Health Savings Accounts And Health Care Reform Law

<div class="Section1">HSA law provides special treatment for spouses in the following areas:<br /> <blockquote><strong>Tax-Free Distributions.</strong> An HSA owner can use his or her HSA tax-free to pay the qualified medical expenses of spouses. This benefit does not extend to domestic partners (in limited circumstances a domestic partner could be a tax dependent and an HSA owner can use an HSA for a tax dependent).<br /> <br /> <strong>Beneficiary Treatment.</strong> A spouse beneficiary can treat the HSA as his or her own upon the death of the HSA owner. Non-spouse beneficiaries must take a full distribution of the money remaining in the HSA.<br /> <br /> <strong>Divorce Transfer.</strong> An HSA owner can transfer assets into an HSA of former spouse in the case of a divorce.<br /> <br /> <strong>Estate Tax Treatment.</strong> If a spouse is named as the beneficiary of the HSA, the treatment of the HSA may change for estate tax purposes.<br /> <br /> <strong>Family HDHP Treatment.</strong> Spouses covered under a family HDHP are capped at the combined HSA family limit. Also, if one spouse has a family HDHP, then both spouses are deemed to have family HDHPs. This rule closes a loophole that allowed each partner in a same-sex couple to contribute the family HSA maximum in certain circumstances.<br /> <br /> <strong>Child of Former Spouse.</strong> An HSA owner can use the HSA to pay for medical expenses of his or her child that is claimed as a tax dependent by a former spouse (this is helpful in cases of divorce and legal separation).</blockquote><br /> </div>

<div class="Section1">For amounts paid after December 31, 2010 and before 2020, a distribution from an HSA or Archer MSA<a href="#_ftn1" name="_ftnref1">¹</a> for a medicine or drug was a tax-free qualified medical expense only if the medicine or drug (1) required a prescription, (2) was an over-the-counter medicine or drug and the individual obtained a prescription, or (3) was insulin. The prescription requirement for over-the-counter drugs was eliminated beginning in 2020.</div><br /> <div class="Section1"><br /> <br /> If amounts are distributed from an HSA or Archer MSA for any medicine or drug that does not satisfy these requirements, the amounts are distributions for nonqualified medical expenses, which are includable in gross income and generally are subject to a 20 percent additional tax. This change does not affect HSA or Archer MSA distributions for medicines or drugs made before January 1, 2011, nor does it affect distributions made after December 31, 2010, for medicines or drugs purchased on or before that date.<br /> <br /> IRS guidance reflecting these statutory changes makes it clear that the rules in IRC Sections 106(f), 223(d)(2)(A), and 220(d)(2)(A) do not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. These items may qualify as medical care if they otherwise meet the definition of medical care in IRC Section 213(d)(1), which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.<br /> <br /> Expenses for items that are merely beneficial to the general health of an individual, such as expenditures for a vacation, are not expenses for medical care.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 223(d)(2)(A), IRC § 220(d)(2)(A).<br /> <br /> </div>

<div class="Section1">A same sex couple legally married under the law of any state is now subject to the same HSA contribution limits as an opposite gender couple (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="397">397</a>).&nbsp;As a result, the IRS issued guidance providing a remedy for situations in which both members of a same sex couple contributed funds to an HSA prior to the recognition of their marriage that, when combined, exceed the applicable limit for a married couple. The couple could choose to reduce one or both members&rsquo; contribution to the HSAs in order to avoid exceeding the contribution limit. In the alternative, if their contributions exceeded the threshold, the excess could be distributed to the spouses prior to the due date for filing their tax return. Any remaining excess contributions were subject to the penalty tax typically imposed under IRC Section 4973.&nbsp;These rules apply for the 2013 tax year and beyond.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp;Notice 2014-1, 2014-2 IRB 270.<br /> <br /> </div></div><br />

