A QUESTION from a broker:
I need your assistance. One of my clients (who uses a bank to handle the employee HSAs) just determined that several employees have contributed over the maximum for2011. I have done some research and found that most banks will allow the individuals to complete an “Excess Contribution Form” and withdraw the money before the tax filing deadline.
However, what happens with this on the employer level? How would the employer have to go back and adjust their tax filings to account for the payroll tax benefits they received from the excess contributions?
On a side bar, if she had been using you guys for the administration, would you have alerted her to the fact that someone was going to exceed the allowable thresholds based on their payroll schedule and contribution amounts?
Your assistance on this is greatly appreciated.
What happens if I contribute more than my maximum allowable contribution?
You may withdraw the excess amount and any earnings on the excess amount prior to April 15th of the following year. However, you must pay income tax on your excess contributions and income tax on any earnings of the excess contribution. There is no 20% penalty on excess contributions.
What happens if I don’t withdraw my excess contributions prior to April 15th of the following year?
You must pay a 6% excise tax on the excess contribution and on any earnings of the excess contribution. If in the next year you decreased your maximum contribution by the amount of your excess contribution made the year before, you do not have to pay the 6% excise tax again. If, however, you leave the excess contribution in, and do not decrease your maximum contribution by the amount of your excess contribution made the year before, you will have to pay the 6% excise tax each year the excess contributions and earnings are in the HSA.
posted from Federal Employees Website
Are there any penalties or adjustments needed on the employer side who payroll deducted the excess contributions, since theoretically they saved the matching FICA on those dollars?
No penalties. But if they (employer and employee) make the change before January 1 to the correct amount, the employer can put on the W2 correctly. If not, the employee will have to pay their own taxes and presumably the bank (you hope) will give them a 1099 of some sort to file and the employee will pay taxes on that excess amount including 6% addtional. Does that help?
Don’t forget eflex has a fantastic HSA product that never requires an employee to contact a bank. The employees can get 10 investments that Fidelity manages, and they can get checks, correct answers every time they call in and debit cards. For a quote contact email@example.com