Overfunded Health Savings Account
Q: What happens if I send $7,000 to my Health Savings Account? According to HSA rules I researched through the internet, excess contributions over the allowable limit are treated as income and are subject to a 6% tax. is that correct? So, 6% of $7,000 is $420 plus what ever the income tax is. now, here is my question for you. if I contributed over the maximum amount allowed, let's say $7,000, then I would have to pay income tax and a penalty on top of it. would that income tax and penalty be just one time? or, would I have to continue each year to pay the income tax and penalty? or to make it easier, would that just be a one time tax and penalty and then it would be over with? if that is the case, in that it would be a one time tax and penalty, then it would be worth the future compounded interest to contribute way over the limit. does that make sense?
A: While there are times when it pays to take aggressive tax positions, this is not one of those situations.
First, no bank or investment company would accept a $7,000 deposit for one year. You would probably be told that the deposit processor or bank clerk can not even find a way to record the transaction into their system. (Incorrect HSA deposits are frequently delayed of returned to the customer for this reason). A $7,00 single deposit could be credited to two years' contribution if you are eligible. For example, a $7,000 deposit made in January 2009 could serve as a $5,000 contribution for 2008 and a $2000 contribution for 2009. It is necessary to specify the intended allocation on the deposit slip or check.
The penalty would apply if you opened two different HSA accounts at different institutions during the year. Each would be unaware that you were not eligible to make the entire contribution. In that case the IRS automated matching program would likely correct the error and send you a tax adjustment letter with the penalty plus interest for the excess contribution. The HSA custodian would be required to return the excess deposit but we are not aware of the specific mechanism that the IRS might use to alert the account custodians. The overfunded amount could be penalized multiple times if not returned or somehow reallocated as an allowable deposit.
Tax reporting and enforcement of HSA rules is still in developmental state so we cannot offer advice on the probability of enforcement action. But even without this, there is no indication that overfunding a HSA would lead to anything positive.