14 HSA Mistakes That Land on HR’s Desk (and How to Stop Each One Before January)
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Here are the 14 HSA mistakes that show up on a benefits admin’s desk every year, usually in Q1 when the tax forms arrive. Five are eligibility mistakes employees make without knowing. Five are contribution mistakes that create a 6% penalty. Three are employer setup mistakes with a 35% excise tax behind them. One is a paperwork mismatch. Each one has a fix.
The HSA is the least explained benefit in most plans and the one where a quiet mistake costs a real person real money. The employee never sees it coming. Then they get a letter, and they walk to your desk holding it.
Almost none of these are plan design problems. They’re communication and setup problems, which means they’re yours to prevent. Here’s the list.
Which eligibility mistakes cost employees money?
1. Enrolling in Medicare Part A and getting backdated six months
Anyone who enrolls in Medicare after 65 can have Part A backdated up to six months, and any HSA contribution made in those months becomes an excess contribution with a 6% excise tax every year it stays in the account (Medicare.gov). Applying for Social Security triggers Part A automatically.
This is the number-one HSA cleanup in benefits, and it always arrives in February. The employee did nothing wrong by your rules. They kept working, stayed on your plan, kept contributing, and then filed for Social Security in October. Suddenly April through September were ineligible months.
Action: Send everyone 64 and older a separate note: stop HSA contributions six months before you apply for Medicare or Social Security.
2. A spouse’s general-purpose FSA disqualifies your employee
If an employee’s spouse has a general-purpose health FSA at another job, that FSA covers the employee too, and it makes your employee ineligible for HSA contributions all year (IRS Publication 969).
Nobody asks this question at enrollment, so nobody catches it. The employee elects the HDHP and the HSA, the spouse re-elects their FSA at the other company, and both households think they’re fine. The fix is a single question on your OE form.
Action: Add “Does your spouse have a health FSA through their employer?” to the HSA election, with a one-line explanation of why it matters.
3. Keeping a general-purpose FSA at your own company next to the HSA
An employee can’t be in your general-purpose health FSA and contribute to an HSA in the same year. Only a limited-purpose FSA (dental and vision) can sit next to an HSA (IRS Publication 969).
The sneaky version is the grace period or carryover. An employee leaves the FSA to join the HDHP, but their old FSA still has a $400 carryover balance in January. That carryover is general-purpose coverage, and it blocks HSA contributions until it’s gone or converted to limited-purpose. Most benefits systems don’t flag this.
Action: Set your plan to convert any carryover to limited-purpose automatically for anyone moving to the HDHP, or make them spend it down by December 31.
The FSA-vs-HSA confusion is the single most common question in a live OE meeting. The Plain-English HSA has the word-for-word script for it. One page, free.
4. Other coverage that quietly pays before the deductible
Any other health coverage that pays before the HDHP deductible is met disqualifies the HSA: a spouse’s PPO that covers the employee, a general-purpose HRA, or most non-HDHP group plans (IRS Publication 969). Dental, vision, disability, and specific-disease policies are fine. Since 2026, direct primary care under $150 a month and pre-deductible telehealth are fine too (IRS Notice 2026-5, 2025).
| Coverage the employee also has | HSA contributions allowed? |
| Spouse’s PPO or HMO that covers the employee | No |
| Spouse’s general-purpose health FSA | No |
| Own general-purpose FSA or FSA carryover | No |
| Limited-purpose FSA (dental/vision only) | Yes |
| Medicare, any part | No |
| Dental, vision, disability, accident, specific-disease policy | Yes |
| Direct primary care, $150/mo or less (single) | Yes (2026+) |
| HDHP with pre-deductible telehealth | Yes (permanent) |
| ACA bronze or catastrophic individual plan | Yes (2026+) |
Action: Put this table on the back of your HSA election form.
5. An adult child on the plan who isn’t a tax dependent
An employee can cover a child up to age 26 on the HDHP, but if that child is not their tax dependent, the employee’s HSA can’t pay the child’s medical bills (IRS Publication 969). The good news: that child can open their own HSA and contribute up to the full family limit, because they’re covered by a family HDHP.
