Form 5329 and the 6% Excise Tax: When It Applies for HSAs

What Is the 6% HSA Excise Tax

Code section 4973 imposes a 6% tax on excess contributions to an HSA. The IRS calls this an excise tax, which is a penalty designed to discourage specific behavior. In this case, the behavior is contributing more to your HSA than the annual limit allows.

You will have excess contributions if the contributions to your HSA for the year are greater than the limits. Excess contributions are not deductible. For 2025, the limits are $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution for those 55 and older. For 2026, the limits increase to $4,400 for self-only coverage and $8,750 for family coverage.

The 6% rate applies to the excess amount each year. If you contributed $1,000 over your limit, you owe $60. If you contributed $500 over, you owe $30. The calculation seems simple until you understand the compounding nature.

What triggers excess contributions? Multiple scenarios create this problem. You might have contributed the family limit but switched mid-year to individual coverage. You might have employer contributions you forgot to count. You might have lost HSA eligibility partway through the year but kept contributing. You might have contributed to two different HSAs and exceeded the combined limit. All roads lead to the same destination: Form 5329 Part VII.

When Form 5329 Part VII Applies to HSAs

If you, someone on your behalf, or your employer contributed more to your HSAs for 2025 than is allowable or you had an amount on line 49 of your 2024 Form 5329, you may owe this tax.

You must complete Part VII of Form 5329 in two situations. First, you have excess contributions in the current tax year. Second, you had excess contributions from a prior year that you never corrected, and they are still sitting in your HSA. The form does not let you ignore old mistakes.

The deadline to avoid Form 5329 entirely is critical. You may withdraw some or all of the excess contributions and avoid paying the excise tax if you withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. For the 2025 tax year, that deadline is April 15, 2026, or October 15, 2026 if you file for an extension.

Miss that deadline and Form 5329 becomes mandatory. Even if you filed your return already, you can still make the withdrawal no later than 6 months after the due date of your tax return, excluding extensions, by filing an amended return with "Filed pursuant to section 301.9100-2" entered at the top, reporting any related earnings and including an explanation.

Part VII also applies if you are carrying forward excess contributions from prior years. Line 42 on the 2025 Form 5329 asks for the amount from line 48 of your 2024 Form 5329. If that number is greater than zero, you are still dealing with unresolved excess contributions. The form forces you to address the problem every year until it is gone.

You do not need to file Form 5329 if you successfully corrected the excess by the deadline. The excess contribution fix process requires coordination with your HSA custodian, but once complete, the contributions are treated as if they never happened.

How to Calculate the Excise Tax on Form 5329

The calculation follows a specific formula built into Part VII of Form 5329. Understanding each line is essential because the IRS structure reveals how excess contributions compound over time.

The additional tax is 6% of the smaller of line 48 or the value of your HSAs on December 31, 2025 (including 2025 contributions made in 2026). This creates an interesting wrinkle: you never pay the excise tax on more than your HSA is actually worth at year-end. If your HSA balance dropped below your excess contributions due to spending on medical expenses, the 6% applies only to the remaining balance.

Here is a real example. You contributed $5,200 to your HSA in 2025 with self-only coverage. Your limit was $4,300. Your excess is $900. Your HSA balance on December 31, 2025 is $3,800 after you paid medical bills. The excise tax is 6% of $900, which equals $54, because $900 is smaller than your account balance of $3,800.

Another example shows the account value limitation. You contributed $10,000 to your HSA in 2025 with family coverage. Your limit was $8,550. Your excess is $1,450. But you had major surgery and your HSA balance on December 31, 2025 is only $600. The excise tax is 6% of $600, which equals $36, because your account value is smaller than the excess amount.

The account value cap prevents the IRS from taxing phantom balances. You cannot owe $87 on $1,450 of excess if you only have $600 left in the account.

You report the final excise tax amount on Schedule 2 (Form 1040), line 8, which flows to your main tax return. You include this amount on Schedule 2 (Form 1040), line 8. The tax increases your total liability dollar for dollar. There is no deduction, no credit, no offset. It is pure penalty.

Check if you have excess contributions before you file to see if you need Form 5329.

The Compounding Problem: How the 6% Recurs Each Year

This is where excess HSA contributions become a long-term financial drain. The 6% excise tax is not a one-time event. For each year, the HSA owner must pay excise tax on the total of all excess contributions in the account.

The mechanics work like this: Line 42 of your current Form 5329 pulls forward the excess from line 48 of last year's form. That old excess plus any new excess from this year creates your total exposure. You owe 6% on the total every single year.

Scenario: You contributed $1,000 over the limit in 2024. You paid $60 in excise tax on your 2024 return. You did nothing to fix it. In 2025, you contributed correctly and stayed within limits. But that $1,000 from 2024 is still in your account. Line 42 of your 2025 Form 5329 shows $1,000. You owe another $60 for 2025. In 2026, same story. Another $60. This continues until you die, spend it, or fix it.

Now layer on a second year of excess. You contributed $1,000 over in 2024 and never fixed it. In 2025, you contributed another $800 over the limit. Your total excess is now $1,800. You owe 6% of $1,800, which is $108 for your 2025 return. If you still do nothing, you will owe $108 again in 2026, 2027, and every subsequent year.

