What happens if I over-contribute to my FHSA?
The federal government applies a 1% penalty per month on any contribution amounts over your annual FHSA limit. You can’t deduct over-contributions in the year you make the over-contribution. However, you can deduct it in the following year if you have new unused FHSA contribution room that covers the over-contribution. The 1% penalty ceases when you either withdraw the over-contribution or you earn sufficient contribution room the following year.
For example, let’s assume you open an FHSA and contribute $10,000 in 2023. You have a $2,000 over-contribution for 2023. For 2023, you can deduct $8,000 of that $10,000 contributed. But for the 2023 tax year, you can’t deduct the $2,000 you over-contributed. A 1% penalty tax applies for each month you retain the over-contribution in the plan. On January 1, 2024, you receive additional contribution room of $8,000 for 2024. You can deduct the $2,000 over-contribution in 2024 and contribute and deduct up to $6,000 more during the year. The 1% penalty ceases on January 1, 2024. Note you won’t receive additional contribution room if you’ve surpassed your lifetime limit ($40,000).