Health Savings Account (HSA) Contribution Rules (Part 2)
Posted on: June 25, 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.
Are there any special contribution limits for spouses?
There is a special contribution rule for married individuals, which provides that if either spouse has family HDHP coverage, then both spouses are treated as having only that family coverage.
If both spouses are HSA-eligible, the HSA contribution limit calculated under this special contribution rule is a joint limit, which is divided equally between the spouses (unless they agree on a different division). This means that if both spouses are HSA-eligible and either has family HDHP coverage, the spouses’ combined contribution limit is the annual maximum limit for individuals with family HDHP coverage.
This special contribution rule applies even if one spouse has family HDHP coverage and the other has self-only HDHP coverage, or if each spouse has family HDHP coverage that does not cover the other spouse.
The special contribution rule for married spouses does not apply to catch-up contributions. Married couples who both are over age 55 may each make an additional catch-up contribution ($1,000) to their separate HSAs.
Spouses who are HSA-eligible may allocate the joint contribution limit in any way they want. They may divide the limit equally or allocate it between their HSAs in any proportion, including allocating it entirely to one spouse.
In addition, keep in mind that HSAs are individual trusts or accounts, which means that spouses cannot share a joint HSA. Also, if a spouse has non-HDHP coverage (such as a low-deductible health plan, general purpose FSA or HRA) that covers the other spouse, both spouses are ineligible for HSA contributions.
| The special contribution rule for married spouses does not apply when: |
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If employees make pre-tax HSA contributions, can they change their elections during a plan year?
HSAs are commonly offered with HDHPs under an employer’s Section 125 plan (or a cafeteria plan). This allows employees to make their HSA and HDHP contributions as pre-tax salary reductions.
As a general rule, cafeteria plan elections are irrevocable for an entire plan year. This means that participants ordinarily cannot make changes to their cafeteria plan elections during a plan year. The IRS, however, allows a cafeteria plan to be designed to permit mid-year election changes in limited situations.
IRS Notice 2004-50 confirms that the irrevocable election rules do not apply to a cafeteria plan’s HSA benefit. An employee who elects to make HSA contributions under a cafeteria plan may start or stop the election or increase or decrease the election at any time during the plan year, as long as the change is effective prospectively. If an employer places additional restrictions on HSA contribution elections under its cafeteria plan, then the same restrictions must apply to all employees. Also, to be consistent with the HSA monthly eligibility rules, HSA election changes must be allowed at least monthly and upon loss of HSA eligibility.
What are the rules for employer HSA contributions?
Employers may contribute to the HSAs of current or former employees. An individual’s HSA contribution limit is reduced by any employer contributions (including pre-tax salary deferrals under a cafeteria plan) made to his or her HSA (or Archer MSA).
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In addition, if an employer makes HSA contributions outside of a cafeteria plan, the employer must make comparable contributions to the HSAs of all comparable participating employees. As a general rule, contributions are comparable if they are the same dollar amount or the same percentage of the HDHP deductible. If an employer fails to comply with the comparability requirement during a calendar year, it will be liable for an excise tax equal to 35 percent of the aggregate amount contributed by the employer to the HSAs of its employees during that calendar year.
The comparability rules do not apply to employer HSA contributions made through a cafeteria plan. Employer contributions to employees’ HSAs are made through the cafeteria plan when the cafeteria plan allows eligible participants to make pre-tax salary deferrals to fund their HSAs. When employer HSA contributions are made through a cafeteria plan, however, the employer’s contributions are subject to the nondiscrimination rules governing cafeteria plans.
What is the deadline for making HSA contributions?
Although the dollar limit for HSA contributions is determined on a monthly basis, HSA contributions do not have to be made in equal amounts each month. An eligible individual can contribute in a lump sum or in any amounts or any frequency that he or she wants.
| Deadline for HSA Contributions | All HSA contributions for the eligible individual’s taxable year must be made by the date for filing his or her federal income tax return for that year, without extensions. For example, all contributions for 2015 would have to be made by April 15, 2016, the date for filing the 2015 federal income tax return, without extensions. |
Are rollover contributions or transfers from other accounts allowed?