Parents reimburse themselves for the 24-year-old’s ER visit all the time. That’s a non-qualified withdrawal: income tax plus a 20% penalty. And nobody tells the 24-year-old they could be putting $9,000 a year into their own account.
Action: Add one line to the dependent section: “Adult children who aren’t your tax dependents can open their own HSA. Ask me how.”
Which contribution mistakes create a 6% penalty?
6. Payroll cap set at the full limit without subtracting the employer seed
The annual limit includes employer money. If the employer puts in $750 and payroll lets the employee elect the full $4,500, the account is $750 over and the employee owes a 6% excise tax on the excess every year until it’s removed (IRS Form 8889 instructions).
The payroll system doesn’t know about the vendor’s seed deposit, and the vendor doesn’t know about payroll. You’re the only one who sees both.
Action: Set payroll caps at the statutory limit minus the employer contribution, per tier, and test one employee at each tier in January.
7. Mid-year changes that nobody prorated
HSA eligibility is tested on the first of each month and the limit is 1/12 per eligible month (IRS Publication 969). Someone who drops from family to self-only in July, or leaves the HDHP in September, has a lower limit than the one on their election.
The last-month rule makes it worse. A December 1 hire can fund the whole year, but only if they stay HSA-eligible through the following December 31. Break that testing period and the extra is income plus a 10% penalty.
Action: Every mid-year coverage change gets a limit recalculation, written on the change form, before payroll updates.
8. Catch-up contributions applied wrong
The $1,000 catch-up is for anyone 55 or older by December 31, it must go into that person’s own HSA, and it prorates if the person enrolls in Medicare mid-year (IRC §223(b)(3)).
Two ways this breaks. A married couple both over 55 tries to put $2,000 of catch-up into one account. Or a 55-year-old is set up for the catch-up in January, enrolls in Medicare July 1, and the catch-up wasn’t prorated to $500.
Action: Flag every employee turning 55 and every employee turning 65 in your OE prep, and handle them by hand.
9. Payroll deducts the money but the account was never opened
If the employee never completes the HSA custodian’s account opening (ID verification, signature, whatever the vendor requires), payroll deductions and employer seeds have nowhere to land. They bounce back, sit in a suspense account, or get refunded as taxable wages months later.
This one is entirely preventable and it happens at every company at least once. The employee elected the HSA at OE, assumed it was done, and never opened the vendor email. Six months of deductions later, somebody asks why the balance is zero.
Action: Run a “funded vs. elected” report from the vendor 30 days after the plan year starts, and chase every zero-balance election by phone.
10. Deductions that post late (or not in the same year)
Pre-tax HSA payroll deductions have to reach the account within a reasonable time. Employer contributions and pre-tax deferrals both count toward the year they’re deposited, not the year they were withheld (IRS Form 8889 instructions).
The classic: December 30 payroll, deposit posts January 4. The employee’s W-2 says one number, the custodian’s 5498-SA says another, and their tax return is wrong in a way that takes three phone calls to explain.
Action: Confirm the funding file cutoff with your vendor so the last December payroll posts in December.
Which employer setup mistakes trigger a 35% excise tax?
11. Making employer contributions outside the cafeteria plan
Employer HSA contributions made through a Section 125 cafeteria plan are tested under the (relatively easy) cafeteria plan nondiscrimination rules. Employer contributions made outside a cafeteria plan fall under the HSA comparability rules, and a comparability failure carries a 35% excise tax on all employer contributions for the year (26 CFR §54.4980G-5; IRC §4980G).
The plain-English version: if your employees can make pre-tax HSA contributions through payroll, you’re inside the cafeteria plan, and comparability doesn’t apply. If you don’t offer pre-tax payroll HSA deductions and you just deposit a seed, you’re under comparability, and comparability means every employee in the same tier gets the same dollar amount or the same percentage. No exceptions for managers. No “match.”
Action: Confirm your Section 125 plan document includes HSA contributions. If it doesn’t, get it amended before the next seed deposit.
12. Giving more to the people who run the company
Even inside the cafeteria plan, HSA contributions can’t favor highly compensated employees or key employees, and small firms fail the key employee concentration test more than any other (IRC §125(b)). Separately, more-than-2% S-corp shareholders and partners can’t receive pre-tax HSA contributions through the plan at all.