<div class="Section1">Reimbursement arrangements whereby an employer reimburses its employees for the cost of individual health insurance premiums generally are themselves considered group health plans and cannot be integrated with individual policies in order to satisfy the market reform provisions of the Affordable Care Act (ACA). (However, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for information on the newly available individual coverage HRAs.).<div class="Section1"><br /> <br /> As a result, these arrangements will typically violate the ACA prohibition on annual benefit limits and provision of preventive care without employee costs, and will cause the employer to be subject to a $100 per day penalty per employee.<a href="#_ftn1" name="_ftnref1">¹</a> This penalty is subject to the guidance provided in IRS Notice 2015-17 and the 21st Century Cures Act, which provide relief to small employers who are not applicable large employers subject to the employer mandate and to S corporations in regard to their shareholders.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRS FAQ, Employer Health Care Arrangements, updated October 23, 2023, available at http://www.irs.gov/Affordable-Care-Act/Employer-Health-Care-Arrangements. <em><em>See also</em></em> IRC &sect; 4980D.<br /> <br /> </div></div><br />

<div class="Section1">For an individual unable to afford traditional insurance, the HDHP and HSA combination may provide an affordable approach to insurance not possible otherwise. Many people that can afford traditional insurance also choose HDHPs and HSAs because the combination reflects a cost savings and provides more pure insurance rather than pre-paid medical. This background is important because many of the disadvantages of HSAs are only in comparison to traditional low or no deductible health insurance. The following are potential disadvantages of a combination HDHP and HSA.<br /> <blockquote>(1)     <em>Higher Deductible.</em> An account owner generally faces a higher health insurance deductible than a person with traditional insurance. This can present an increased cost burden.<br /> <br /> (2)     <em>Expenses before Savings.</em> An account owner may face a large medical expense prior to having time to build a sufficient balance in the HSA.<br /> <br /> (3)     <em>More Responsibility for Health Spending.</em> HSAs require individuals to take charge of their own health care spending. This will generally require the individual to devote more time to learning about health care costs and alternatives in order to save on health costs, as compared to a person with traditional insurance coverage where many expenses are simply paid.<br /> <br /> (4)     <em>Tax Reporting.</em> Account owners are required to account for both HSA contributions and distributions each year on their income tax return. Additionally, the account owner is responsible for saving medical receipts in order to substantiate health-related expenses.<br /> <br /> (5)     <em>HSA Rules.</em> HSAs, similar to all tax-driven types of accounts, can become complicated. The account owner is responsible for learning the HSA rules and following them in order to avoid negative tax consequences.<br /> <br /> (6)     <em>HSA Maintenance.</em> The account owner is responsible for maintaining the HSA, paying medical bills, monitoring the balance, choosing beneficiaries, and otherwise maintaining the HSA.</blockquote><br /> </div>

<div class="Section1">HSAs are tax-driven accounts and, as such, many of the benefits are tax related. Some of the tax benefits of an HSA include the following:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; <em>Federal Income Tax Deduction.</em> HSA contributions reduce an account owner&rsquo;s income for federal income tax purposes because personal HSA contributions are tax deductible and employer contributions are received on a pre-tax basis (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="397">397</a>).<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; <em>State Income Tax Deduction.</em> Most states with income taxes allow account owners to reduce state taxable income by the amount of an HSA contribution. California, New Jersey and Alabama are the only states that do not allow a state income tax deduction for an HSA contribution. All other states have either passed specific legislation allowing HSA deductions for state income tax purposes, have conforming legislation where the federal deductions flow through at the state level, or do not have a state income tax.<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; <em>Payroll Tax Avoidance.</em> Account owners receiving HSA contributions pre-tax through an employer, whether they are employer contributions or employee payroll deferral through a Section&nbsp;125 plan, avoid Social Security taxes, Medicare taxes (together with Social Security referred to as FICA), federal unemployment taxes (FUTA), Railroad Retirement Act taxes, and in most cases state unemployment taxes (SUTA) (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="418">418</a>).<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; <em>Tax Deferred Earnings Growth.</em> Any interest, dividends or other appreciation of the assets in an HSA grow tax-deferred while in the HSA (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="410">410</a>).<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; <em>Tax-free Distributions.</em> Account owners that use HSA funds for qualified medical expenses enjoy tax-free distributions (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="411">411</a>). If the funds will be used to pay for qualified medical expenses, the HSA rules are more advantageous than the tax treatment provided to distributions from traditional IRAs or 401(k)s because those plans are only tax-deferred, not tax-free (although Roth IRA and Roth 401(k) distributions are tax-free, as contributions are made with after-tax dollars).