Rollovers from Other HSAs or Archer MSAs
HSAs may accept rollover contributions from another HSA or from an Archer MSA. These rollover contributions do not count toward the annual HSA contribution limit, and they are not required to be in cash. Also, an individual does not need to be HSA-eligible to make a rollover contribution from his or her existing HSA to a new HSA. To qualify as a rollover distribution, the amount must be distributed from the other HSA (or Archer MSA) to the HSA accountholder and then deposited into the individual’s HSA within 60 days of when the distribution was received.
This rollover exception only applies once every 12 months. In addition, HSA funds may be moved from one HSA trustee directly to another HSA trustee (called a trustee-to-trustee transfer). There is no limit on the number of trustee-to-trustee transfers allowed during a year.
Transfers from IRAs – Qualified HSA Funding Distributions
An HSA–eligible individual may irrevocably elect a direct trustee-to-trustee transfer of a qualified HSA funding distribution from his or her traditional IRA or Roth IRA into his or her HSA. Qualified funding distributions may not be made from ongoing SEP IRAs or SIMPLE IRAs.
Generally, only one qualified HSA funding distribution is allowed during the lifetime of an individual. Also, the distributions must be from an IRA to an HSA owned by the individual who owns the IRA, or, in the case of an inherited IRA, for whom the IRA is maintained. This means a qualified HSA funding distribution cannot be made to an HSA owned by any other person, including the individual’s spouse.
Qualified HSA funding distributions are counted as contributions when applying the annual HSA contribution limit for the taxable year in which they are contributed to the HSA.
In addition, the qualified HSA funding distribution rules require the individual to remain HSA–eligible during a testing period. The testing period begins with the month in which the qualified funding distribution is contributed to the HSA and ends on the last day of the twelfth month following that month. For example, if a qualified funding distribution is made on June 4, 2015, the testing period would begin in June 2015 and continue until June 30, 2016. If an individual loses his or her HSA eligibility at any time during the testing period, the amount of the qualified HSA funding distribution is included in the individual’s gross income, and the amount is subject to a 10 percent additional tax. These adverse tax consequences do not apply if an individual ceases to be HSA–eligible due to disability or death.
How are HSA contributions taxed?
All HSA contributions receive tax-favored treatment (unless they are excess contributions). The specific tax treatment, however, depends on who is making the contribution, as described in the table below.
| Source of Contribution | Tax Treatment |
| HSA Accountholder | Individuals who make contributions to their own HSAs get an above-the-line deduction for the contributions. |
| Family member or other person/entity (but not employer) | These contributions may be subject to applicable gift taxes. Contributions made by anyone other than an employer are deductible by the HSA accountholder (but not necessarily by the contributor) in computing adjusted gross income (that is, as an above-the-line deduction). |
| Employer contributions (including employees’ pre-tax salary deferrals under a cafeteria plan) | In general, these contributions are deductible by the employer and excludable from employee’s gross income. Also, they are not subject to income tax withholding or Social Security/Medicare taxes, if, at the time of contribution, it is reasonable to believe that the contribution will be excluded from the employee’s income. |
HSA contributions that exceed an individual’s maximum contribution amount or that are made by or on behalf of an individual who is not HSA-eligible are considered “excess contributions.” Excess contributions are not deductible by the HSA owner. Also, employer HSA contributions are included in the gross income of the employee to the extent that they exceed the individual’s maximum contribution amount or are made on behalf of an employee who is not an eligible individual.
A 6 percent excise tax is imposed on the HSA owner for all excess contributions. The excise tax can be avoided if the excess contributions for a taxable year (and the net income attributable to those excess contributions) are distributed to the HSA owner by the deadline for filing the owner’s federal income tax return for the taxable year (that is, the following April 15).
| If a corrective distribution is made, then: |
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The 6 percent excise tax is cumulative and will continue in future years if a corrective distribution is not made. For each year, the HSA owner must pay excise tax on the total of all excess contributions in the account. However, the amount on which the tax is assessed is reduced in certain circumstances. For example, if HSA contributions for any year are less than the maximum limit for that year, the amount subject to the excise tax is reduced (for that year and subsequent years) by the difference between the maximum limit for the year and the amount actually contributed.
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