Penalty for Having HSA and FSA: Excise Tax and How to Fix It

The penalty for having an HSA and an FSA at the same time is a 6% excise tax on every dollar you contributed to the HSA during months you were also covered by a general-purpose FSA, plus regular income tax on those contributions because the deduction was never valid. The 6% applies again each year the excess money stays in the account. If you catch the mistake before your tax filing deadline, you can pull the excess out and avoid the excise tax entirely.

Why a General-Purpose FSA Blocks HSA Contributions

To contribute to an HSA, federal law requires you to be an “eligible individual”: enrolled in a High-Deductible Health Plan on the first day of the month and not covered by any other health plan that pays benefits before the HDHP deductible is met.¹ A standard general-purpose FSA reimburses medical expenses from the first dollar, with no deductible in the way. The IRS treats that as disqualifying coverage.

You don’t have to actually use the FSA for it to disqualify you. Being covered is enough. Eligibility is also determined month by month, so a single day of disqualifying coverage during a month makes you ineligible for HSA contributions for that entire month.²

What the 6% Excise Tax Actually Costs

Any HSA contribution made during a month you weren’t eligible is an “excess contribution,” and the IRS charges 6% on it.³ The tax is not one-time. It applies every year the excess remains in the account. A $3,000 excess costs $180 the first year, another $180 the next, and so on until you remove the money or absorb it with future unused contribution room.

The excess amount is also not deductible. You have to include it in your gross income for the year of contribution. If the money went in through payroll on a pre-tax basis, the pre-tax treatment doesn’t survive, so you still owe income tax. Report the 6% on Form 5329, filed with your regular return.⁴

The math compounds if you contribute over the limit across multiple months without correcting earlier errors, because the 6% applies to the cumulative excess sitting in the account at the close of each tax year.

FSA Types That Don’t Trigger the Penalty

Not every FSA disqualifies you. The IRS allows several specialized arrangements alongside an HSA because they don’t provide the first-dollar general medical coverage that conflicts with an HDHP.⁵

A limited-purpose FSA covers only dental, vision, and preventive care. This is the most common FSA paired with an HSA.
A post-deductible FSA reimburses medical expenses only after the HDHP’s minimum annual deductible has been met.
A dependent care FSA covers childcare and elder care, not medical expenses, and has no effect on HSA eligibility.

If your employer offers an FSA at the same time as an HDHP, check which type it is before contributing to the HSA. A limited-purpose FSA is a tax-savings combo. A general-purpose FSA is a penalty trap.

Grace Periods and Carryovers That Extend the Problem

Two FSA features catch people who switch to an HDHP mid-cycle and want to start funding an HSA.

Grace periods. Many employers give FSA participants up to two and a half months after the plan year ends to spend leftover funds. If your prior general-purpose FSA had a grace period, you’re still considered covered by it during those months, so you can’t contribute to an HSA during that time. The only exception is if your FSA balance was exactly zero at the end of the prior plan year.⁵

Carryovers. Many FSA plans let you carry unused funds into the next plan year, up to $680 for 2026. A carryover from a general-purpose FSA blocks your HSA eligibility for the entire new plan year, not just the months you spend it down. You can fix this by spending the balance completely before year-end, asking your employer to convert the carryover to a limited-purpose arrangement, or forfeiting what’s left. Losing a few hundred dollars in FSA money is cheaper than owing penalties on a full year of ineligible HSA contributions.

How to Fix Excess HSA Contributions

The cleanest fix is to withdraw the excess before your tax filing deadline for the year of the contribution, including extensions. For a 2025 excess, that typically means withdrawing by October 15, 2026, if you file an extension.¹

The withdrawal has to include two pieces: the excess contribution itself and any earnings that money generated while sitting in the HSA. Your HSA custodian calculates the net income and processes the distribution, then reports it on Form 1099-SA.⁶

If you do this on time, the excise tax disappears for the year of contribution and every year going forward. The excess amount still counts as income for the year it was contributed, since the deduction was never valid, and the earnings count as income for the year you withdraw them. The 20% additional tax that normally hits non-medical HSA distributions does not apply to a timely corrective withdrawal.¹

You’ll report the calculation of your allowed contribution and any excess on Form 8889 with your return.⁷ If you were eligible for only part of the year, your annual limit is prorated: divide the annual maximum by 12 and multiply by the number of eligible months, adding a prorated share of the $1,000 catch-up if you’re 55 or older.⁸

If You Miss the Correction Deadline

If you don’t withdraw the excess by the filing deadline, the money stays in the account and the 6% tax hits for that year. You can still work the excess down in future years by contributing less than your annual limit, since the unused room absorbs prior excess, but the 6% keeps applying each year until the excess is fully absorbed or removed.³

When Your Employer Made the Contribution

If your employer contributed to your HSA during months you weren’t eligible, which happens when someone switches FSA types mid-year or a payroll system doesn’t catch the change, the contribution is still excess. You owe the income tax and the 6% excise tax regardless of who put the money in.

Employers do have a path to recover mistaken contributions directly from the HSA custodian, but only where there’s clear documentation of an administrative error such as contributing to the HSA of someone who was never eligible, processing duplicate payroll files, or entering the wrong dollar amount. The employer contacts the custodian and requests a return of the funds. If they recover the money, you don’t have an excess contribution to correct. If they don’t, the burden of withdrawing the excess and paying any taxes falls to you.

Watch the Last-Month Rule

One related trap is worth knowing about. If you become HSA-eligible by December 1, the “last-month rule” lets you treat yourself as eligible for the whole year and contribute the full annual limit rather than a prorated amount.¹ The tradeoff is a 13-month testing period running through December 31 of the following year. If you lose HSA eligibility during that period, for instance by switching jobs and getting enrolled in a general-purpose FSA, the extra amount you contributed under the rule gets added to your gross income plus a 10% additional tax, with exceptions only for death or disability.⁷ Use the last-month rule only if you’re confident you’ll keep HDHP coverage and stay clear of disqualifying FSA coverage for the entire testing period.

1
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
2
Internal Revenue Service. Individuals Who Qualify for an HSA
3
Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts
4
Internal Revenue Service. Instructions for Form 5329
5
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
6
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
7
Internal Revenue Service. Instructions for Form 8889
8
Internal Revenue Service. Rev. Proc. 2025-19 – 2026 Inflation Adjusted Amounts for Health Savings Accounts