</blockquote><br /> The non-tax benefits of HSAs are also significant, and include the following:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; <em>Balance Rolls Over. </em>HSA balances roll over from year to year and do not have &ldquo;use it or lose it&rdquo; restrictions that apply to other medical spending account plans.<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; <em>HSA Remains after Separation from Service.</em> An HSA remains with the account owner after separation from service even if the employer provided the HSA funding.<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; <em>Transferability.</em> Account owners can move their HSA to a new HSA custodian at any time (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="413">413</a>).<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; <em>Ownership.</em> HSA account owners own the money in their HSA and can use it as they see fit. This relates to other benefits already mentioned, but also provides account owners the ability to name beneficiaries on the account, select investments, and decide when to take a distribution (even if the distribution is for a nonmedical reason). Note that the penalty tax for non-qualified distributions does not apply once the taxpayer has reached age 65.<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; <em>Control Spending.</em> An HSA gives account owners some additional control over their medical spending. The account owner can decide where to spend the money and can negotiate with providers when appropriate. This gives the account owner some freedom to choose medical providers outside of an insurance company&rsquo;s network or to try alternative approaches (within the definition of &ldquo;qualified medical expense&rdquo;).<br /> <br /> (6)&nbsp;&nbsp;&nbsp;&nbsp; <em>Lower Insurance Premiums.</em> HDHPs (which must be used in order for the individual to qualify for an HSA) are generally less expensive than traditional insurance.</blockquote><br /> </div><br />

<div class="Section1">For purposes of an HSA, an eligible individual is an individual who, for any month, is covered under a high deductible health plan (HDHP) as of the first day of that month and is not also covered under a non-high deductible health plan providing coverage for any benefit covered under the high deductible health plan.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> An individual enrolled in Medicare Part A or Part B may not contribute to an HSA.<a href="#_ftn2" name="_ftnref2">²</a> Mere eligibility for Medicare does not preclude HSA contributions.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> An individual may not contribute to an HSA for a given month if he or she has received medical benefits through the Department of Veterans Affairs within the previous three months. Mere eligibility for VA medical benefits will not disqualify an otherwise eligible individual from making HSA contributions.<a href="#_ftn4" name="_ftnref4">⁴</a> Beginning January 1, 2016, an individual shall not fail to be an eligible individual because of receiving hospital care or medical services under a law administered by the Secretary of Veterans Affairs for a service-connected disability. The IRS defines “service-connected disability” as the following:<br /> <blockquote>“Distinguishing between services provided by the VA for service-connected disabilities and other types of medical care is administratively complex and burdensome for employers and HSA trustees or custodians. Moreover, as a practical matter, most care provided for veterans who have a disability rating will be such qualifying care. Consequently, as a rule of administrative simplification, for purposes of this rule, any hospital care or medical services received from the VA by a veteran who has a disability rating from the VA may be considered to be hospital care or medical services under a law administered by the Secretary of Veterans Affairs for service-connected disability.”<a href="#_ftn5" name="_ftnref5">⁵</a></blockquote><br /> A separate prescription drug plan that provides any benefits before a required high deductible is satisfied normally will prevent a beneficiary from qualifying as an eligible individual.<a href="#_ftn6" name="_ftnref6">⁶</a> The IRS has ruled that if an individual’s separate prescription drug plan does not provide benefits until an HDHP’s minimum annual deductible amount has been met, then the individual will be an eligible individual under Section 223(c)(1)(A). For calendar years 2004 and 2005 only, the IRS provided transition relief such that an individual would not fail to be an eligible individual solely by virtue of coverage by a separate prescription drug plan.