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Not entirely sure how, but between pass-through contributions, payroll deductions, and a manual contribution at the beginning of last year that was supposed to cover the gap caused by the inability to elect contributions that weren't an even dollar amount, we ended up contributing a total of $7200.08 to our HSA for tax year 2021, when the limit is $7200. We got a letter from the HSA informing us of this mistake, and telling us to correct it or face a penalty (of some percentage of the overcontribution, can't remember exactly what, but on 8¢, any percentage under four figures is meaningless).

It seems like a royal pain to undo this contribution. I was planning to just pay the penalty. But it turns out I can't report the overage, because all numbers on taxes are rounded off to the nearest dollar, and you can't report an overage of $0.

What's going to happen if I just ignore this? Will someone eventually come after me for taxes, penalties and interest due on my overcontribution of 8¢?

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  • 1
    You could simply contribute 8 (or 9) cents less next year (=2022), and apply the existing overcontribution to the next year (should be an option on the HSA provider's website). That way, you still owe the penalty (probably a shocking amount of 0 or 1 cent) for the one year, but you would be done with it after that.
    – Aganju
    Mar 10, 2022 at 22:02
  • My HSA is like online banking. I can withdraw/spend anytime with relative ease. When I withdraw, I have the option to upload corresponding documents that show it is for reimbursement for qualified medical expenses in case of future audit. Simply withdraw it. If you feel you must, you can type and sign a letter explaining the withdraw is to undo the misappropriation.
    – user26460
    Jul 28, 2022 at 20:28

2 Answers 2

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I don't know the answer to your question. But let me offer these thoughts:

First, when it comes to over contributing to an HSA, you cannot just "pay the penalty" and be done with it, because the rules state that the penalty must be paid every year it remains in the HSA. Paying the penalty this year will not avoid the requirement to remove the over-contribution.

Second, removing an overcontribution should not be a "royal pain." The HSA took the time to tell you that you overcontributed, so there should be a straight-forward process to doing an excess contribution withdrawal. The 8 cents will be returned to you, in addition to any earnings that the 8 cents generated (probably at most 1 cent). You have until April 15 to get this done. You are then supposed to add this 8 cents to your tax return as "other income", but as you mentioned, this will round down to zero when it hits your return. It should be a fairly easy process.

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    "because the rules state that the penalty must be paid every year it remains in the HSA" Yes, but if the penalty is rounded to $0 every year, does it matter?
    – user102008
    Mar 10, 2022 at 19:02
  • 1
    @user102008 As I said at the beginning of my answer, I don’t know the answer to the question, “What happens if you incur an IRS penalty of less than 50 cents?” But in general, you cannot over contribute to an HSA, pay the penalty once, and call it good.
    – Ben Miller
    Mar 10, 2022 at 19:52
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    You can let the penalty occur at least once and see what happens. It'll be interesting if they are all rounded to 0 and you end up with a recurring fine of $0.
    – Nelson
    Mar 11, 2022 at 4:26
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    @Nelson There is no “seeing what happens” with this, as you do your own taxes and calculate your own penalty.
    – Ben Miller
    Mar 11, 2022 at 11:03
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What's going to happen if I just ignore this? Will someone eventually come after me for taxes, penalties and interest due on my overcontribution of 8¢?

I expect nothing. If all your numbers on the returns are rounded to the dollar, you haven't overcontributed.

It seems like a royal pain to undo this contribution

You don't need to "undo" the contribution, you just need to withdraw $0.08 from the account. This is called "excess contribution withdrawal" and the HSA provider should process it for you. Technically they would withdraw the $0.08 and any earnings on that, which I expect to not be much.

Again, if this is the only withdrawal, you'll get a 1099 with $0.08 on it, which will be silently ignored in your tax return. If you were able to earn 500%++ on it, you'll probably need to deal with some reporting of the earnings as misc income.

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