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I accidentally made an excess contribution to my HSA (or my employer or HSA custodian made a mistake, it's still not clear). I know what I need to do to correct it, but I'm curious, why is that allowed to happen in the first place?

The HSA custodian knows how much I've contributed at any given point in time, and they know what the IRS limit is (and that I was single). So why didn't they just prevent the excess contribution? That seems like it'd have been a lot simpler for everyone. Now I have to fill out a bunch of complicated paperwork, they have to process it and issue a corrected tax form, etc.

I've searched for reasons, but haven't found anything.

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Some institutions enforce the limits, some don’t.

However, one aspect that you may not realize is that they really don’t know what your contribution limits are. Lots of things affect your contribution limits. For the HSA specifically, your limits can be reduced if you are only eligible for part of the year, or if you have another HSA account that you are contributing to. Your limits are increased if you are over 55 in age, if you have family coverage, or if you use the “last month rule.” Sometimes, you won’t know your limit until the end of the year.

Figuring out your limit can be more complicated than it may first seem, and some HSA custodians put that responsibility on the customer, so that they don’t run the risk of doing it wrong or require the customer to give them a bunch of information that they really don’t need to know.

In your case specifically, you should be happy that they allowed the extra contribution, because if I’m reading it correctly, the last contribution that put it over the top was from your employer. Now you can withdraw the excess and keep it. If the custodian had rejected that deposit from the employer, then there would have been a big complication to get it all straightened out with them.

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Why are excess HSA/IRA/401k/etc contributions allowed?

Sometimes they aren't allowed, e.g. Vanguard makes sure that the customers don't over-contribute to IRAs:

enter image description here

So it depends on how good/bad your financial institution is. Also note that they can't check whether you over-contributed if you have other accounts at other financial institutions.

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  • Yeah, I'd love it if we used Vanguard. That looks like it could prevent manual employee contributions, but my situation is that an automated/employer contribution pushed it over the limit. Do you know if they have any controls in place for that?
    – Ian Dunn
    Feb 17 at 17:56
  • @IanDunn sorry I don't know. Feb 17 at 17:58
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    I would not ever want them to prevent employer contributions - I can just withdraw them and get some free money. If you don't want free money, send it to me.
    – Aganju
    Feb 17 at 18:58
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    Even there, Vanguard isn't entirely preventing you from over-contributing. You could make more than the income limit and over-contribute to a Roth that way, or you could contribute more than your earned income, or you could have five different iRA at different brokers, and Vanguard has no way of knowing that. Feb 18 at 3:06
  • @ZachLipton correct, I mentioned they can't check whether you over-contributed if you have other accounts at other financial institutions, and the screenshot shows traditional IRA. Feb 18 at 3:08

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