What Happens if I Contribute More Than the Maximum to My HSA?

HSA's, or Health Savings Accounts, are tax-preferred savings accounts that are used for medical care. Like a 401k retirement account, workers divert a portion of their pretax income to the account. This diversion reduces adjusted gross income, which can lower a taxpayer's bill. IRS regulations restrict the amount of money that can be added to an HSA annually. Contributions above the limit, which can vary depending on a person's age and family status, are subject to a 6 percent excise tax.

Limits

• To qualify for an HSA, workers must be enrolled in a high deductible insurance plan. Contribution limits for HSA's in 2011 are $3,050 for people with single coverage, and $6,150 for people with family coverage. Persons over 55 can contribute an additional $1,000. According to the IRS, "if both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution."

Prevention/Solution

• There is a way to avoid paying the excise tax if you have accidentally contributed to much. According to the IRS, you must "withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made." HSA's are interest-bearing accounts, and some are invested in stocks and mutual funds. If this is the case, and you need to remove excess contributions, you must also, withdraw "any income earned on the withdrawn contributions and include the earnings in 'Other income' on your tax return for the year you withdraw the contributions and earnings."

Warning

• Because HSA's are tax-favored, IRS regulations restrict how the money can be spent. HSA funds must be spent on qualified medical expenses as defined by IRS Publication 502. HSA funds that are spent on non-qualified expenses are subject to taxation at a taxpayer's normal rate, plus an additional 10 percent penalty. If you need to remove excess contributions, talk to your plan administrator to make sure the withdrawal doesn't trigger the penalty.

History

• American health care costs have outpaced inflation between 1999 and 2009. This has forced a dramatic increase in health insurance premiums and forced businesses, which provide most of the health insurance in the United States, to shoulder larger and larger burdens. Workers too have begun to pay more.

  To policy makers, a big cost driver in these increases is the nature of health insurance. They believe that people with traditional health insurance plans use health care without regard to cost, quality or whether they even need a doctor. If people were forced to dip into their own pocket to pay for medical expenses, then they would use health care more wisely. Maybe they would even shop around, forcing doctors to lower rates.

  This is where the high deductible/HSA plans come in. Premiums cost less, about $11,000 annually, compared to nearly $14,000 for family coverage in 2010. But workers with families could incur costs as high as $11,000 per year before insurance begins paying. Policy makers hope that younger, healthier workers can use their healthy years sock away enough money to cover large deductibles in the years when they or their families face large medical costs.

Significance

• The tax advantages of an HSA can be significant. A person in the lowest income bracket can effect a tax savings of 15 percent on contributions to an HSA. Other workers in higher tax brackets can sock away 35 percent savings. But these workers tend to use less of their money on living expenses, and thus save more. One fear policy makers have is that HSA's could become tax shelters for affluent wage earners. Thus, lawmakers have placed caps on contributions to HSAs.