Health Savings Account (HSA) Contribution Rules (Part 1)
Posted on: June 23, 2015Categories: HR & ComplianceMany employers offer high deductible health plans (HDHPs) to control premium costs and pair this coverage with health savings accounts (HSAs) to help employees with their health care expenses.
An HSA is a tax-favored trust or account that can be contributed to by, or on behalf of, an eligible individual for the purpose of paying qualified medical expenses. For example, individuals can use their HSAs to pay for expenses covered under their HDHPs until their deductibles have been met, or they can use their HSAs to pay for qualified medical expenses not covered by their HDHPs, such as dental or vision expenses.
HSAs provide a triple tax advantage—contributions, investment earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, Social Security/Medicare tax and most state income taxes. Due to an HSA’s potential tax savings, federal tax law includes strict rules for HSA contributions.
Who can contribute to an HSA?
Only an eligible individual can establish an HSA and make HSA contributions (or have them made on his or her behalf). An individual’s eligibility for HSA contributions is generally determined monthly, as of the first day of the month.
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HSA contributions can be made by the HSA account holder or by any other person on his or her behalf, including an employer or family member. An individual who is no longer HSA-eligible may still contribute to his or her HSA (or have contributions made on his or her behalf) for the months of the year in which he or she was HSA-eligible.
How much can be contributed to an HSA each year?
For each month an individual is HSA-eligible, he or she may contribute one-twelfth of the applicable maximum contribution limit for the year. This limit is called the general monthly contribution rule. The applicable maximum contribution limit depends on whether the individual has self-only HDHP coverage or family HDHP coverage on the first day of the month.
- Self-only HDHP coverage is HDHP coverage for only one HSA–eligible individual.
- Family HDHP coverage is HDHP coverage for one HSA-eligible individual and at least one other individual (regardless of whether the other individual is HSA–eligible).
The maximum HSA contribution limits are subject to an annual adjustment for inflation. By June 1 of each calendar year, the Internal Revenue Service (IRS) publishes the cost-of-living adjustments that will become effective as of the next Jan. 1.
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Maximum Contribution Limit |
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| Type of coverage | 2014 | 2015 | 2016 |
| Self-only HDHP coverage | $3,300 | $3,350 | $3,350 |
| Family HDHP coverage | $6,550 | $6,650 | $6,750 |
Except for rollover contributions, all HSA contributions made by or on behalf of an HSA–eligible individual are aggregated for purposes of applying the maximum contribution limit. However, HSA administrative fees or account maintenance fees paid by the HSA accountholder (or someone on his or her behalf) are not HSA contributions, and do not count toward the annual contribution limit. Also, all HSA contributions, except rollover contributions, must be made in cash. For example, HSA contributions cannot be made in stock or other property.
In addition, if an HSA accountholder has an Archer MSA, the maximum contribution limit for the HSA is reduced by any amounts contributed to the Archer MSA for the taxable year.
Keep in mind that there are some special contribution rules for individuals who are age 55 or older, mid-year HDHP enrollees and married spouses with family HDHP coverage. These rules, which are discussed below, may impact how much can be contributed to an individual’s HSA each year.
Who is eligible to make catch-up contributions?
Individuals who are age 55 or older by the end of the tax year are permitted to make additional HSA contributions, called “catch-up contributions.” The maximum annual catch-up contribution is $1,000. Because the catch-up contribution limit is not adjusted for inflation, it remains the same year after year. As with the general HSA contribution limit, the catch-up contribution limit is determined on a monthly basis.
The HSA catch-up contribution limit is not reduced for the year in which the individual reaches age 55 if he or she reaches age 55 after Jan. 1. For example, an individual who is HSA-eligible for all of 2015 and who turns age 55 on Dec. 1, 2015, may make a full $1,000 catch-up contribution for 2015.
A married couple may make two HSA catch-up contributions, as long as both spouses are at least age 55. However, in order for a married couple to make two HSA catch-up contributions, a separate HSA must be established in the name of each spouse.
