Overcoming HSA Contribution Errors: A Guide for Navigating the Complexities of Health Savings Accounts

HSA Contribution Limits: A Shared Responsibility for Spouses

Health Savings Accounts (HSAs) are tax-advantaged savings accounts that allow individuals with qualifying high-deductible health plans (HDHPs) to set aside pre-tax dollars for qualified medical expenses. It’s crucial to understand the contribution limits for HSAs, especially for spouses who may switch insurance plans during the year.

When a spouse has a family HDHP, the HSA contribution limit for both spouses is based on the family limit. Even if one spouse has a self-only HDHP, the contribution limit for both spouses is still the family limit. This shared limit must be considered to avoid overcontributions.

In the example shared, the individual and their spouse initially had separate HDHPs and HSAs, taking advantage of employer contributions. However, when the spouse changed jobs and the couple switched to a family plan, they needed to account for the prior HSA contributions made by the spouse. Overcontributing to an HSA can result in penalties.

Handling Excess HSA Contributions

If an excess contribution is made to an HSA, it’s important to take immediate action to rectify the situation. Options include:

Withdrawing the Excess Contribution: Withdraw the overcontributed amount before the filing deadline. This withdrawal will be subject to income tax and a potential 6% penalty if not used for qualified medical expenses.
Rolling Over the Excess Contribution: If eligible for HSA contributions in the following year, roll over the excess amount into the current year’s limit. However, this requires the existence of funds in the HSA to cover the rolled-over amount.
Paying the 6% Penalty: If the overcontribution cannot be withdrawn or rolled over, the individual will be responsible for paying a 6% penalty on the excess amount annually until it’s corrected.

Impact of Zero HSA Balances

It’s worth noting that if all HSAs across the board have a zero balance on December 31, the 6% penalty may not apply. In such cases, individuals can simply file Form 5329, line 49, indicating $0 to avoid the penalty. However, the excess contribution must still be reported as other income on the tax return.

Seeking Professional Guidance

Navigating the complexities of HSA contributions can be challenging. It’s advisable to seek guidance from a licensed insurance agent or tax professional if you have any questions or concerns. They can help you understand the specific rules and requirements that apply to your situation and ensure you’re taking the appropriate steps to avoid penalties and maximize the benefits of your HSA.