HSA's Accounts & Tax Implications
INTRODUCTION. A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA administrator to pay or reimburse certain medical expenses you incur.
The easiest way to contribute to an HSA is through pre-tax payroll deductions, if allowed by your employer. However, you may also contribute directly to your HSA post-tax through banks, credit unions, and insurance companies, the lower their administration fees are the more beneficial for you.
Fact: HSAs have been around since 2003, and in 2017 over 22 million Americans had one.
BENEFITS OF HSA
Contributions are tax-deductible even when you don’t itemize (or made pre-tax, if funded through a payroll deduction).
The interest earnings are tax-free, and you can take distributions at any time to pay off medical expenses, including your deductible, without tax penalties.
Unlike an FSA (Flexible Saving Account), unused funds from HSA are carried to the next year.
You must be enrolled in a high deductible health plan (HDHP) on the first day of the month. A high deductible plan is defined by the IRS as having a deductible of at least: A minimum annual deductible of $1,350 Self-Only Coverage or $2,700 Family Coverage, and an out-of-pocket maximum of $6,750 Self-Only coverage or $13,500 Family Coverage. (These numbers change from year to year based on inflation).
You have no other health coverage except what is permitted by the IRS.
You are not enrolled in Medicare, TRICARE or TRICARE for Life.
You are not claimed as a dependent on someone else’s tax return.
You haven’t received Veterans Affairs (VA) benefits within the past three months. (except for preventive care or If you have a disability rating from the VA)
You don't have a health care flexible spending account (FSA) or a health reimbursement account (HRA) unless they are limited.
HIGH DEDUCTIBLE HEALTH PLAN. For purposes of establishing an HSA, a qualifying HDHP plan is a plan that doesn’t provide benefits until the minimum annual deductible has been met, except if they are for preventive care, such as getting a physical, cancer screenings or immunization. If you can receive benefits before the deductible is met, then most likely it’s not a qualifying High Deductible Health Plan for HSA purpose. (Please ready the insurance policy plan or contact the insurer.
The minimum annual deductible is the amount that you yourself are expected to pay per year for medical services before your insurance company pays anything. After you meet your deductible your insurance policy will begin to pay a portion of your covered services based on your coinsurance and copay. You will continue to share the costs with your insurance until you’ve reached the maximum annual deductible and other out-of-pocket expenses. The yearly out of pocket expenses include (deductibles, copayments, and coinsurance). After you reach the out of pocket maximum the insurance pays 100% for covered services.
Plans with higher deductibles usually have lower monthly premiums and plans with lower deductibles usually have higher monthly premiums.
An employee covered by a High Deductible Health Plan and a health FSA or an HRA that pays or reimburses qualified medical expenses generally can’t make contributions to an HSA. However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements.
• Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.
• Suspended HRA. Before the beginning of an HRA coverage period, you can elect to suspend the HRA. The HRA doesn’t pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. When the suspension period ends, you are no longer eligible to make contributions to an HSA.
• Post-deductible health FSA or HRA. These arrangements don’t pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements doesn’t have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.
• Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement, you are no longer eligible to make contributions to an HSA.
The maximum amount that can be contributed to your HSA depends on the type of HDHP coverage you have.
If you have Self-Only Coverage, your maximum contribution is $3,500.
If you have a Family Coverage, your maximum contribution is $7,000.
If you are 55 years or older at the end of the year you can make an additional contribution of $1,000.
1. The easiest way to contribute is pre-tax through payroll deduction. Contributions made by your employer usually aren’t included in your income. Contributions to an employee’s account by an employer using the amount of an employee’s salary reduction through a cafeteria plan are treated as employer contribution and your contribution is reduced by any employer contributions.
All employer contributions to an HSA must be reported in Box 12 of W2 with code W. Employer contributions to an HSA that are not excludable from the employee’s income must be reported in boxes 1,3,5 of W2 Form.
2. You may also contribute directly to your HSA post-tax through bank, credit unions, and insurance companies. When you make a post-tax contribution, your HSA Administrator would report your contribution on form 5498-SA and you must report it in form 8889 and file it with 1040 / 1040NR your tax return.
Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income, up to the annual limits.
If you fail to be an eligible individual for any month during the year, you are still allowed to make contributions for any month for which you were an eligible individual.
3. You are also allowed to take a one -time distribution from your traditional IRA or Roth IRA and contribute it to your HSA account, this is called a Qualified HSA funding distribution (allowed once-in-a-life-time per individual, not per IRA). The Qualified HAS funding distribution is subject to the annual limits depending on your HDHP and if you have more than one IRA account, first you need to transfer enough funds from one IRA to another so that one IRA has enough funds.
This distribution can’t be made from an ongoing SEP IRA or SIMPLE IRA. (For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within the tax year in which the distribution would be made).
Funding distribution have a testing period. Each HSA funding distribution has its own testing period, and requirements, you must remain an eligible individual during the testing period.
If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the qualified HSA funding distribution. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax.
ROLLOVERS. A rollover contribution isn’t included in your income, isn’t tax deductible, and doesn’t reduce your contribution limit. You can roll over amounts from Archer MSAs and other HSAs into an HSA. You don’t have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. Rollover contributions don’t need to be in cash. Rollovers aren’t subject to the annual contribution limits. You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period.
Contributions made by your employer aren’t included in your income. Contributions to an employee’s account by an employer using the amount of an employee’s salary reduction through a cafeteria plan are treated as employer contributions. Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.
CONTRIBUTIONS BY A PARTNERSHIP. Contributions by a partnership to a bona fide partner’s HSA aren’t contributions by an employer. The contributions are treated as a distribution of money and aren’t included in the partner’s gross income. Contributions by a partnership to a partner’s HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner’s gross income. In both situations, the partner can deduct the contribution made to the partner’s HSA.
CONTRIBUTIONS BY AN S CORPORATION: Contributions by an S corporation to a 2% shareholder-employee’s HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee’s gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee’s HSA.
EXCESS CONTRIBUTIONS. You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. Generally, you must pay a 6% excise tax on excess contributions.
You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the conditions.
DISTRIBUTIONS include amounts paid with a debit card and amounts withdrawn from the HSA by you or other individuals that you have designated. The trustee will report any distribution to you and the IRS on Form 1099-SA.
Qualified medical expenses are those expenses that generally would qualify for the medical and dental expenses deduction. Non-prescription medicines (other than insulin) aren’t considered qualified medical expenses for HSA purposes. A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug:
1. Requires a prescription,
2. Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or
3. Is insulin.
Qualified medical expenses can be incurred by:
1. You and your spouse.
2. All dependents you claim on your tax return.
3. Any person you could have claimed as a dependent on your return except that:
The person filed a joint return
The person had gross income more than $4,150 or more
You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s tax return.
If you take a distribution from your HSA for qualified medical expenses, you don’t pay tax on the distribution, but you have to report the distribution on Form 8889 and file it with your 1040 / 1040NR.
If you take a distribution from your HAS and don’t use it to pay for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040 / 1040NR. You may have to pay an additional 20% tax on your taxable distribution.