HSA Excess Contribution Rollover to Next Year: 6% Tax vs. Withdrawal

You can apply an HSA excess contribution to next year’s limit instead of withdrawing it, but the excess owes a 6% excise tax for every year it stays in the account until a future year’s unused contribution room absorbs it.¹ The cheaper fix, when it’s still available, is pulling the money out before your tax filing deadline; that path avoids the penalty entirely.² If that window has closed, the rollover is your remaining option, and it works within specific limits.

How the Rollover Actually Works

The IRS lets you absorb an excess contribution by under-contributing in a later year. The money stays in your HSA, and the excess is treated as though it was contributed during the later year against that year’s limit.²

The amount you can absorb each year is the lesser of two figures: your maximum HSA contribution limit for that year minus what you actually contribute, or the total excess sitting in the account at the start of the year. For 2026, the annual caps are $4,400 for self-only HDHP coverage and $8,750 for family coverage, with an additional $1,000 catch-up for anyone age 55 or older.³

A quick example. Say you ended 2026 with a $600 excess and never withdrew it. In 2027, you contribute only $3,800 toward your $4,400 self-only limit. That leaves $600 of unused room, the prior year’s excess fills the gap, and the excess is fully resolved.

Two things can stall this. First, if your unused room is smaller than the excess, only part of the excess gets absorbed and the rest carries forward, still generating the 6% tax. If your unused room is $400 but the excess is $600, you’ll go into the next year with $200 of uncorrected excess. Second, you must be an HSA-eligible individual with qualifying HDHP coverage during the year you’re applying the excess. Lose eligibility, and the excess just sits there, taking the 6% hit annually with no way to absorb it until eligibility returns.

What the 6% Tax Costs You

The excise tax is 6% of the excess amount remaining in the account at the end of each tax year.¹ The penalty is capped at 6% of the account’s total value at year-end, but that ceiling rarely comes into play unless the balance is very small relative to the excess.

The tax repeats every year the excess is uncorrected. A $1,000 excess costs $60 per year. Leave it for three years before the rollover finishes absorbing it, and you’ve paid $180 on money that was yours to begin with.

When you apply the excess to a future year, you owe the 6% tax for the original year the excess was created, plus any intervening years it remained unresolved. You don’t owe the 6% in the year the rollover completes; the correction erases it going forward.

Why Timely Withdrawal Usually Beats the Rollover

The rollover exists because people miss the withdrawal deadline. If you’re still inside it, take the withdrawal instead. For an excess created in 2026, you have until April 15, 2027, or October 15, 2027 if you file an extension.²

A timely withdrawal has to include the net income attributable to the excess, meaning whatever gains (or losses) the extra money earned while sitting in the account. The NIA is taxable income for the year you receive the distribution.⁴ The returned principal itself is not taxed, because it’s treated as never contributed. If the excess lost money, the loss reduces what you withdraw and there’s no NIA to include in income.

You don’t calculate the NIA yourself. Call your HSA custodian, request a “return of excess contribution,” and they’ll run the numbers and issue the distribution. The withdrawal shows up on Form 1099-SA with distribution code 2, flagging it as a returned excess.⁵

Compared side by side: timely withdrawal costs you tax on the NIA and nothing else. Rollover costs you 6% of the excess for every year it sits, plus you’re locked into eligibility and available room to make it work. Whenever the deadline is still open, take the withdrawal.

Forms You File Either Way

Every HSA owner files Form 8889 with their return to report contributions and calculate the deductible amount.⁶ If total contributions exceed the deductible limit, the difference is your excess.⁷

If you’re rolling the excess forward, you also file Form 5329 for every year the excess remains in the account, and the 6% excise tax flows to Schedule 2 of your Form 1040.⁸ In the year the rollover absorbs the excess, that year’s Form 8889 shows a reduced current-year contribution, and no Form 5329 penalty applies for that year.

If you took a timely withdrawal, you don’t claim a deduction for the returned amount, you report any NIA as other income for the year you received it, and no Form 5329 is needed because the timely withdrawal erases the excess as though it never happened.

Situations That Create the Excess

Before choosing a correction path, confirm what created the excess, because a few situations affect whether the rollover will even work.

Combined contributions from you and your employer (and anyone else contributing on your behalf) pushed the total over the annual cap.³
You switched from family to self-only HDHP coverage mid-year, so your limit prorated down while your contributions didn’t.
You lost HDHP coverage during the year, making contributions from the uncovered months excess.
You were claimed as a dependent on another person’s return, which disqualifies you from contributing at all.
Two employers each contributed after a mid-year job change and the combined total went past the cap.

Two more traps sit outside the ordinary contribution math. The “last-month rule” lets someone who becomes HDHP-eligible partway through the year contribute the full annual amount as long as they have qualifying coverage on December 1, but only if they remain eligible through the entire following calendar year.⁴ Lose eligibility during that 13-month testing period, and the amount you contributed beyond a month-by-month calculation gets added back to gross income with an additional 10% tax on top. Death and disability are the only exceptions.

Medicare enrollment is the other one. Once you enroll in Medicare Part A or Part B, your HSA contribution limit drops to zero. Part A can be backdated up to six months (though never before you first became eligible), which retroactively turns HSA contributions from those backdated months into excess. If you plan to enroll in Medicare after 65, stop HSA contributions at least six months before your enrollment date. The safest approach for most people is to stop contributing the month you turn 65.

These situations matter for the rollover because they often coincide with losing HSA eligibility, and the rollover only works while you’re still an eligible individual with HDHP coverage. If Medicare or a plan change ended your eligibility, the rollover path may be closed, and the timely withdrawal, if still available, becomes the only clean fix.

California State Treatment

Most states follow the federal HSA treatment, but California does not recognize any of the federal HSA tax benefits. Contributions are not deductible on your California return, and earnings are taxable at the state level. If you’re correcting an excess while a California resident, the NIA on a timely withdrawal may have no state-level consequence because the earnings were never state-tax-exempt to begin with. Check with a tax professional familiar with California’s HSA treatment before finalizing your correction.

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 – Health Savings Accounts and Other Tax-Favored Health Plans
3
Internal Revenue Service. Revenue Procedure 2025-19
4
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
5
Internal Revenue Service. Form 1099-SA – Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
6
Internal Revenue Service. About Form 8889, Health Savings Accounts
7
Internal Revenue Service. Instructions for Form 8889
8
Internal Revenue Service. Instructions for Form 5329