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> An individual will not fail to be an eligible individual solely because the individual is covered under an Employee Assistance Program, disease management program, or wellness program, if the program does not provide significant benefits in the nature of medical care or treatment.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> An employer can provide an onsite medical clinic without jeopardizing employee HSA eligibility, provided the employer’s clinic does not provide “significant benefits in the nature of medical care” (in addition to disregarded coverage or preventive care). Meeting the exception depends on the level of services provided by the health clinic. Allowed services include the following:<br /> <ul><br /> <li>Physicals,</li><br /> <li>Immunizations,</li><br /> <li>Injecting antigens provided by employee,</li><br /> <li>Providing aspirin/pain relievers, and</li><br /> <li>Treatment of injuries or accidents that occur at work.</li><br /> </ul><br /> <br /> <hr /><br /> <br /> Certain kinds of insurance are not taken into account in determining whether an individual is eligible for an HSA. Specifically, insurance for a specific disease or illness, hospitalization insurance paying a fixed daily amount, and insurance providing coverage that relates to certain liabilities are disregarded.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> In addition, coverage provided by insurance or otherwise for accidents, disability, dental care, vision care, long-term care, telehealth visits, or other remote care will not adversely impact HSA eligibility.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> If an employer contributes to an eligible employee’s HSA, in order to receive an employer comparable contribution the employee must:<br /> <blockquote>(1)     establish the HSA on or before the last day in February of the year following the year for which the contribution is being made and;<br /> <br /> (2)     notify the appropriate contact person of the HSA account information on or before the last day in February of the year described in (1) above and specify and provide HSA account information (e.g., account number, name and address of trustee or custodian, etc.) as well as the method by which the account information will be provided (e.g., in writing, by e-mail, on a certain form, etc.).</blockquote><br /> An eligible employee that establishes an HSA and provides the information required as described in (1) and (2) above will receive an HSA contribution, plus reasonable interest, for the year for which contribution is being made by April 15 of the following year.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 223(c)(1)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 223(b)(7).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Notice 2004-50, 2004-2 CB 196, A-3.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     Notice 2004-50, 2004-2 CB 196, A-5.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     IRS Notice 2015-87.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.     Rev. Rul. 2004-38, 2004-1 CB 717.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.     Rev. Proc. 2004-22, 2004-1 CB 727.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.     Notice 2004-50, 2004-2 CB 196, A-10.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.     IRC § 223(c)(3).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.     IRC § 223(c)(1)(B), as amended by CARES Act.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.     TD 9393, 2008-20 IRB.<br /> <br /> </div>

<div class="Section1">HSAs are generally not subject to the Employee Retirement Income Security Act of 1974 (ERISA).<a href="#_ftn1" name="_ftnref1">¹</a> HSA plans avoid much of the complexity that goes with an ERISA covered plan, making it a good choice for employers desiring greater simplicity. An employer that exercises too much discretion over employees’ HSAs could cause an employer HSA program to become an ERISA plan, but that is not likely.</div><br /> <div class="Section1"><br /> <br /> To avoid ERISA coverage, the establishment of an HSA must be completely voluntary on the part of the employee and the employer cannot do any of the following:<br /> <blockquote>Limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by HSA law.<br /> <br /> Impose conditions on utilization of HSA funds beyond those imposed by HSA law.<br /> <br /> Make or influence the investment decisions with respect to funds contributed to an HSA.<br /> <br /> Represent that the HSAs are an employee welfare benefits plan.<br /> <br /> Receive any payment or compensation in connection with an HSA.</blockquote><br /> A common practice of employers offering HSAs is to select one HSA provider for all employees to simplify employer administration of the plan. This practice, in itself, does not violate any of the above conditions.