Getting Married with Kids? How to Live Happily Ever After with Your HSA and Avoid Penalties

As an engaged couple in our early sixties with a wedding this year, we knew we needed to think about how our marriage was going to affect our financial and tax situation. As a CPA and tax professional, I am keenly aware of the marriage penalty and how combining incomes could accelerate us into higher tax brackets and earlier phaseouts. Since we both are still working, these items needed to be looked into and understood.

Surprise!

One surprise we uncovered was not related to additional taxes that we may owe upon filing a joint return, but the fact that each of us would need to adjust our HSA contributions for the remainder of the year to avoid a penalty.

I was set with payroll deductions to fully contribute at the family contribution rate of $7,750 with an additional $1,000 catch-up (I still have a college-age dependent), while my fiancé was set to fully contribute at the single contribution rate of $3,850 with an additional $1,000 catch-up. If we continued down this path for the remainder of the year, we would have over-contributed $3,850. Sadly, on a jointly filed tax return, the IRS only allows a maximum deduction for HSA contributions at the family limit, plus the $1,000 catch-up for each spouse.

Penalties – Ouch!

This excess contribution would need to be withdrawn from our HSAs before the tax filing deadline (April 15th next year) to avoid being taxed as income (due to the pre-tax nature of the payroll deductions) and to avoid being subject to a 6% excess contribution penalty.

If not withdrawn, the penalty would be assessed each year until the excess is withdrawn from the HSA. I can think of better things to spend money on than IRS penalties!

So Unfair!

I have been trying to build up my HSA balance for years, but with three kids the money went out as fast as it went in. Only recently was I able to contribute at the family level and was hoping to continue funding at this rate until I no longer had a dependent. It really seemed unfair to have to lower my contribution since I am eligible for a family high-deductible health plan (HDHP), which includes my daughter, and consequently I am allowed to contribute to my HSA at the family limit. Alas, what we do for love!

Avoid the Penalties

To avoid having to add the excess contribution as income on our 2023 joint tax return and pay a 6% penalty, we did the following mid-year:

1. Determined the total amount we had each contributed to our respective HSAs year-to-date
2. Took into account employer contributions since both our employers make contributions on our behalf
3. Adjusted our remaining employee contributions for the rest of the year to not go over the annual family limit (plus catch-ups)

Once we made the adjustments, we waited a couple of pay periods and looked at our calculations again along with our future contributions to ensure that we were not going to exceed the limit. We actually were a little off on our initial calculations and made the necessary adjustments.

Wedding in Rome

September 22, 2023 was the official wedding day! Here’s a selfie before we left the church. The wedding was magical as was the two-week honeymoon in Italy. Fortunately, we didn’t need to worry about our HSA contributions as we had made the adjustments earlier in the year.

Note: You do not need to wait until you are married to adjust your contributions, especially if the wedding date is later in the year. Waiting may not allow you enough time to adjust the payroll contributions before you have exceeded the family limit.

Bright Side

One final note: If you happen to find yourself at the end of the year (or even the following spring) in an excess contribution situation, don’t panic. You can still live happily ever after by withdrawing the excess contributions from your HSAs. As long as they are withdrawn by the due date of your personal income tax return, typically April 15th, you will not be subject to a penalty. You will still need to include the amount as income on your tax return (if it was contributed via payroll deductions), but at least you won’t be wasting your hard-earned money on silly penalties.

Ciao!

This is intended for educational purposes only and should not be construed as personalized tax or financial advice.

Tawn M. Bush Private Client Group Leader CPA/PFS, CFP®, MST

Tawn has extensive experience consulting on tax issues and tax planning. She earned a master of science in taxation degree from DePaul University, is a member of the AICPA’s Personal Financial Planning Section and Tax Section, and is a long-standing member of the Illinois CPA Society.