Health Savings Accounts and Excess Contributions
Health Savings Accounts (HSAs) provide a convenient way for people to set funds aside to pay for out of pocket medical expenses. Since they are a tax favored account, there are certain rules that need to be followed to be able to enjoy the full tax benefit, including the maximum amount that can be contributed each year.
The contribution limits are set by the IRS and are reviewed and updated annually. Click here to review the limits for 2018. In addition to the annual amount that can be contributed, there is also a catch up contribution for account holders who are 55 years old or older. HSA eligibility is determined monthly, so someone who is not eligible for the entire tax year may not be able to contribute the full annual amount as allowed by the IRS. See IRS Publication 969 for more information on determining the annual contribution amount.
Once the annual contribution amount is determined, if more funds have been contributed to the account than allowed, the account holder can incur penalties and fees on the excess contributions. When filing their taxes, if the excess contributions remain in the HSA, the account holder will be subject to income tax and a 6% excise tax on the excess amounts.
An account holder can avoid the taxes and penalties associated with excess contributions if the funds are removed from the account before the tax filing deadline. Additionally, any interest and earnings on the excess amounts should be removed from the account. If the excess contributions are not removed from the account, the taxes and penalties will continue to be incurred each year the funds remain in the account. Account holders should refer to their HSA provider to confirm the details of removing excess contributions from their account.
BusinessPlans, Inc. – myCafeteriaPlan does not intend to provide legal or tax advice and information contained in this article should not be interpreted as such. Regulations governing pretax plans are often open to interpretation and should be reviewed with your legal or tax advisor before making any decisions regarding your plan.