<a href="#_ftn2" name="_ftnref2">²</a> However, a concern exists if that HSA provider limits investment options. The Department of Labor (DOL) states “the mere fact that employer selects an HSA provider to which it will forward contributions that offers a limited selection of investment options … would not, in the view of the Department, constitute the making or influencing of an employee’s investment decisions giving rise to an ERISA-covered plan so long as employees are afforded a reasonable choice of investment options and employees are not limited in moving their funds to another HSA.” The DOL, however, also states: “[t]he selection of a single HSA provider that offers a single investment option would not, in the view of the Department, afford employees a reasonable choice of investment options.”<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A couple of other common employer practices are also permitted without an HSA program becoming subject to ERISA. An employer can pay for fees associated with the HSA without the plan becoming an ERISA plan.<a href="#_ftn4" name="_ftnref4">⁴</a> An employer can unilaterally open an HSA for an employee and deposit employer funds into that HSA and still meet the “completely voluntary” requirement to avoid ERISA coverage.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The employer cannot receive a discount on another product offered by the HSA custodian in exchange for using the custodian for its employees’ HSAs.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If an HSA program is covered by ERISA, the employer must: (1) file the Form 5500 annually, (2) provide employees with Summary Plan Descriptions (SPDs), (3) be a fiduciary for the plan, and (4) meet other ERISA imposed terms. HSAs are not designed as ERISA plans and employers generally should seek to avoid ERISA coverage. If the plan does become an ERISA plan, the employer will face a number of challenging questions in applying ERISA to an HSA program.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     DOL FAB 2004-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     DOL FAB 2004-1; DOL FAB 2006-02, A2.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     DOL FAB 2006-02.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     DOL FAB 2006-02, A5.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     DOL FAB 2006-02, A1.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.     DOL FAB 2006-02, A7.<br /> <br /> </div>

<div class="Section1">An eligible individual may deduct the aggregate amount paid in cash into an HSA during the taxable year, up to $4,330 for 2025 ($4,150 for 2024, $3,850 for 2023), for self-only coverage and $8,550 for 2025 ($8,300 for 2024, $7,750 for 2023) for family coverage. The HSA contribution limits for the 2024 taxable year and previous years are provided in the table below.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <table style="height: 186px;" border="1" width="652" align="center"><br /> <tbody><br /> <tr><br /> <td width="73"></td><br /> <td style="text-align: center;" width="52"><strong>2017</strong></td><br /> <td style="text-align: center;" width="52"><strong>2018</strong></td><br /> <td style="text-align: center;" width="52"><strong>2019</strong></td><br /> <td style="text-align: center;" width="52"><strong>2020</strong></td><br /> <td style="text-align: center;" width="52"><strong>2021</strong></td><br /> <td style="text-align: center;" width="52"><strong>2022</strong></td><br /> <td style="text-align: center;" width="52"><strong>2023</strong></td><br /> <td style="text-align: center;" width="52"><strong>2024</strong></td><br /> <td style="text-align: center;" width="52"><strong>2025</strong></td><br /> </tr><br /> <tr><br /> <td width="73">Individual HSA Limit</td><br /> <td style="text-align: right;" width="52">$3,400</td><br /> <td style="text-align: right;" width="52">$3,450</td><br /> <td style="text-align: right;" width="52">$3,500</td><br /> <td style="text-align: right;" width="52">$3,550</td><br /> <td style="text-align: right;" width="52">$3,600</td><br /> <td style="text-align: right;" width="52">$3,650</td><br /> <td style="text-align: right;" width="52">$3,850</td><br /> <td style="text-align: right;" width="52">$4,150</td><br /> <td style="text-align: right;" width="52">$4,300</td><br /> </tr><br /> <tr><br /> <td width="73">Family HSA Limit</td><br /> <td style="text-align: right;" width="52">$6,750</td><br /> <td style="text-align: right;" width="52">$6,850</td><br /> <td style="text-align: right;" width="52">$7,000</td><br /> <td style="text-align: right;" width="52">$7,100</td><br /> <td style="text-align: right;" width="52">$7,200</td><br /> <td style="text-align: right;" width="52">$7,300</td><br /> <td style="text-align: right;" width="52">$7,750</td><br /> <td style="text-align: right;" width="52">$8,300</td><br /> <td style="text-align: right;" width="52">$8,550</td><br /> </tr><br /> </tbody><br /> </table><br /> For 2006 and prior years, the contribution and deduction were limited to the lesser of the deductible under the applicable HDHP or the indexed annual limits for self-only coverage or family coverage.