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

You can roll an HSA excess contribution over to next year instead of withdrawing it, but the IRS charges a 6% excise tax on the excess for every year it stays in the account uncorrected.¹ The rollover works by under-contributing in a later year so the old excess fills the unused room. The alternative, if your tax filing deadline hasn’t passed, is to pull the excess out of the account and avoid the penalty entirely.

How the Rollover Works

When you leave the excess in the HSA, you’re not formally moving money. The dollars stay where they are. What changes is how a future year’s contribution is counted: the IRS lets you treat part of your prior excess as though it were contributed in the later year, which absorbs it against that year’s limit.

The amount you can absorb in any given year is the lesser of two figures: your HSA contribution limit for that year minus whatever new contributions you actually make, or the total excess still sitting in the account at the start of the year.²

A concrete example. Say you overcontributed $600 in 2026 under self-only coverage. In 2027, the self-only limit is $4,400.³ If you deposit only $3,800 of new money in 2027, you leave $600 of unused room, and the 2026 excess fills it. The excess is resolved as of year-end 2027.

If your unused room is smaller than the excess, only part of the problem goes away. A $600 excess against $400 of unused room leaves $200 still uncorrected and still generating the 6% tax the following year.

You Have To Stay HSA-Eligible

Absorption only works in a year you’re an eligible individual with HDHP coverage. If you lose HDHP coverage, enroll in Medicare, or otherwise become ineligible, the excess has nowhere to go. It stays in the account and the 6% tax keeps repeating every year until you either regain eligibility and absorb it, or withdraw the money as a taxable non-qualified distribution.

What the 6% Tax Actually Costs

The penalty is 6% of the excess amount remaining in the account at the end of each tax year, capped at 6% of the account’s year-end value.¹ A $1,000 excess costs $60 the first year. Leave it alone for three years and that’s $180 in penalties on money you already earned and already paid payroll taxes on.

The clock stops in the year you fully absorb the excess (or withdraw it). If you absorb a $600 excess in 2027, you owe the 6% tax on your 2026 return, but no penalty applies for 2027 because the excess was corrected during that year.

The Alternative: Withdraw Before Your Filing Deadline

If your tax return for the year of the excess isn’t due yet, the cheaper fix is pulling the money out. A timely withdrawal avoids the 6% tax entirely. For a 2026 excess, that means getting the money out by April 15, 2027, or October 15, 2027 if you file an extension.²

You can’t just withdraw the principal. You also have to pull out the net income attributable (NIA) to the excess, meaning whatever gains the excess money earned while it was in the account. The returned principal isn’t taxed, but the NIA is included in your gross income for the year you receive the distribution.⁴ If the investments lost money, the NIA is negative; you withdraw less than you contributed and owe no income tax on the loss.

You don’t calculate the NIA yourself. Call your HSA custodian and request a “return of excess contribution.” They run the formula and process the distribution, then report it on Form 1099-SA with distribution code 2, which flags it as a returned excess.⁵

Comparing the Two Options

Timely withdrawal costs you only the tax on any gains the excess earned, which is usually small. The rollover costs 6% of the excess per year until it’s absorbed. For a modest excess corrected within one additional year, the difference might be $30 or $60. For a larger excess, or one that lingers because your eligibility is uncertain, the math moves hard toward withdrawing while you still can.

The rollover makes sense in exactly one situation: you missed the filing deadline (including extensions) and withdrawal is no longer an option. At that point, absorption against a future year’s limit is the only way to make the penalty stop without taking a taxable non-qualified distribution.

How To Report It

Form 8889

Every HSA owner files Form 8889 with their tax return. The form reports your contributions, calculates your deductible amount, and surfaces any excess by comparing total contributions against your deductible limit.⁶ In the year you absorb a prior excess, that year’s Form 8889 shows a reduced new contribution; the absorbed amount isn’t deducted again because it was already in the account.

Form 5329

If you didn’t withdraw the excess by the deadline, you file Form 5329 to calculate and pay the 6% excise tax.⁷ You file it for every year the excess sits in the account. The year you fully absorb the excess, you stop filing Form 5329 for that excess — no penalty applies for the correction year itself.

Form 1099-SA

If you took the withdrawal path instead, your custodian issues Form 1099-SA. Box 2 shows the NIA you have to report as income, and the distribution code identifies the withdrawal as a returned excess rather than a regular distribution.⁵ Keep the form with your records as proof the correction was processed.

Watch the Last-Month Rule Testing Period

If your excess came from using the last-month rule, rolling it forward won’t help, because the problem isn’t an over-contribution in the ordinary sense. The last-month rule lets someone who becomes HDHP-eligible partway through the year contribute the full annual amount, provided they have qualifying coverage on December 1.⁴ The trade is a 13-month testing period that runs through December of the following year.

If you lose HSA eligibility during that window — by switching to a non-qualifying plan, enrolling in Medicare, or dropping coverage — the contributions you made beyond what a month-by-month calculation would have allowed get added back to your gross income, and you owe an additional 10% tax on the added-back amount.⁴ The only exceptions are death and disability. That’s a different mechanism than the 6% excess-contribution tax, and the rollover-to-next-year option doesn’t address it.

Medicare Can Create an Excess You Didn’t Know You Had

Enrolling in Medicare Part A or Part B drops your HSA contribution limit to zero, even if you still have HDHP coverage through work. The quiet trap is Part A’s retroactive effective date: if you enroll after age 65, Part A can be backdated up to six months (but never earlier than the month you first became eligible). Contributions made during the backdated months become excess retroactively.

If you turned 65 in March 2026 and enroll in Medicare in November 2026, Part A can backdate to May 2026, and HSA contributions from May onward are excess. The safe move if you’re approaching Medicare is to stop HSA contributions at least six months before your planned enrollment date.

If You Live in California

California doesn’t recognize the federal HSA tax benefits. Contributions aren’t deductible on your California return, and earnings are taxable at the state level. The federal correction mechanics are the same, but the state consequences of the NIA and the excise tax look different because the state never gave the account preferential treatment to begin with. A California tax professional can tell you how your correction plays out on your state return.

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. Instructions for Form 8889
7
Internal Revenue Service. Instructions for Form 5329