requirements to make or receive any contributions. Unfortunately, this prevents you from contributing to an old Health Savings Account if you no longer have qualifying insurance. You have to have coverage at some point during the tax year to make contributions. The key phrase “during the tax year” is important there. This does not mean that you need to currently have coverage to contribute to the HSA. If you had HSA eligible coverage at any point during the year, you can at least make a partial contribution to your HSA.

For example, assume that you had HSA eligible self-only insurance from January – July, and then ended coverage. You made no contributions during that time. You might think that since you made no contributions, you missed out and can contribute nothing to your HSA for the year. This is is not the case. In fact, you are allowed to contribute on a monthly pro-rata basis for the year, in this case 6/12 months or 1/2 of your contribution limit. Health Savings Account contributions and limits are viewed on yearly timeline, and you can even contribute to your HSA in the following year, using what is called a Prior Year Contribution.


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Now onto who can actually make contributions to your Health Savings Account.

1) The account holder (you) can contribute to your HSA

Of course, you can make contributions to your own HSA. This is the most common form of contribution and can take two forms, either a cafeteria plan contribution (pre tax), or a manual contribution (post tax) . While the method and timing differs, both result in the same tax benefits once you file taxes. Cafeteria plan contributions are arranged by your employer and remove your HSA contributions from your paycheck on a pre tax basis. These amounts are deposited into your HSA and you enjoy immediate tax savings. Alternatively, you can make manual contributions to your HSA. This is probably the most common method and involves getting paid, paying taxes, and then depositing or transferring post tax money to your Health Savings Account. At tax time, these deposits are retroactively removed from your taxable income, so you reap the tax deduction benefit at tax time.

Form 8889 line 2 contributions

The method in which you make contributions to your HSA also determines how you file HSA tax Form 8889. The above image shows that manual contributions (post tax) made on line 2, whereas cafeteria contributions (pre tax) are made on line 9 (see next image).

2) Your employer can contribute to your HSA

You can also receive employer contributions to your Health Savings Account. This is a great perk because your employer is in effect giving you free money to use for your healthcare. The schedule and amounts at which they contribute will vary based on your employer. Some employers will provide a small contribution to your HSA’s, whereas others may be very generous and fund your entire HSA. Either way, employer contributions are factored into Form 8889 on Line 9.

Form 8889 line 9 employer contributions

Please note, that per the above discussion, that you must have HSA eligible insurance to receive employer contributions to your HSA. So if your employer offers a great benefit like a HSA contribution, but you choose a non-HSA eligible insurance, you cannot take part in that benefit.

3) Other people can contribute to your HSA

Another benefit of Health Savings Accounts is that anyone can contribute to your HSA. This means that you can contribute to anyone’s HSA, and conversely that your parent, grandparent, rich aunt/uncle, or friend can contribute to your HSA. The best part is that the recipient of the contribution receives the tax deduction for the amount contributed, so that is a second order effect, besides having funds in the HSA.

Form 8889 line 2 other contributions

Note that you must declare contributions from others on your Form 8889 on line 2.

Note: all contributions count toward your contribution limit

Remember that all contributions made to your Health Savings Account count toward your yearly contribution limit. This means that you must take into account employer contributions (and contributions from ‘others’) when you determine how much can be contributed to your HSA for the year.

For example, say you have self-only HSA eligible insurance for all of 2016, affording you a $3,350 maximum contribution limit. If your employer generously contributes $3,000 to your HSA, and your parents chip in an additional $300, you would only be allowed to contribute $50 yourself without incurring excess contributions.