Exceeding HSA Contribution Limits

Are there consequences for making a contribution in excess of the allowed limit?

Contributions made by an employer to an employee's HSA are included in the gross income of the employee to the extent that they exceed the individual's maximum contribution amount or are made on behalf of an employee who is not an eligible individual. All such amounts are considered "excess contributions."

An excise tax of 6% for each taxable year is imposed on the HSA holder for all excess contributions. This excise tax is avoided if the excess contributions for a taxable year and the net income attributable to such excess contributions are distributed to the account holder before the last day prescribed by law (including extensions) for filing the account holder's federal income tax return for the taxable year (for calendar-year taxpayers, generally, the following April 15).

What can a participant do to avoid the Excise Tax?

If excess contributions for a taxable year are distributed to the account holder before the account holder's federal income tax return filing deadline (including extensions) for that taxable year, then the 6% excise tax is not imposed on the excess contributions.

What should an employee do once they realize they have made excess contributions?

The employee should notify the HSA trustee/custodian of the excess contribution and request a distribution of the excess amount and attributable earnings. The trustee/custodian will report the distribution on Form 1099-SA, coded as an excess contribution. In addition, if the employer does not include the distribution on the employee’s W-2, then the employee should report this amount as “other income” on their federal tax return. 

What should an employer do once they realize an employee has made excess contributions?

Employer contributions to an HSA are not subject to withholding from wages for income tax or subject to FICA, or FUTA if, at the time of the contribution, it is reasonable to believe that the employee will be able to exclude the payment from the employee's income under Code §106(d). Thus, if an employer makes contributions to an employee's HSA in the mistaken but reasonable belief that the employee is an eligible individual, the employer should not have to take corrective action later with respect to these payroll taxes if the employer discovers that the individual was not eligible for HSA contributions.

 However, because the employer has become aware of the excess contribution before the end of the taxable year, it would be possible to include the excess contribution in the employee’s wages for income and employment tax purposes. The withholding requirements may be satisfied out of other wages being paid for the year. An employer cannot recoup amounts from an HSA once they have been contributed. But it may be possible for the employer to withhold excess employer contributions from future wages.