Penalty for Having HSA and FSA: 6% 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 contribute to the HSA during any month you were also covered by a general-purpose FSA, plus regular income tax on those contributions because the deduction was never valid. That 6% applies every year the excess stays in the account, not just the year you made the mistake. Two things soften the picture: some FSA designs don’t trigger the penalty at all, and if you catch the problem before your tax filing deadline, you can pull the excess out and wipe the excise tax away.

Why a General-Purpose FSA Blocks HSA Contributions

To contribute to an HSA, federal law requires you to be an “eligible individual,” which means you’re enrolled in a High-Deductible Health Plan on the first day of the month and you have no other health coverage that pays benefits before the HDHP deductible is met.¹ A standard general-purpose FSA reimburses medical expenses from the first dollar, so the IRS counts it as disqualifying coverage.

You don’t have to spend anything from the FSA for the rule to apply. Being covered is enough. Eligibility is determined month by month, so coverage for a single day of a month knocks out that whole month for HSA purposes.² That monthly test is what creates the penalty exposure: contribute as if you’re eligible all year when you weren’t, and the IRS treats the difference as excess.

FSA Types That Don’t Trigger the Penalty

Not every FSA is a problem. The IRS allows a few arrangements that don’t give you first-dollar medical coverage, so they coexist with an HSA without destroying eligibility.³

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

If your employer offers both an HDHP and an FSA, confirm which type of FSA it is before you enroll. Signing up for a general-purpose FSA while contributing to an HSA is the single most common way people walk into the 6% penalty.

Grace Periods and Carryovers Extend the Block

Two routine FSA features catch people who switch to an HDHP mid-career. Many employers give FSA participants a grace period of up to two and a half months after the plan year ends to spend remaining funds. During those grace period months you’re still considered covered by the FSA, which means no HSA contributions. The only exception is if your FSA balance was exactly zero at the end of the prior plan year.³

Carryovers are worse. Many FSA plans let you carry unused funds into the next plan year, up to $680 for 2026. If any amount of a general-purpose FSA carries over, that balance blocks HSA eligibility for the entire new plan year, not just the months it takes you to spend it down. Your options are to spend the balance to zero before the new year begins, ask your employer to convert the carryover into a limited-purpose arrangement, or forfeit it. Losing a few hundred dollars in FSA money is almost always cheaper than losing a full year of HSA contribution room to penalties.

The 6% Excise Tax and the Income Tax Hit

Any HSA contribution made in a month you weren’t eligible is an excess contribution, and the IRS imposes a 6% excise tax on it.⁴ The tax applies every year the excess stays in the account. A $3,000 excess costs you $180 the first year, another $180 the second, and so on until you remove it or absorb it with unused room from a future year.

The excess amount also isn’t deductible. You include it in gross income for the year it was contributed. If the money went in through payroll deductions or an employer contribution, the pre-tax treatment doesn’t survive the ineligibility, so you still owe income tax on it. The excise tax is reported on IRS Form 5329, filed with your regular return.⁵

Because the 6% applies to the cumulative excess at the close of each tax year, letting the problem sit through multiple years compounds the cost fast.

How Much Were You Actually Allowed to Contribute?

If you were HSA-eligible for only part of the year, you prorate the annual limit. Take the applicable maximum ($4,400 for self-only or $8,750 for family coverage in 2026), divide by 12, and multiply by the number of eligible months. Add the prorated catch-up ($1,000 ÷ 12 per eligible month) if you’re 55 or older.⁶

Say you had a general-purpose FSA from January through June and switched to a limited-purpose FSA in July. You were HSA-eligible for six months, so your self-only limit for 2026 would be $4,400 × 6/12 = $2,200. Anything above that is excess. These numbers get reported on Form 8889 with your return.⁷

The Last-Month Rule and Its Testing Period

One exception to proration can save or cost you a lot of money. If you’re HSA-eligible on December 1, the “last-month rule” lets you treat yourself as eligible for the entire year and contribute the full annual limit.¹

In exchange, you enter a testing period running from that December through December 31 of the following year. If you lose HSA eligibility at any point in those 13 months, including by picking up a general-purpose FSA at a new job, the extra amount you contributed under the last-month rule gets added to your gross income and hit with an additional 10% tax. Only death or disability excuses the failure.⁷ Use the last-month rule only when you’re confident you’ll hold HDHP coverage, and avoid disqualifying FSA coverage, for the full testing period.

How to Fix an Excess Contribution

The clean fix is to withdraw the excess before your tax filing deadline for the year of the contribution, including extensions. For a 2025 excess, that generally means withdrawing by October 15, 2026, if you file an extension.¹ The withdrawal has to include two things: the excess itself and the net income it earned while sitting in the HSA. Your custodian calculates the earnings piece and reports the distribution on Form 1099-SA.⁸

If the withdrawal is timely, the tax treatment is:

The excess contribution is included in gross income for the year it was contributed. You owed income tax on this already because the deduction was never valid.
The net income is included in gross income for the year you withdraw it.
The usual 20% additional tax on non-medical HSA distributions does not apply to a timely corrective withdrawal.¹
The 6% excise tax is eliminated for the year of contribution and for every future year, because the excess is no longer in the account.

Miss the deadline and the excess stays put. You can still reduce it in later years by contributing less than the annual limit, so the unused room absorbs the old excess, but the 6% applies for each year it remains.⁴

When the Excess Came From Your Employer

If your employer put money into your HSA during months you weren’t eligible, often because someone switched FSA types mid-year or payroll didn’t track the change, the deposit is still an excess contribution and still subject to the same penalties. You owe the income tax and the 6% excise tax regardless of who moved the money.

Employers can recover mistaken contributions directly from the HSA custodian when there’s clear documentation of an administrative error, such as a contribution to someone who was never eligible, a duplicate payroll file, or a wrong dollar amount. The employer contacts the custodian and requests a return, with the goal of putting everyone back where they would have been without the mistake. If the employer catches it and the custodian returns the funds, you have no excess to clean up. If they don’t, the withdrawal and the tax bill are yours.

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