1. What are excess contributions?
Contributing more to your health savings account (HSA) than the IRS limit for the tax year creates excess contributions. All excess contributions are subject to income tax and a 6% excise tax each year until corrected.
For the current annual IRS limits see Section D question #1 of the HSA FAQs.
2. What are some situations that might cause excess contributions to occur?
- Employee changed employers mid-year, and the combined contributions exceed the statutory limit;
- Employee made contributions directly to the HSA, outside of payroll, and the combined contributions exceed the statutory limit;
- Employee and spouse contributions exceeded the combined family limit;
- Employee changed from family coverage level to employee-only coverage level mid-year and their contributions exceed the pro-rated statutory limit;
- Employee enrolled in Medicare mid-year and their contributions exceed the pro-rated statutory limit.
- Employee is no longer enrolled in a High Deductible Health Plan mid-year and their contributions exceed the pro-rated statutory limit.
3. How do I determine if I have made excess contributions?
First, determine if there are any months in the year that you are not eligible to make HSA contributions (see Section B. Eligibility of the HSA FAQs)
Then, based on the number of months you were eligible, calculate the prorated IRS contribution limit to only reflect the months you were eligible. (see Question 4 below)
If your year-to-date contributions (your contributions and IU’s contribution(s)) exceed the prorated maximum, then you have excess contributions.
4. How do I calculate a pro-rated IRS contribution maximum?
HSA contribution limits are determined on a tax year basis. If you are not eligible for all 12 months, then IRS rules state that your contribution limit must generally be prorated by the number of months you are eligible to contribute to an HSA. Your eligibility is based on your coverage status on the first day of the month.
To calculate your personal limit:
- Take the total annual contribution limit based on your coverage type (individual or family) and age (if age 55+ add $1,000 catch-up contribution).
For the current annual IRS limits see Section D question #1 of the HSA FAQs. - Divide that amount by 12.
- Multiply it by the number of months that you qualify that year.
For example, let’s assume your Medicare enrollment was effective April 1 and your HDHP coverage level is individual. You would only be eligible to make contributions to your HSA for 3 months. Your personal contribution limit would be: $4,150 ÷ 12 × 3 = $1,037.50 or if you are age 55+ your limit would be: ($4,150 + $1,000) ÷ 12 × 3 = $1,287.50.
Additional details about calculating the prorated contribution maximums can be found on the Instructions for IRS Form 8889 or you can speak with a personal tax advisor.
5. What happens if I contribute more than the IRS annual maximum?
If your HSA contains excess or ineligible contributions you will generally owe the IRS a 6% excess-contribution penalty tax for each year that the excess contribution remains in your HSA.
It is recommended you speak with a tax advisor for guidance. However, in general, you can take one of the following additional actions:
- Complete an HSA Distribution Request Form and return it to WEX by December 31st. The excess amount will be removed from your account and refunded to you. You will need to claim the excess contributions on your Federal Income Tax return and pay income taxes on those contributions. However, you would avoid having to pay the 6% excise tax penalty.
- Leave the excess contributions in your HSA and pay the excise tax on the excess contributions when filing your Federal Income Tax Return for that year. The funds would remain in your HSA and then would be able to be counted as part of your next-year contributions. Next year you may want to consider contributing less than the annual limit to your HSA to take into account the excess contribution rollover.
Questions regarding the HSA distribution request process may be directed to WEX at or at 800-284-8412.
6. Are excess contributions subject to a penalty?
Yes. In general, an excise tax of 6% for each tax year is imposed on the HSA owner for any excess individual and employer contributions made to their account that are not removed within the same tax year.
7. Can the excess contribution penalty be avoided?
Yes. The 6% cumulative penalty can be avoided if an HSA Distribution Request Form is received by WEX by December 31 of that same tax year, and if the excess contributions (and any earnings on those excess contributions) are paid out to the HSA owner and are reported on their federal income tax return. The HSA owner would still be responsible for paying income taxes on the excess contribution amount.
8. Are there any special circ*mstances to take into consideration with regards to Medicare or Social Security benefits?
Yes! If you are enrolled in Medicare then you are no longer eligible to make or receive tax-free contributions to your HSA. Depending on the effective date of your Medicare coverage, you may have contributed more than the prorated contribution limit and may have excess contributions.
A Note about Medicare: When you turn age 65 you will become eligible to enroll in Medicare.However, as long as you are enrolled in a group insurance plan (such as IU’s medical plans) then you are eligible to postpone enrollment in Medicare, without penalty, until you either begin drawing your Social Security benefits or you retire from active employment.If you postpone enrollment in Medicare beyond your initial eligibility period (i.e. when you turn age 65) then when you do eventually apply for Medicare and/or Social Security benefits, your Medicare coverage will be backdated by 6 months or to your 65th birthday, whichever is closest. This will affect how you prorate your IRS contribution limit.
Example #1: If you apply for your Social Security at age 70, which falls in the month of August, your Medicare (Part A) effective date will be backdated to March 1 (6 months = August, July, June, May, April, March). You would then calculate the prorated IRS contribution limit based on only being eligible for 2 months (January and February).
Example #2: If you apply for Social Security or enroll in Medicare in April of this year, then your Medicare (Part A) effective date will be backdated to November 1 of the prior tax year (6 months = April, March, February, January, December, November). You may need to amend and address any excess contributions made in the prior year, as well as any contributions made in the current year.
Example #3: If you postpone enrollment in Medicare when you turn 65 in August, then decide to retire at the end of December of that same year, your Medicare (Part A) effective date will be backdated to August 1 (the month you turned age 65). You would use the month you turned 65 as your effective date since it is closer than backdating 6 months (6 months = December, November, October, September, August, July).Your prorated contribution limit would then be calculated based on only being eligible for 7 months of the year (January, February, March, April, May, June, July).
9. How do I request a distribution of my Excess Contributions?
You may request a distribution of your excess contribution by completing the HSA Distribution Request Form and submitting it to WEX via email at , fax 888-887-9961, or by mail at:
IU HSA/FSA
P.O. Box 2905
Fargo, ND 58108-2905