What is the full-contribution rule for mid-year enrollees?
The full-contribution rule is an exception to the general rule that the maximum amount of HSA contributions for a year is determined monthly, based on the individual’s HSA eligibility for that month.
| Full-contribution Rule | Under the full-contribution rule, an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if he or she becomes covered under an HDHP in a month other than January and is HSA-eligible on Dec. 1 of that year. |
The eligible individual is treated as enrolled in the same HDHP coverage (that is, self-only or family coverage) as he or she has on the first day of the last month of the year. For example, if an individual first becomes HSA-eligible on Dec. 1, 2015, and has family HDHP coverage, he or she is treated as an eligible individual who had family HDHP coverage for all twelve months in 2015.
The full-contribution rule applies regardless of whether the individual was an eligible individual for the entire year, had HDHP coverage for the entire year, or had disqualifying non-HDHP coverage for part of the year. However, an individual who relies on this special rule must generally remain HSA-eligible during a 13-month testing period, with exceptions for death and disability.
The full-contribution rule applies to both the general monthly contribution limit and to the additional HSA catch-up contribution limit for eligible individuals who reach age 55 by the end of the year.
The full-contribution rule, however, does not change the requirement that expenses incurred before the date the HSA was established cannot be reimbursed by the HSA. An HSA is not established before the date that the HSA is actually established, even when individuals are treated as HSA–eligible for the entire year under the full-contribution rule.
How does the full-contribution rule work?
The full-contribution rule can increase, but not decrease, the amount that an individual would otherwise be eligible to contribute to his or her HSA under the general monthly contribution rule.
| An individual who is eligible for the full-contribution rule can contribute the greater of: |
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Thus, under the full-contribution rule, an individual who has self-only HDHP coverage for most of the taxable year, but who switches to family HDHP coverage late in the year and who still has family HDHP coverage on Dec. 1 of that year, will be able to contribute significantly more to his or her HSA for the year than if he or she had kept self-only HDHP coverage for all 12 months of the year.
What is the testing period for the full-contribution rule?
If an individual makes additional HSA contributions (or if contributions are made on his or her behalf) under the full-contribution rule, and the individual does not remain HSA-eligible during the 13-month testing period, he or she will experience adverse tax consequences.
These adverse tax consequences do not apply, however, if an individual loses his or her HSA eligibility during the testing period due to disability or death.
Also, to remain HSA-eligible during the testing period, an individual is not required to keep the same level of HDHP coverage during the testing period. Thus, if an HSA-eligible individual merely changes his or her HDHP coverage level (from self-only to family coverage, or vice versa) during the testing period, he or she will not suffer any adverse tax consequences.
The testing period begins on Dec. 1 of the year for which the HSA contributions were made, and it ends on Dec. 31 of the following year.
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Adverse Tax Consequences |
If an individual makes additional contributions under the full-contribution rule and then ceases to be HSA-eligible during the testing period, the additional contributions that were made under the full-contribution rule will be:
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The amount that is included in the individual’s gross income is computed by subtracting the amount that could have been contributed under the general monthly contribution rule from the amount actually contributed under the full-contribution rule.
Earnings on the taxable amount are not included in gross income and are not subject to the 10 percent additional tax, as long as the earnings remain in the individual’s HSA or are used for qualified medical expenses.
The 10 percent additional tax for the failure to remain HSA-eligible during the testing period applies regardless of the individual’s age (that is, it applies even after the individual attains age 65).
This additional tax cannot be avoided by withdrawing the taxable amounts from the HSA. An amount included in an individual’s federal gross income because the individual failed to remain HSA-eligible during the testing period is not an “excess contribution.” Withdrawing the taxable amount (and not using the withdrawn amount for qualified medical expenses) will result in double taxation because the withdrawn amount will again be included in the individual’s gross income and (unless the individual has died, become disabled or attained age 65) will also be subject to the additional 20 percent tax on nonmedical distributions.
Lookout for part 2 on Thursday!
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