The HSA is a medical savings account that is:

• Set up with a trustee or custodian
• Owned by an individual (not the employer)
• Contributed to by the eligible individual or anyone else, including their employer
• Used to pay current and future medical expenses tax-free
• Paired with a high deductible health plan (HDHP)
• Subject to strict tax rules

HSAs are a popular benefit option because they are a powerful savings tool, allow funds to roll over from year-to-year. The HSA accounts are also individually owned and typically have lower monthly premiums.

The HSA also provides a triple tax advantage. HSA contributions reduce taxable income, interest and earning accumulate tax-free, and distributions for medical expenses are tax-free.

HSA Contributions

HSA Contributions can be made by the HSA account holder or anyone else, including an employer or family member. Employer contributions (including pre-tax salary deferrals) are not taxable. If made by the HSA account holder, contributions are “above-the-line” tax deductions. If made by other individuals, contributions can be deducted by the HSA account holder in determining taxable income.

For each month a person is HSA-eligible, they can contribute 1/12 of the applicable maximum contribution limit for the year. Contribution limits are updated each year. The monthly limit depends on type of HDHP coverage (self-only or family). All contributions are aggregated regardless of source.

The full-contribution rule is a special rule that allows an individual who is HSA-eligible for only part of a year to make a full year’s worth of HSA contributions. HSA contribution limits are determined on a monthly basis. A person is HSA-eligible for the entire calendar year if they:

• Become eligible in any month other than January
• Are HSA-eligible on Dec. 1 of that year

That individual should remain eligible during 13-month testing period (with exceptions for death and disability).

There is also an advantage for married individuals. If either spouse has family coverage, both spouses are treated as having only that family coverage. If both people are HSA-eligible, the HSA contribution limit is divided between spouses. The rule applies even if one spouse has family and other has self-only coverage, and the rule does not apply to catch-up contributions.

However, there are some adverse tax consequences if the status of the employee changes. If a person makes additional contributions under the full-contribution rule and then is no longer HSA-eligible during the testing period, the additional contributions will be included in the individual’s gross income, subject to an additional 10% tax.

HSA contributions are also nonforfeitable and can’t be subject to a vesting schedule and are not returned if the employee ends employment.

HSA Distributions

Individuals with an HSA can receive distributions at any time and reasonable restrictions by trustee or custodian are ok. There are no mandatory distributions, and the balance carries over from year-to-year. Finally, the Individual does not need to be HSA-eligible, and the distribution can be used for any purpose, medical or non-medical. However, non-medical expenses may receive a different tax treatment depending on type of expense and the timing of the expense.

HSA distributions are tax-free if they are used to pay for unreimbursed qualified medical expenses incurred after the HSA was established. In order for the Medical Expense to be HSA-eligible, it must be incurred for medical care, by the HSA account holder, their spouse or dependents and occur after the HSA was established.

Examples of Eligible Expenses

• Most medical care expenses
• Prescription drugs
• Over-the-counter drugs
• Dental or vision care
• Some insurance premiums. See below.

COBRA

• Health insurance premiums while receiving unemployment benefits
• Qualified long-term care premiums
• Any health insurance premiums paid (other than for a Medicare supplement policy) by individuals ages 65 and over

Non-Medical Expenses

• If an HSA distribution is not used for qualified medical expenses, the amount of the distribution is included in the account holder’s income
• A 20% additional tax also applies, except when the distribution is made after the individual dies, turns 65 years old or becomes disabled

Recordkeeping

Employers are not required to determine whether an HSA distribution is used for a qualified expense and there is no claim adjudication requirements for employers. HSA account holders are responsible for keeping track of their distributions and reporting to the IRS using Form 8889.

Employers must report their HSA contributions on employees’ Forms W-2. If an employer is making a contribution for a prior year by April 15 of the current year, they must notify employees and the HSA trustee/custodian and report the contributions on a W-2 for the current year, and employees make reconciliation on Form 8889. Employers that violate the comparability requirements will use IRS Form 8928 to pay 35% excise tax.

If you have any questions about your HSA or how it can benefit you, please contact TIG Advisors.

This presentation is current as of the date presented and is for informational purposes only. It is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Please contact legal counsel for legal advice on specific situations. This presentation may not be duplicated or redistributed without permission. © 2021 Zywave, Inc.  All rights reserved.