8835 / What is the penalty for making excess contributions to an HSA? How does an excess contribution impact the taxation of distributions from the HSA?

(1) The distribution is received by the individual on or before the last day for filing the individual’s income tax return for the year including extensions.

(2) The distribution is accompanied by the amount of net income attributable to the excess contribution. Any net income must be included in an individual’s gross income for the taxable year in which it is received.¹

Excess contributions to an HSA are subject to a 6 percent tax. However, the penalty tax may not exceed 6 percent of the value of the account, as determined at the close of the taxable year.²

Excess contributions are defined, for this purpose, as the sum of:

(1) the aggregate amount contributed for the taxable year to the accounts, excluding rollover contributions, which is neither excludable from gross income under IRC Section 106(b) nor allowable as a deduction under IRC Section 223; and

(2) the amount calculated in (1), above, for the preceding taxable year reduced by the sum of (x) the distributions from the accounts that were included in gross income under IRC Section 223(f)(2), and (y) the excess of the maximum amount allowable as a deduction under IRC Section 223(b)(1), for the taxable year, over the amount contributed for the taxable year.³