Employees may contribute to an HSA only if they are enrolled in an HSA-qualified high deductible health plan (HDHP) and have no disqualifying coverage.
Our Compliance team has compiled a list of frequently asked questions (FAQs) and responses to make offering and administering HSAs as easy as possible.
1. How do I know if the high deductible health plan (HDHP) is HSA-qualified?
Disqualifying coverage includes any other non-HDHP health coverage.
In order for an HDHP to be HSA-qualified, the plan must meet three requirements:
- It must have a minimum annual deductible of $1,500 for self-only coverage and $3,000 or family coverage in 2023 ($1,600 / $3,200 in 2024).
- The out-of-pocket maximum cannot exceed $7,500 for single coverage or $15,000 for family coverage in 2023 ($8,050 / $16,100 in 2024).
- The HDHP can only pay for preventive care and telehealth services before the deductible has been satisfied. Through December 31, 2024, HDHPs can also pay for COVID-19 testing and treatment before the deductible. See Question #12 for more details.)
2. What are the IRS contribution limits?
- For 2023, the annual contribution limits are $3,850 ($320.83 per month) for single HDHP coverage and $7,750 ($645.83 per month) for family HDHP coverage.
- For 2024, the annual contribution limits are $4,150 ($345.83 per month) for single HDHP coverage and $8,300 ($691.67 per month) for family HDHP coverage.
- If you are age 55 or older, you can make a $1,000 annual ($83.33 per month) catch-up contribution in addition to the above limits. Only the HSA account holder can make a catch-up contribution.
3. How do HSA contributions work for non-calendar plan years?
HSA contribution limits apply on a calendar year basis, regardless of whether the medical plan runs on a calendar year. Employees who join an employer’s HDHP plan and become eligible for HSA contributions mid-year will need to pro-rate their contribution based on the number of months of the year they are HSA-eligible. A month of eligibility is counted if an individual was eligible on the first day of that month.
For example, if an employer’s HDHP plan year begins January 1, an employee who joins the plan on July 1 will be eligible for 6 months of HSA contributions that year (July – December) and so may contribute 50% of the annual maximum contribution for that year. If this employee wants to make the full annual contribution, they must be HSA-eligible on December 1 of the year and must remain HSA-eligible for an additional 12 months, so through the end of the following July.
4. Which individuals are ineligible for pre-tax contributions to an HSA?
2%+ shareholders in an S corporation, partners in a partnership, sole proprietors, and other self-employed individuals are free to contribute to HSAs, however, they are not eligible to make contributions to an HSA with pre-tax dollars under a Sec. 125 Cafeteria Plan. This is because these individuals are considered to be self-employed under the tax code and so are not technically employees. Additionally, these individuals are ineligible for pre-tax employer contributions to their HSAs as well.
5. When is the latest an HSA-eligible employee can contribute to their HSA?
HSA-eligible individuals may make or receive contributions to their HSA for the calendar year at any time during the year up until the tax filing deadline, typically April 15 each year. If an individual ceases to be HSA-eligible at any time during the year, they may still make or receive contributions for the months they were an eligible individual up until the tax filing deadline.
6. Are employers responsible for monitoring their employees’ HSAs and ensuring that HSA dollars are spent on qualified medical expenses?
Although enrollment in an HSA is associated with enrollment in a high deductible health plan offered by an employer, the HSA itself is not health insurance, and the employee is the owner of the account. This means that while employers have the responsibility to educate employees on the purpose of the account and may assist with setting up the account, employers cannot restrict how employees use their HSA funds.
Employees are responsible for ensuring their HSA dollars are spent on qualified out-of-pocket medical expenses incurred by themselves, a spouse, or a tax dependent. Distributions from an HSA account that are not used to pay for qualified medical expenses are subject to income tax and may be subject to an additional 20% penalty.
7. Who is responsible for paying HSA administration fees?
Employers may choose whether or not to pay HSA administration fees or account maintenance fees on behalf of employees. Administration fees paid by employers will not count towards an accountholder’s maximum annual contribution. For a determination as to whether employer-paid HSA administration fees must be included in employees’ gross income, contact your tax advisor.
Alternatively, fees may be withdrawn directly from HSA account funds. If the fees are deducted from the account directly, once the accountholder reaches the maximum annual contribution, the HSA accountholder may not contribute an additional amount to make up for the fee. Any amounts paid towards administration fees are not subject to taxation.
8. What happens to employer and employee contributions if a participant fails to set up their HSA account?
In some cases, an employee may enroll in an HDHP plan and begin making salary reductions for their HSA even though they may have failed to complete the paperwork necessary to open their HSA account. Additionally, an employer could attempt to contribute to their employees’ HSA accounts only to discover that one or more employees have failed to open the account.
In this case, the employer may communicate to the employee individually and alert them that their contributions will not be made to the account until they complete the paperwork required to open the account. Once the employee takes action, all of the salary reductions that were previously deducted pre-tax must be resent to the HSA vendor and deposited to the account. The employer cannot return any salary reductions as taxable income to the employee.
