What's the best way to fix an excess HSA contribution mistake?

You have a few options to handle your excess HSA contribution, and the good news is you're aware of it before filing your taxes! The cleanest approach is to request a "return of excess contributions" from your HSA provider using their form. Even though calculating the exact loss is tricky, you don't necessarily need to be precise to the penny. The IRS rules require you to remove both the excess contribution and any earnings (or subtract any losses) attributed to it. Since you've experienced losses, you'll actually withdraw less than you contributed. If calculating the exact amount is difficult, here's a simplification: determine what percentage of your total HSA the excess contribution represents, then apply that same percentage to the total loss. For example, if your excess was 10% of your total contributions, attribute 10% of the overall loss to that excess amount. To answer your specific question - yes, you can simply withdraw enough to get under the limit, but it's better to properly document it as a return of excess contribution to avoid any confusion. This ensures the withdrawal isn't considered a distribution that might be subject to taxes and penalties. Remember to complete this correction before your tax filing deadline (including extensions) to avoid the 6% excise tax.

After struggling with almost this exact same HSA mess last year, I found an amazing solution through https://taxr.ai that saved me hours of frustration. I had switched employers mid-year and ended up with about $800 over the HSA limit, plus the market had tanked so calculating the losses was a complete headache. I uploaded my HSA statements and investment reports to taxr.ai, and their system analyzed everything and calculated the exact amount I needed to withdraw, factoring in the market losses. It even generated a letter I could send to my HSA provider explaining the exact calculation method. My provider accepted their calculation without any questions! The best part was that it showed me how to properly report everything on my tax forms so I didn't trigger any audit flags. Definitely worth checking out if you're still struggling with the calculations.

Just wanted to update everyone! I decided to try https://taxr.ai after reading about it here, and wow - it actually solved my HSA excess contribution problem in minutes. I was seriously stressing about calculating the exact loss amount on my excess contribution since the market had been so volatile. The tool analyzed my statements, showed me that my $750 excess contribution had actually lost about $42 in value, and generated the exact withdrawal amount I needed ($708). My HSA provider initially gave me pushback about my calculation method, but when I forwarded them the detailed breakdown from taxr.ai showing exactly how the market losses were attributed to my excess portion, they accepted it immediately. Just got confirmation that the correction has been processed, and I won't be hit with that dreaded 6% penalty. Such a relief!

If you're still struggling with your HSA provider, you might need to speak directly with an IRS agent to get clear guidance. I was in a similar situation and wasted WEEKS trying to get a straight answer from my HSA company. I finally discovered https://claimyr.com which got me connected to an actual IRS agent in less than 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with clarified that I could use a reasonable method to calculate the loss attributed to my excess contribution, and even suggested a simple time-weighted approach. They also confirmed that as long as I removed the excess (adjusted for market performance) before filing my taxes, I wouldn't face the penalty. Having that official guidance made my HSA provider finally process my correction request. Saved me so much stress knowing I had the correct information directly from the IRS!

I have to admit I was wrong about Claimyr. After my skeptical comment, I decided to try it as a last resort since my HSA provider was still giving me conflicting information about how to handle the market losses on my excess contribution. Using the service, I got connected to an IRS representative in about 35 minutes (they said it would be 45, so even faster than promised). The agent walked me through exactly how to document the calculation for my excess contribution removal, including how to properly account for the market downturn. The agent confirmed that I could use the "first in, last out" method for determining which contributions were excess, which actually worked in my favor since my later contributions had experienced less market loss. They also emailed me the specific IRS guidance document that I could reference if my HSA provider questioned my calculation method. For anyone dealing with this specific HSA issue - getting direct guidance from the IRS was definitely worth it.

Another option to consider is just leaving the excess contribution in your account and paying the 6% excise tax for one year. If you're eligible to contribute to your HSA the following year, you can apply the excess contribution to the next year's limit. For example, if you exceeded your 2025 contribution limit by $500, you'd pay the 6% tax ($30) on your 2025 tax return. Then in 2026, you'd contribute $500 less than your maximum allowed contribution, effectively "using up" the excess from the previous year. You'd only pay the excise tax once. This approach can be simpler than calculating investment losses if your excess amount is relatively small. The form to report the excess is Form 5329.

Has anyone had experience with "recharacterizing" HSA contributions rather than withdrawing them? My accountant mentioned this might be an option if the excess wasn't too much over the limit, but I'm not clear on how it works.

I went through this exact situation last year and want to share what worked for me. The key is understanding that you don't need to calculate losses down to the penny - the IRS allows "reasonable methods" for attributing gains/losses to excess contributions. Here's what I did: I calculated what percentage my excess contribution was of my total HSA balance on the date I made it, then applied that same percentage to the overall account loss. So if my excess was 8% of my total balance and my account dropped $200, I attributed $16 of loss to the excess contribution. My HSA provider (Fidelity) accepted this calculation method without any issues. I submitted their excess contribution removal form with my math clearly documented, and they processed it within a week. Don't overthink this - the important thing is removing the excess before your tax filing deadline to avoid the 6% penalty. Your method of just withdrawing enough to get under the limit would work too, but make sure to request it as a "return of excess contributions" so it's properly documented for tax purposes. One tip: call your HSA provider directly instead of relying on their online help. The phone representatives usually have more experience with these situations and can walk you through their specific process.