What's the Penalty for Carrying Over an Excessive HSA Contribution Year-to-Year?

Quick question - if they do the withdrawal option, is there a time limit on when they need to do this? And also, do they need to specifically tell the HSA provider it's for an excess contribution or just do a normal withdrawal?

For the withdrawal option, ideally you should correct excess contributions before filing your tax return for that year. However, since you're dealing with a prior year excess, you can still make the correction now - just be clear with your HSA provider that you're specifically withdrawing an excess contribution from 2023. You absolutely need to specify to your HSA provider that this is an "excess contribution withdrawal" rather than a normal distribution. A normal distribution would be considered a potentially taxable and possibly penalized withdrawal if not used for qualified medical expenses, while an excess contribution withdrawal has different tax treatment. Your HSA provider will have a specific form or process for this type of correction.

Does that tool actually help with submitting the correction to the HSA provider or just tell you what to do? I've got a similar situation but with a smaller amount ($800 excess) and wondering if it's worth using.

I'm skeptical about using third-party tools for tax issues. Couldn't you have just called the HSA provider directly? They should know how to handle excess contributions without needing special software, right?

The tool doesn't submit anything to your HSA provider, but it creates a detailed report explaining exactly what forms you need to file with the IRS and what to request from your HSA administrator. It basically translates all the tax code jargon into plain instructions. Regarding calling the HSA provider directly, you definitely can do that, but in my experience, they sometimes just direct you to "talk to your tax advisor" without giving specific guidance. What was helpful about using the analyzer was that it showed me precisely what sections of Form 8889 and Form 5329 needed to be completed and how they related to each other. It also gave me the exact wording to use when requesting the excess contribution withdrawal so the HSA administrator processed it correctly.

How does that even work? I thought it was impossible to get through to the IRS these days. I've literally spent 3+ hours on hold multiple times and got disconnected.

Yeah right. Some magical service that gets the IRS to answer the phone? I'll believe it when I see it. The IRS isn't even processing paper returns from 2022 yet, but they'll hop on a call for your HSA question? Sounds fishy.

It works by holding your place in the IRS phone queue so you don't have to wait on hold yourself. When they get an agent on the line, you get a call back and are connected directly. It's not some special access - it's just automated hold technology. The reason most people can't get through is because they give up after being on hold for hours. This service just does the waiting for you. My call was with an IRS tax law specialist who specifically handles questions about retirement accounts including HSAs. They can't process your return faster or anything like that, but they absolutely can answer technical questions about how to properly handle excess contributions and complete the forms correctly.

So if I understand correctly, I could leave my $2100 excess in there, pay the 6% tax one more time for 2024, but then for 2025 I would only contribute $2050 instead of the full $4150? And then everything would be back to normal going forward? That actually sounds easier than trying to get my HSA administrator to do a special withdrawal.

Exactly right! You'll pay the 6% tax ($126) one more time when you file your 2024 return, but then for 2025, you'd only contribute $2050 instead of the full $4150. This way, your total 2025 contribution (including the $2100 excess that remained in your account) equals the maximum allowed contribution. After that, everything is back to normal for 2026 and you can resume contributing the full annual limit. Many people find this approach simpler than dealing with the withdrawal process, especially if your HSA administrator has a complicated process or charges fees for excess contribution withdrawals.

The 6% excess contribution tax applies to the tax year in which the excess contribution occurred. So if you over-contributed in 2023, you'd pay the tax when filing your 2023 tax return (which you'd typically file in early 2024). If you don't correct the excess contribution by withdrawing it or using it up (by contributing less in a later year), then you'll continue paying the 6% tax in each subsequent year until the situation is fixed. That's why the original poster is facing another 6% tax for 2024 - because the excess from 2023 is still sitting in their HSA.