The failure pattern: the three owners max their HSAs through payroll, the company seeds their accounts, and half the hourly staff waived coverage. Run the numbers, and 60% of the plan’s pre-tax dollars went to key employees. The 25% ceiling is gone.
Action: Run nondiscrimination testing before OE closes, not after the year ends, and have a plan for the owners’ contributions if you’re close.
13. Terminations that keep contributing after coverage ends
When an employee terminates, HSA eligibility ends the first of the month after their HDHP coverage ends. The final paycheck still has the HSA deduction on it, and sometimes the employer seed for the following month goes out anyway.
That final-check deduction is legal if the employee was still covered on the first of that month. The employer seed a month later is an excess contribution the ex-employee now has to remove, with a penalty, from a job they no longer have.
Action: Add “stop HSA seed” to the termination checklist next to “stop payroll deduction,” and check the date against the first of the month.
Which paperwork mismatch shows up in January?
14. W-2 Box 12 Code W doesn’t match the vendor’s totals
Employer HSA contributions plus employee pre-tax payroll contributions go on the W-2 in Box 12, Code W (IRS W-2 instructions). The custodian reports what actually posted on Form 5498-SA. When those two numbers disagree, every affected employee’s Form 8889 is wrong.
The mismatch comes from items 9 and 10: money withheld but never posted, or posted in the wrong year. It surfaces in February when the first employee’s tax preparer calls. By then it’s a W-2c.
Action: Reconcile Code W to the vendor contribution report before W-2s are released, employee by employee.
Nobody told me that the HSA would generate more one-on-one cleanup conversations than any other benefit in the plan, and that almost every one of them traces back to a question nobody asked at enrollment. The fix isn’t a better vendor. It’s five questions on the election form and one report thirty days after the plan year starts. That’s it. That’s the whole moat.
What to do first
- Add the five eligibility questions (spouse FSA, own FSA carryover, other coverage, Medicare timing, adult-child status) to your HSA election form before OE opens.
- Set payroll caps at the limit minus the employer seed, per tier.
- Confirm your Section 125 document covers HSA contributions. If you’re not sure, that’s a “no” until you’ve read it.
- Calendar the “funded vs. elected” vendor report for 30 days after plan-year start.
- Calendar the Code W reconciliation for the second week of January.
- If you want the exact January reconciliation steps and a tracker to run them in, the free Post-OE Audit field guide is built for this. Different freebie than the HSA scripts; this one’s for the cleanup.
- New to the seat and the carrier portal still feels like a maze? Day One Ready includes the Carrier Command Center, which is where the funded-vs-elected report lives.
- If your team is running an HDHP with 100-plus enrollees and nobody has run comparability or 125 testing in two years, that’s an audit conversation. Email me at ekirby@ericakirby.com.
This is the plain-English version to get you oriented, not legal or tax advice. Before you act on any of it, confirm the specifics with your broker, your benefits counsel, or your filing software. My job here is to make it make sense, not to be your lawyer.
FAQ
Q: What happens if an employee contributes to an HSA while on Medicare? A: Contributions made after Medicare coverage starts, including backdated Part A months, are excess contributions and carry a 6% excise tax each year they stay in the account. The excess must be withdrawn with earnings.
Q: Can an employee have an HSA if their spouse has an FSA? A: Not if the spouse’s FSA is general-purpose, because it covers the employee’s medical expenses too. A limited-purpose (dental and vision) FSA is allowed alongside an HSA.
Q: Do employer HSA contributions have to be the same for everyone? A: If contributions are made through a Section 125 cafeteria plan, they follow cafeteria plan nondiscrimination rules and can vary as long as they don’t favor highly compensated employees. Outside a cafeteria plan, the comparability rules require equal amounts or percentages per tier, with a 35% excise tax for failures.
Q: Can a parent’s HSA pay for an adult child on their health plan? A: Only if the child is the parent’s tax dependent. Otherwise the child can open their own HSA and contribute up to the family limit.
Q: What is HSA W-2 Code W? A: Code W in Box 12 of the W-2 reports employer HSA contributions plus employee pre-tax payroll contributions for the year. It should match the custodian’s Form 5498-SA.
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