What to Do When You Mistakenly Withdraw Money from Your HSA [HSA Ineligible Expenses]
This happens all the time: Someone withdraws money from their HSA to pay for something, only to find out that it is not an HSA-qualified expense. For example, many people assume that health insurance premiums are HSA-eligible, which they are actually not.
If you withdrew too much from your HSA, you have until April 15th (tax day) to put it back. If you realize you’ve made a mistake and want to correct it, simply return the money to your HSA and you will avoid the additional penalty.
If you do not return the money to your HSA, it will be counted as taxable income, and even worse, you’ll have to pay a 20% penalty.
What to Do if you Deposit Too Much to Your HSA [How to Remove an Excess HSA Contribution]
Contributing too much to your HSA can lead to a tax penalty if you don’t take action. The IRS sets the limit for HSA contributions, and this limit changes every year.
In 2024, the HSA contribution limit is $4,150for individuals and $8,300for family coverage. Any individual who is 55 or older may contribute an additional $1000 per year until they are 65.
Here are the steps you can take if you ever make an excess HSA contribution:
- Withdraw the excess from your account and handle it as taxable income for the year. This is perhaps the easiest way to deal with an excess contribution. However, it’s essential that you make the withdrawal before the due date of that year’s tax return. Remember: You must also withdraw any income earned on your excess contribution (dividends / interest)
- Reduce your contribution by the same amount the following year. If you don’t withdraw your excess contribution before the tax deadline, you will still have to pay a 6% excise tax for that year. But if you reduce your contribution the following year by the same amount, that excise tax will not be applied to subsequent years.
- Pay the 6% excise tax for as long as that money is in your account. This is what you would call the “wrong step”. Every year that your excess contribution is in your account, you will be forced to pay a 6% excise tax.
Do HSA Rollovers Count Against the Contribution Limit?
No, if you are rolling HSA funds over from one account into another, those funds do not count towards the contribution limit.Here are some additional blogs on the topic: Higher 2024 HSA Contribution Limits Allow You To Save Even More on Taxes | The Best Health Savings Account Administrators in 2023 | Turbocharge Your HSA: An Introduction to Self-Directed HSA Investing
Here are some additional pages related to this article: Healthshare Plans | The HSA Secure Plan