The annual nature of the excise tax creates a mathematical trap. Over 10 years, a $1,000 excess contribution costs you $600 in penalties ($60 per year times 10 years). That is 60% of the original excess. Over 20 years, the penalty exceeds the excess amount itself.

The compounding extends across tax years, but it is not interest - it is a fresh penalty each year. You are not paying 6% on accumulated penalties. You are paying 6% on the excess contribution amount that remains in the account. This distinction matters because it means distributions for qualified medical expenses can reduce your future liability even if you do nothing else to correct the excess.

Here is how distributions reduce the compounding effect. You have $1,000 in excess contributions. Your HSA balance is $5,000 on December 31. You pay $60 in excise tax. Next year, your contributions are within limits, but you spend $4,000 on qualified medical expenses. Your December 31 balance is $1,000. Now the excise tax is 6% of $1,000 (the smaller of your excess or account balance), which is still $60. But if you had spent $5,000, dropping your balance to zero, you would owe no excise tax that year because 6% of zero is zero. The excess still exists on paper, but there is nothing to tax.

This creates a perverse incentive to drain your HSA if you have uncorrected excess contributions, which defeats the entire purpose of long-term HSA investing. The better approach is to fix the problem properly.

Three Ways to Eliminate the Excise Tax

You have three options to stop the annual 6% penalty. Each has different tax consequences and timing requirements.

Option 1: Corrective distribution before the deadline. The 6% excise tax can be avoided if the HSA owner withdraws the excess contributions for a taxable year by the deadline (including extensions) for filing their federal income tax return for the year. For the 2025 tax year, this means removing the excess by April 15, 2026, or October 15, 2026 if you file an extension.

The process requires requesting a return of excess contribution from your HSA custodian. Most providers have a specific form for this. You must withdraw both the excess contribution and any earnings attributable to that excess. You may withdraw some or all of the excess contributions and avoid paying the excise tax if you withdraw by the due date, including extensions.

The withdrawn excess contribution is not subject to the 6% excise tax, but the earnings on the excess are taxable income. The earnings also avoid the 20% penalty that normally applies to non-qualified distributions. You report the earnings as other income on your tax return for the year you withdraw them, even if the withdrawal happens in the following calendar year.

Example: You contributed $1,000 over your limit in 2025. By March 2026, those contributions earned $50. You request a corrective distribution. Your HSA custodian sends you $1,050. You do not owe the 6% excise tax on the $1,000. You report the $50 of earnings as taxable income on your 2025 return. You do not file Form 5329 Part VII at all.

Option 2: Apply the excess to a future year. If you cannot or do not want to withdraw the excess, you can leave it in your HSA and apply it toward a future year's contribution limit. This is called the carry-forward method. If HSA contributions for any year are less than the maximum limit for that year, the amount subject to the excise tax is reduced.

The mechanism works through Form 5329 line 43. If contributions to your HSAs for 2025 were less than your contribution limit for HSAs, enter the difference on line 43. That difference reduces the prior year excess that flows through to line 46.

Example: You had $1,000 in excess contributions from 2024. In 2025, you contribute only $3,300 even though your limit is $4,300 for self-only coverage. The $1,000 difference goes on line 43. Line 46 (prior year excess minus line 43) becomes zero. You eliminated the excess by under-contributing in 2025.

The downside is you pay 6% each year until the excess is absorbed. Using the example above, you pay $60 on your 2024 return for the original excess. You still pay $60 on your 2025 return because the excess existed for all of 2025. Only in 2026 do you stop paying the excise tax, because the excess is finally gone.

Option 3: Corrective distribution after filing. If you already filed your tax return and realized you have excess contributions, you can still make the withdrawal no later than 6 months after the due date of your tax return, excluding extensions. This extended deadline gives you until October 15, 2026 for a 2025 tax return filed by April 15, 2026 without extensions.

The trade-off is you must file an amended return. File an amended return with "Filed pursuant to section 301.9100-2" entered at the top, report any related earnings for 2025 on the amended return and include an explanation of the withdrawal, and make any other necessary changes such as an amended Form 5329.

The process is more complex than option 1, but it gives you additional time if you discover the problem after filing. You still avoid the 6% excise tax if you act within the six-month window.

Find providers that help with excess contribution corrections if you need guidance on requesting a corrective distribution.

Form 5329 Line-by-Line Instructions for HSA Excess

Part VII of Form 5329 contains eight lines (42 through 49) that calculate your excise tax. Each line serves a specific purpose in the compounding calculation.

Line 42: Enter the excess contributions from line 48 of your 2024 Form 5329. Enter the amount from line 48 of your 2024 Form 5329 only if the amount on line 49 of your 2024 Form 5329 is more than zero. This brings forward unresolved excess from prior years. If you had no excess last year, or if you corrected it, enter zero and skip to line 47. If you enter an amount here, you are acknowledging that you have a continuing problem.

