Correcting Ineligible HSA Contributions: Deadlines, Penalties, and Forms

To correct ineligible HSA contributions, ask your HSA custodian for a “return of excess contribution” before your tax-filing deadline (including extensions), withdraw both the ineligible amount and the earnings it generated, and report the earnings as income for the year of the withdrawal. Handled on time, that erases the problem. Miss the deadline and a 6% excise tax applies for every year the money remains in the account, under IRC 4973.¹

Figure Out Which Kind of Mistake You Made

The fix is the same, but knowing the cause helps you stop the bleeding and explain the situation to your custodian.

An ineligible contribution happens when the person funding the HSA doesn’t qualify at all. The most common version: you lost HDHP coverage mid-year (a job change, Medicare enrollment, or picking up disqualifying coverage like a general-purpose FSA), but payroll deductions kept flowing. Every dollar contributed after eligibility ended is ineligible.

An excess contribution happens when you were eligible but went over the annual limit. Two employers running HSA payroll in the same year is a classic cause, as is stacking direct contributions on top of payroll without tracking the total. You cannot contribute if you’re covered by Medicare, TRICARE, or a general-purpose FSA, and married couples with any family HDHP coverage share a single family limit between them.²

For correction purposes, the IRS treats both the same way: the money has to come out, and the 6% excise tax applies to whatever remains past the deadline.

Remove the Money Before Your Tax Deadline

The clean fix is a timely withdrawal. For the 2025 tax year, that means April 15, 2026, or October 15, 2026, if you filed an extension. Contact your HSA custodian, request a return of excess contribution, and specify the exact dollar amount.³

You can’t stop at the principal. Any earnings attributable to the ineligible amount must come out with it. Your custodian calculates the Net Income Attributable (NIA) using a Treasury formula that compares the account’s opening and closing balances during the period the money was invested.⁴ If the account lost money during that stretch, the NIA can be negative, and you’ll withdraw less than you put in.

When both the principal and the NIA come out on time, the principal is treated as though it was never contributed. No income tax on it, no excise tax. The earnings are taxable as ordinary income on the return for the year you withdraw them.³

The Six-Month Amended Return Window

Filed your return already and forgot to pull the excess out first? You still have room. The IRS lets you remove the excess within six months of the original filing deadline, not counting extensions. For a return due April 15, that runs to October 15.

You’ll need to withdraw the money (with earnings), then file an amended return with “Filed pursuant to section 301.9100-2” written at the top, attach a corrected Form 8889, and explain the withdrawal.³ It’s one of the more generous second chances in tax law, and it’s easy to miss if you don’t know it exists.

What It Costs If You Miss Both Windows

Once the filing deadline and the six-month amended-return window pass with the ineligible amount still in the account, the 6% excise tax applies. It’s calculated on the excess remaining on the last day of each tax year, and it keeps applying every year until you resolve it. You report and pay it on Form 5329.⁵

Two ways to stop it from compounding:

Absorb it into a future year’s limit. If you’re still eligible and your current-year contributions are running below the maximum, the prior year’s excess can count toward this year’s limit. Over by $500 in 2025? Contribute $500 less in 2026 and let the carryover fill the gap. This stops the 6% tax going forward but does not erase the excise tax you already owe for the year the excess first sat in the account.²
Take a late distribution. You can pull the money out after the deadline, but the tax treatment is worse. The distribution is taxable income even if you spend it on qualified medical expenses, and if you’re under 65 and not disabled, a 20% additional tax applies to the amount in gross income. It does stop the 6% excise from compounding further.²⁶

The 20% penalty falls away once you reach Medicare eligibility age, but the income tax still applies.⁶

Two Traps That Create Ineligibility After the Fact

Failing the Last-Month Rule Testing Period

The last-month rule lets you contribute the full annual amount if you’re HSA-eligible on December 1, even if you weren’t eligible earlier in the year. The catch: you must stay eligible through the entire testing period, which runs from December of the contribution year through December 31 of the following year.²

If you fail that test (dropping the HDHP, enrolling in Medicare, picking up disqualifying coverage), the difference between what you actually contributed and what you would have been allowed to contribute without the last-month rule becomes taxable income for the failure year. On top of the income tax, a 10% additional tax applies. Death and disability are the only exceptions.³ Report the failure on Part III of Form 8889; the additional tax goes on Schedule 2.

Retroactive Medicare Enrollment

Medicare Part A drops your HSA contribution limit to zero, and the rule applies to periods of retroactive coverage. Contributions made during months you didn’t yet know you were covered turn into excess after the fact.²

This bites hardest when you apply for Social Security after 65. Premium-free Part A gets backdated up to six months before the month you apply, though not earlier than the month you first became eligible.⁷ Anything you contributed during those backdated months is now ineligible.

The safe move is to stop HSA contributions at least six months before applying for Social Security or Medicare.⁷ If retroactive enrollment has already caught you, use the timely or late removal procedures above.

When Your Employer Caused the Excess

Payroll glitches, misconfigured benefit elections, and incorrect matching contributions all push balances past the limit. If the employer catches the error, they can request the return of excess directly from the custodian and issue a corrected W-2 (Form W-2c) adjusting the Box 12 Code W amount to reflect the net contribution. If they fix it before you file, the excess is treated as though it never happened, and you don’t file Form 5329 or owe the excise tax.

If the employer won’t correct it, the responsibility falls back on you. Follow the standard removal steps and pay any excise tax that applies. When an employer refuses to issue a corrected W-2, you can file Form 4852 (Substitute for Form W-2) with your return, report the correct amounts on Form 8889, and keep your HSA statements as backup.

The Forms You’ll Actually File

Form 8889. The primary HSA form, filed with your 1040. Part I calculates your allowable deduction, Part II reports distributions (including timely removals of excess contributions), and Part III handles testing period failures.³
Form 5329. Required whenever the 6% excise tax applies. Calculate the tax on the excess remaining at year-end and file with your 1040.⁵
Form 1099-SA. Sent by your custodian to report distributions during the year, including excess contribution removals and the associated earnings.⁸
Form 5498-SA. Also from the custodian, reporting total contributions to the HSA during the calendar year, including any for the prior year.⁹

When the removal is timely, the withdrawn principal doesn’t show up as taxable income, but the NIA does. Report it as “Other income” on your 1040 for the year of withdrawal. Keep the excess contribution removal request, the withdrawal confirmation, and every tax form the custodian sends. If the IRS questions the correction, that paperwork is your proof you followed the right procedure.

1
Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
2
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
3
Internal Revenue Service. Instructions for Form 8889 (2025)
4
eCFR. 26 CFR 1.408-11 – Net Income Calculation for Returned or Recharacterized IRA Contributions
5
Internal Revenue Service. Instructions for Form 5329 (2025)
6
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
7
Social Security Administration. Medicare
8
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA (12/2026)
9
Internal Revenue Service. About Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information