Any HSA distribution you do not use for qualified medical expenses is subject to federal income tax and a 20 percent penalty.

What happens when you Overcontribute to an HSA?

If you over-contribute to an HSA and don’t correct it, you must pay a 6% penalty each year on the excess that remains in your account. But if you catch the mistake before you file taxes (including extensions), you can avoid the penalty by withdrawing the excess, plus any investment or interest earnings.

Is there a penalty for using excess HSA contributions?

That means that your Form 5498-SA will be accurate for the year and should not include any excess contributions. Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6% per year penalty.

Is there a limit to how much you can contribute to a HSA?

Here’s some important information on HSA contributions, distributions, and penalties. First, let’s look at HSA contributions. Each enrollment season, you decide how much you want to put in your HSA. For 2019, the maximum annual contribution limit is $3,500 for individuals and $7,000 for family.

What happens if I don’t include my HSA contribution on my tax return?

If you fail to include Form 8889 with your tax return indicating your eligibility to make the HSA contribution, the IRS will treat the contribution (reported to them on Form 5498 filed by the HSA custodian) as an excess contribution subject to a 6% excess contribution penalty each year that the excess remains in the account.

What happens if there is a penalty on contributions?

Beyond that, if there is a penalty which is enforced, it means the “excess contributions” (the first 1/4 year’s worth) would become taxable income AND you would pay an additional 6% excise tax. If you are concerned about the the penalty, you could reverse the contributions made during the last 6 months and treat them as if they did not happen.