Line 43: Contribution room that can absorb prior excess. If contributions to your HSAs for 2025 were less than your contribution limit for HSAs, enter the difference on line 43. Your contribution limit for HSAs is the amount on line 12 of Form 8889. This is the reduction mechanism. If you contributed $3,500 but your limit was $4,300, enter $800. That $800 will reduce line 42 and eliminate $800 of prior year excess.

Important: Also include on your 2025 Form 8889, line 13, the smaller of Form 5329 line 43 or the excess of Form 5329 line 42 over line 44. This coordination between forms ensures you claim the deduction properly.

Line 44: 2025 distributions from your HSAs from Form 8889, line 16. Enter the total distributions you took during 2025. These distributions reduce prior year excess contributions that remain in your account. The logic is simple: if the excess is no longer in your account because you spent it, there is less to tax.

Line 45: Add lines 43 and 44. This is the total reduction to prior year excess - both from under-contributing and from distributions.

Line 46: Prior year excess contributions. Subtract line 45 from line 42. If zero or less, enter -0-. This is the amount of old excess that survives into the current year after accounting for all reductions. If this number is zero, you successfully eliminated prior year excess through under-contributing or spending.

Line 47: Excess contributions for 2025. Enter the excess of your contributions made by you or on your behalf to your HSAs for 2025 from Form 8889, line 2, over your contribution limit from Form 8889, line 12. Also include on line 47 any excess contributions your employer made. This is new excess created in 2025. Calculate it from Form 8889: line 2 minus line 12. If line 2 is not greater than line 12, enter zero.

Line 48: Total excess contributions. Add lines 46 and 47. This is the total excess from all sources - old and new - that exists in your account at the end of 2025.

Line 49: Additional tax. Enter 6% (0.06) of the smaller of line 48 or the value of your HSAs on December 31, 2025 (including 2025 contributions made in 2026). Include this amount on Schedule 2 (Form 1040), line 8. Multiply line 48 by 0.06. Compare that result to 6% of your December 31 HSA balance. Enter the smaller amount. Transfer this number to Schedule 2, line 8 of your Form 1040.

The line 48 amount carries forward to next year's line 42. The cycle continues unless you break it through one of the three elimination methods described earlier.

Working through a complete example clarifies the process. You are single with self-only coverage. In 2024, you contributed $4,800 when the limit was $4,150. You had $650 in excess. You paid $39 on your 2024 Form 5329. You did nothing to fix it. In 2025, you contributed $4,000. Your 2025 limit is $4,300. Your December 31, 2025 HSA balance is $6,500.

Line 42: $650 (from line 48 of 2024 Form 5329). Line 43: $300 (your limit of $4,300 minus contributions of $4,000). Line 44: $0 (assume no distributions). Line 45: $300 (line 43 plus line 44). Line 46: $350 ($650 minus $300). Line 47: $0 (you contributed less than the limit in 2025). Line 48: $350 (line 46 plus line 47). Line 49: $21 (6% of $350, which is smaller than 6% of $6,500).

You reduced the excess from $650 to $350 by under-contributing in 2025. You owe $21 instead of the $39 you would have owed if you had not under-contributed. Next year, line 42 will show $350 unless you take further action.

Related reading: Form 8889 guide for 2025 explains how the HSA tax form coordinates with Form 5329.

Frequently Asked Questions

Q: If I pay the 6% excise tax this year, do I have to pay it again next year on the same excess?

Yes. The 6% excise tax is cumulative and will continue in future years if a corrective withdrawal is not made, and for each year, the HSA owner must pay excise tax on the total of all excess contributions in the account. The tax recurs annually until you eliminate the excess through withdrawal, under-contributing, or spending down your HSA balance.

Q: Can I just leave the excess in my HSA and pay the 6% each year?

Technically yes, but it is expensive. Over 10 years, you pay 60% of the excess amount in cumulative penalties. Over 20 years, you pay 120%. The math never favors ignoring the problem. The most efficient approach is withdrawing the excess before the filing deadline or applying it to a future year by under-contributing.

Q: What if my HSA balance drops below my excess contributions due to medical expenses?

The additional tax is 6% of the smaller of line 48 or the value of your HSAs on December 31. You only pay the excise tax on what remains in the account. If your balance drops to $200 but your excess is $1,000, you pay 6% of $200, which is $12. This does not eliminate the excess - it just reduces the tax that year.

Q: Do I need to file Form 5329 if I withdraw the excess before the tax deadline?

No. You may withdraw some or all of the excess contributions and avoid paying the excise tax if you withdraw the excess contributions by the due date, including extensions, of your tax return. If you complete the corrective distribution before filing, you do not file Form 5329 Part VII at all. The withdrawn contributions are treated as never having been contributed.

Q: Can I use Form 5329 from a prior year if I discover excess contributions from 2023 while filing my 2025 return?

If you are filing Form 5329 for a prior year, you must use the prior year's version of the form. If you do not have any other changes and have not previously filed a federal income tax return for the prior year, file the prior year's version of Form 5329 by itself. You cannot correct 2023 excess on your 2025 Form 5329. You must file a 2023 Form 5329, potentially with Form 1040-X if you already filed that year's return.