Health Savings Account Help
Once an individual enrolls in Medicare, contributions, including catch-up contributions, cannot be made beginning with the month the individual enrolls.
EXAMPLE: EXAMPLE: Pearl, who is covered under an HDHP with self-only coverage, attains age 65 and enrolls for Medicare benefits on March 1, 2020. Her 2020 contribution limit is 2/12 of the statutory contribution limit. She may make contributions for January and February but may not make any contributions for March through December 2020 or thereafter.
If both spouses are eligible individuals, the total contribution limit for both spouses cannot exceed the family coverage maximum contribution, divided equally between the spouses unless they agree upon a different division. Regardless of how the limit is divided between the spouses, the aggregate contributions between the two spouses cannot exceed the maximum annual contribution amount for family coverage, (i.e., $7,100 for 2020).
EXAMPLE: Leah and Jon are married. They are both 42 years old and both have family coverage under HDHPs. In this scenario, Leah and Jon in aggregate cannot exceed a contribution of $7,100 for 2020. Each may contribute $3,550 to an HSA for 2020, unless they decide to divide the amount in a different way.
Catch-up contributions: One or both spouses may make catch-up contributions, if age eligible. For example, if both spouses are age 55 or older by the end of 2020, total contributions to their HSAs cannot exceed $9,100 ($7,100 maximum limit + $1000 catch-up for each spouse), when both have family coverage.
Archer MSA contributions: The family coverage limit is reduced by any contributions to Archer MSAs.
Contributions made by an eligible individual: HSA contributions made by an eligible individual or his or her family members are deductible by the eligible individual when determining his or her adjusted gross income. Contributions are deductible whether or not the eligible individual itemizes deductions.
NOTE: The individual cannot also deduct the contributions as medical expense deductions.
Employer contributions: HSA contributions made by an employer to employees’ HSAs may be deducted by the employer. These contributions are excluded from the employees’ gross income, are not subject to withholding for income tax, and are not subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act (RRTA).
NOTE: Contributions to an employee’s HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions.
Tax-deferred earnings: Earnings on amounts in an HSA are tax-deferred and are not includable in gross income while held in the HSA.
HSA contributions that exceed the contribution limit for the year, or contributions made by an ineligible individual, are considered excess HSA contributions. Excess contributions cannot be deducted on the individual’s tax return. Excess contributions made by employers are included in gross income by the employee to the extent they exceed the contribution limit (i.e., the employer must include this excess amount on the employee’s Form W-2, Wage and Tax Statement, as taxable wages).
A six percent excess contribution penalty tax is imposed on the HSA owner for each tax year the excess contribution remains in the account. If, however, the excess contribution for a tax year and the net income attributable (NIA) to the excess are paid to the owner by his or her tax return deadline, plus extensions (or by the end of the automatic six-month extension, for timely tax return filers), the excise tax does not apply. The excess contribution is not taxed when distributed, but the NIA is included in the HSA owner’s income for the tax year in which the distribution is withdrawn, and is generally subject to an additional 20 percent penalty tax.
Transfers: HSA assets may be transferred from one HSA to another HSA with the same or different trustee or custodian. Additionally, a former spouse may transfer HSA funds to his or her own HSA if awarded all or a portion of a former spouse’s HSA as part of a divorce settlement.
Rollovers: Assets from Archer MSAs and other HSAs may be rolled over into an HSA. To avoid confusion over where the rollover assets originated (i.e., from an MSA or HSA) trustees and custodians are advised to verify the source of HSA rollover contributions, and ask specific eligibility questions concerning timeliness of the rollover (i.e., made within 60 days) and the 12-month rollover restriction.
The Tax Relief and Health Care Act of 2006 permits a one-time option to take a “qualified HSA funding distribution” and directly move Traditional or Roth IRA assets to an HSA. The qualified HSA funding distribution is limited to the annual HSA contribution amount, and offsets any regular HSA contributions for that year. The HSA owner must remain HSA-eligible for 12 months following the month of the qualified HSA funding distribution. If the HSA owner does not remain eligible for 12 months (for reasons other than death or disability), the qualified HSA funding distribution amount must be included in income and a 10 percent testing-period failure penalty tax applies.
HSA assets are payable on demand. There are no restrictions on when and how often an HSA owner may take distributions from an HSA. Using checks and debit cards are acceptable means of withdrawing HSA assets from the account.
Federal withholding does not apply to HSA distributions.
Distributions from HSAs may be exempt from federal income tax and penalties, depending on whether or not the distribution is used to pay for qualified medical expenses.
Qualified distributions: Distributions from HSAs for qualified medical expenses of the HSA owner, his or her spouse, or dependents are exempt from federal income tax and penalties.
Nonqualified distributions: Distributions that are not used for qualified medical expenses are includable in the individual’s gross income. In addition, nonqualified distributions are subject to a 20 percent additional penalty tax, unless the distribution is made after the HSA owner’s death, disability, or attainment of age 65.
NOTE: HSA owners are responsible for making the determination as to whether an HSA distribution is qualified or nonqualified. The HSA owner should maintain records of his or her medical expenses sufficient to show that the distributions have been made exclusively to pay for qualified medical expenses, and are, therefore, excludable from gross income. HSA trustees or custodians, as well as employers who make contributions to an employee’s HSA, are not responsible for determining whether distributions are qualified or nonqualified.
Qualified medical expenses are expenses incurred after an HSA has been established, are not covered by insurance, and are paid by the HSA owner, his or her spouse, or dependents. Types of qualified medical expenses include
- diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function on the body;
- transportation for the essential medical care listed above;
- qualified long-term care services;
- premiums for qualified long-term care insurance, COBRA health care continuation coverage, health care coverage while an individual is receiving unemployment compensation; for individuals over age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance; and
- certain amounts paid for lodging while away from home that is essential to medical care.
The tax treatment of an HSA after the death of the HSA owner depends on whether a spouse or non-spouse is designated as the death beneficiary of the account.
Spouse as death beneficiary: If the death beneficiary is a spouse, the HSA is treated as the surviving spouse’s own HSA. Distributions to the surviving spouse for qualified medical expenses would be exempt from federal income tax and penalties.
Non-spouse as death beneficiary: If the death beneficiary is a non-spouse, the HSA ceases to be an HSA as of the date of death, and the non-spouse death beneficiary includes the fair market value of the HSA in his or her income for the year of the death.
NOTE: The amount that must be included in the death beneficiary’s income (unless the death beneficiary is the decedent’s estate) is reduced by any payments made by the HSA for the decedent’s qualified medical expenses, if paid within one year after death.
HSA contributions are reported on IRS Form 5498-SA. Rollover amounts and the year-end fair market value are reported on this form as well. This form is required to be filed with the IRS and sent to the HSA owner by May 31 of the following year.
HSA distributions are reported on IRS Form 1099-SA. This form is required to be sent to the recipient by January 31 and to the IRS by February 28 of the year after distributions are made.
By offering HSAs through their cafeteria plans and/or providing employer HSA contributions, employers potentially have much to gain.
- Contributions are considered employer-provided coverage for medical expenses
- Increased ability to attract and retain employees
- Lower overall health insurance costs
Employees might benefit from participating in an HSA program in the following ways.
- Ability to carry over contributions
- Portability of assets
- Payment of medical costs with pretax dollars
- Potential for additional employee benefits
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