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The determination between self-only and family coverage is made as of the first day of the month. The limit is calculated on a monthly basis and the allowable deduction for a taxable year cannot exceed the sum of the monthly limitations, but see below for the rule applicable to newly eligible individuals, for the months during which an individual was an eligible individual ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="393">393</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> For example, a person with self-only coverage under an HDHP would be limited to a monthly contribution limit of $358.33 for 2025 ($4,300 divided by 12). If a person was an eligible individual for only the first eight months of a year, the contribution limit for the year would be $2,866.67 (eight months multiplied by the monthly limit). Although the annual contribution level is determined for each month, the annual contribution can be made in a single payment, if desired.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Individuals who attain age 55 before the close of a taxable year are eligible for an additional contribution amount over and above that calculated under IRC Section&nbsp;223(b)(1) and IRC Section&nbsp;223(b)(2). The additional contribution amount is $1,000 for 2009 and later years.<a href="#_ftn5" name="_ftnref5">⁵</a> In 2025, this would allow individuals age 55 and older a total contribution of up to $5,300; the total contribution for a family would be $9,550.<br /> <br /> An individual who becomes an eligible individual after the beginning of a taxable year and who is an eligible individual for the last month of the taxable year shall be treated as being an eligible individual for the entire taxable year. For example, a calendar-year taxpayer with self-only coverage under an HDHP who became an eligible individual for December&nbsp;2025 would be able to contribute the full $4,300 to an HSA in that taxable year. If a taxpayer fails at any time during the following taxable year to be an eligible individual, the taxpayer must include in his or her gross income the aggregate amount of all HSA contributions made by the taxpayer that could not have been made under the general rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="385">385</a>). The amount includable in gross income also is subject to a 10 percent penalty tax.<br /> <br /> For married individuals, if either spouse has family coverage, then both spouses are treated as having family coverage and the deduction limit is divided equally between them, unless they agree on a different division (note that this now applies to same sex couples equally, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="407">407</a>). If both spouses have family coverage under different plans, both spouses are treated as having only the family coverage with the lowest deductible.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Even though the tax code refers to &ldquo;family&rdquo; HDHP coverage and provides for a &ldquo;family&rdquo; HSA contribution limit, all HSAs are individual accounts.<a href="#_ftn7" name="_ftnref7">⁷</a> The lack of a family HSA generally does not hurt HSA account owners as most desired goals can be accomplished through individual HSAs. The HSA can still be used for qualified medical expenses of a spouse and dependents. The higher family HSA contribution limit applies to an eligible individual covered under a family HDHP plan. A spouse or child can be named as an authorized signer on the HSA allowing for the family to have direct access to the HSA through checks or debit cards issued in the family member&rsquo;s name.<br /> <br /> The lack of a family HSA, however, can complicate making HSA contributions. A common example of this is the catch-up contribution for individuals over age 55. A married couple with each spouse over the age 55 will have to open two HSAs to maximize their overall HSA contribution because the catch-up contribution must be contributed to each respective spouse&rsquo;s individual HSA. Another implication is for employer contributions and pre-tax payroll deferral through an employer. All pre-tax employer contributions must be made into the HSA of the employee and cannot be contributed to an HSA of the employee&rsquo;s spouse. Opening two HSAs, one in the name of each spouse, is generally the answer to complications arising from the individual nature of HSAs. This approach works well but is counterintuitive to many taxpayers hearing about &ldquo;family&rdquo; HSAs and frustrating given a general desire by many to keep the number of financial accounts to a minimum, especially when there are fees associated with the account.<br /> <br /> <hr><br /> <br /> An HSA may be offered in conjunction with a cafeteria plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3501">3501</a>). Both a high deductible health plan and an HSA are qualified benefits under a cafeteria plan.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Employer contributions to an HSA are treated as employer-provided coverage for medical expenses to the extent that contributions do not exceed the applicable amount of allowable HSA contributions.