If the employer typically makes a contribution to the HSA accounts of its employees, an employee who opens their HSA account late may still receive the employer contribution, as long as they open their account by December 31 of that year.
Employers should encourage employees to open their HSA accounts in a timely fashion since IRS rules indicate that qualified medical expenses must be incurred after the HSA is established to be reimbursed tax-free.
9. In what situations may an employer recuperate mistaken contributions to an employee’s HSA account?
Generally, all contributions made to an HSA account should not be recuperated. There are a limited number of situations where an employer is permitted to recuperate contributions from an employee’s HSA account, and only if there is clear evidence demonstrating that an administrative or process error has occurred.
The IRS permits an employer to recuperate contributions if the employer:
- Makes a contribution to the account of an individual who was never eligible for HSA contributions
- Makes a contribution that puts the account over the annual contribution limit (in this case, the employer may recuperate only the amount that puts the account over the limit; mistaken contributions that do not exceed the annual maximum may not be recuperated)
- Makes a contribution due to an administrative or process error (for example: spreadsheet error, payroll error, clerical error, etc.)
If one of these scenarios occurs, the employer should contact the HSA vendor, and the vendor will likely have a process for distributing the contributions more than the limit back to the employer. However, the HSA vendor is not obligated to distribute funds back to the employer.
If the employer does not want to correct a mistaken contribution and just leave it as is, there will be tax implications for the employee. All contributions more than annual maximum are subject to a 6% excise tax. The employee could avoid paying the excise tax by contacting the HSA vendor and distributing the excess contributions from their account prior to the April 15th tax deadline. Any excess funds distributed from the HSA account back to the employee would be included in the employee’s gross income for the year in which they receive the distribution from the account.
10. May an employer recuperate the HSA contributions they made to the account of an employee who terminates from employment?
Employer HSA contributions, once made, should generally not be recuperated by an employer except for in limited situations. Since HSA eligibility is determined as of the first day of the month, an employer who makes contributions to their employees’ HSAs on a pay-as-you-go basis on the first day of each month may not recuperate contributions from an employee who terminates employment mid-month, as long as that employee was HSA-eligible on the first day of that month. Similarly, an employer who front-loads the HSAs of their employees at the beginning of the year may not recuperate contributions from an employee who terminates mid-year.
11. What happens to HSA account upon the death of the accountholder?
When an HSA account holder dies, the balance remaining in the HSA account gets transferred to the beneficiary previously named by the accountholder. If the accountholder did not name a beneficiary, then the HSA balance transfers according to the terms dictated by the HSA custodial agreement.
If the spouse is the beneficiary of the deceased, then the spouse becomes the new owner of the account, and the funds are not taxable. If the beneficiary is an individual other than a spouse, then the beneficiary receives the value of the account, and this amount gets included in the beneficiary’s gross income.
12. How has the Covid-19 pandemic affected HDHPs and HSAs?
High deductible health plans may cover all medical services related to COVID-19, including testing and treatment of COVID-19, before applying the deductible. IRS Notice 2023-37 extended this relief, which was first available under the CARES Act. This relief will remain available for all plan years ending on or before December 31, 2024. Therefore, individuals covered by an HDHP will still be eligible to make HSA contributions if their HDHP plan provides testing and treatment for COVID-19 without applying these services to the deductible or cost sharing up until that point.
Additionally, the CARES Act (2023) provided a two-year extension of a requirement initially introduced in the CARES Act, which allowed high deductible health plans (HDHPs) to cover telehealth services before participants reach their deductible. This extension means employers with HDHPs can waive participant deductibles for telehealth services without impacting those participants’ HSA eligibility. This provision, previously set to expire on December 31, 2022, has now been extended to December 31, 2024. Non-calendar year HDHP plans may allow pre-deductible telehealth through the end of any plan year which begins before January 1, 2025.
13. We offer both a Health FSA and an HSA to employees. Are there any compliance concerns for an employee who wants to switch from the Health FSA to the HDHP/HSA plan?
If the Health FSA offers a grace period or a carryover, both plan designs will affect an employee’s ability to make HSA contributions in different ways. To be HSA eligible at the start of a new plan year, the employee must ensure that they have spent down the funds in their FSA so that it carries a $0 balance on the last day of the prior plan year. Remember, HSA eligibility is always determined as of the first day of the month, and Health FSA coverage is HSA-disqualifying coverage.
If the Health FSA has a carryover and the employee carries any balance forward into the new plan year, the individual will be ineligible to make HSA contributions for the entire subsequent plan year, even if the employee spends down their account to $0 during that time. For this reason, it is especially important for an employee who wishes to contribute to an HSA in a new plan year to spend down their account to $0 by the last day of the prior plan year.
If the Health FSA has a grace period and the employee carries any balance forward into the new plan year, the employee will be ineligible to make HSA contributions until the first day of the month after the grace period expires, even if they spend down their account to $0 before the grace period is over.
Article provided by OneDigital