HSAs are often confused with health FSAs, but they are very different. Here’s a quick reminder of how an HSA works.
HSA eligibility is determined on a monthly basis, NOT on a plan year or calendar year basis. An individual is only allowed to open and contribute to an HSA only if they are enrolled in a qualified HDHP and have no other disqualifying coverage. Disqualifying coverage includes a general-purpose health FSA or HRA, a spouse’s FSA, copay-type medical plan, Medicare, TRICARE, or any other first-dollar coverage during that same month.
In most cases, the amount someone can contribute to their HSA must be prorated based on the maximum HSA contribution allowed for the HDHP coverage tier in which the participant is enrolled. The HSA maximum contributions for 2020 are $3,550 for those enrolled in single HDHP coverage and $7,100 for those enrolled in family HDHP coverage ($3,600 and $7,200 for 2021).
For example, if an employee was enrolled in single HDHP coverage from 1/1/20 to 4/30/20, that person could contribute up to $1,183.33 for 2020 in their HSA ($3,550/12*(4 months). But once they are no longer enrolled in a qualified HDHP as of 5/1, they would have to stop putting money into their HSAs.
If an individual goes over the monthly maximum, they should contact the HSA trustee or bank and get a refund started. Note that an employer cannot recoup its contributions to an employee’s HSA after funds have already been deposited (i.e., employer contributions generally cannot be paid back). Therefore, any employee/employer contribution over the individual’s allowable HSA contribution amount would be considered an ‘excess contribution.’ Excess contributions are subject to income tax, and may also be subject to a 6% excise tax. The individual should work with the bank on proper treatment of the excess contribution, which usually involves distribution of any funds left in the account. If the distribution is completed before the tax filing deadline for the corresponding tax year, the distribution would be taxable, but would avoid the 6% excise tax. Any funds that have already been spent would generally be added to the employee’s gross income.
Ultimately, an employee should contact a tax professional in the event of over-contribution, as it’s an individual tax issue they’ll need to correct.