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> An employee will not be required to include any amount in income simply because he or she may choose between employer contributions to an HSA and employer contributions to another health plan.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> An employer generally can deduct amounts paid to accident and health plans for employees as a business expense ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="330">330</a>).<br /> <br /> An individual may not deduct any amount paid into his or her HSA; that amount is excludable from gross income under IRC Section&nbsp;106(d).<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> No deduction is allowed for any amount contributed to an HSA with respect to any individual for whom another taxpayer may take a deduction under IRC Section&nbsp;151 for the taxable year.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; &nbsp; &nbsp;IRC &sect;&sect; 223(a), 223(b)(2); Rev. Proc. 2016-28, Rev. Proc. 2017-37, Rev. Proc. 2018-30, Rev. Proc. 2019-25, Rev. Proc. 2020-32, Rev. Proc. 2021-25, Rev. Proc. 2022-24, Rev. Proc. 2023-23, Rev. Proc. 2024-25.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(b)(2), prior to amendment by TRHCA 2006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(b)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(b); Notice 2004-2, 2004-1 CB 269, A-12.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(b)(3).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(b)(5).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223 (d)(3).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; &nbsp; &nbsp;IRC &sect; 125(d)(2)(D).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 106(d)(1).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; &nbsp;IRC &sect;&sect; 106(b)(2), 106(d)(2).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; &nbsp; IRC &sect; 223(b)(4).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; IRC &sect; 223(b)(6).<br /> <br /> </div></div><br />

<div class="Section1">The benefits of offering employees an HDHP and HSA vary dramatically depending upon the circumstances. A key strength of offering an HSA program is flexibility. Employers can be very generous and fully fund an HSA and also pay for the HDHP coverage. Alternatively, employers can also use the flexibility of the HSA to allow for the employer to reduce its involvement in benefits and put more responsibility onto the employee. Generally, employers switch to HDHPs and HSAs to save money on the health insurance premiums (or to reduce the rate of increase) and to embrace the concept of consumer driven healthcare. The list below elaborates on strengths of HDHPs and HSAs.<br /> <blockquote>(1)     <em>Lower Premiums.</em> HDHPs, with their high deductibles, are usually less expensive than traditional insurance.<br /> <br /> (2)     <em>Consumer Driven Healthcare.</em> Many employers believe in the concept of consumer driven healthcare. If an employer makes employees responsible for the relatively high deductible, the employees may be more careful and inquisitive into their health care purchases. Combining this with an HSA where employees can keep unused money increases employees’ desire to use health care dollars as if they were their own money – because it is their own money.<br /> <br /> (3)     <em>Lower Administration Burden.</em> Given the individual account nature of HSAs, much of the administrative burden for HSAs is switched from the employer (or paid third-party administrator) to the employee and the HSA custodian as compared to health FSAs and HRAs. This increased burden on the employee comes with significant perks for the employee: more control over how and when the money is spent, increased privacy, and better ability to add money to the HSA outside of the employer.<br /> <br /> (4)     <em>Flexibility. </em>HSA and HDHP programs allow employers to adjust the program to their needs by varying the level of employer commitment to insurance premium and HSA contributions for employees. HSAs allow for employees to contribute on their own.<br /> <br /> (5)     <em>Tax Deductibility at Employee Level.</em> The ability of employees to make their own HSA contributions directly and still get a tax deduction is advantageous. Although it is better for employees to contribute through an employer to save payroll taxes, an employee can make contributions directly. An employer may not offer pre-tax payroll deferral or it may be too late for an employee to defer. For example, an employee that decides to maximize his prior year HSA contribution in April as he is filing his taxes can still do so by making an HSA contribution directly with the HSA custodian.<br /> <br /> (6)     <em>HSA Eligibility.</em> Becoming eligible for an HSA is a benefit that also stands on its own. Although not all employees will embrace HSAs, savvy employees that understand the benefits of HSAs will value a program that enables them to have an HSA.</blockquote><br /> </div>