Back to Health And Medical Savings Accounts

Contributions

  • 397. What are the limits on amounts contributed to a Health Savings Account (HSA)?

    • An eligible individual may deduct the aggregate amount paid in cash into an HSA during the taxable year, up to $3,850 for 2023 ($3,650 for 2022), for self-only coverage and $7,750 for 2023 ($7,300 for 2022) for family coverage.[1] The HSA contribution limits for the 2023 taxable year and previous years are provided in the table below.

        2016 2017 2018 2019 2020 2021 2022 2023
      Individual HSA Limit   $3,350 $3,400 $3,450 $3,500 $3,550 $3,600 $3,650 $3,850
      Family HSA Limit   $6,750 $6,750 $6,850 $7,000 $7,100 $7,200 $7,300 $7,750

      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.[2]

      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 393).[3]

      For example, a person with self-only coverage under an HDHP would be limited to a monthly contribution limit of $320 for 2023 ($3,850 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 $2,566 (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.[4]

      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 223(b)(1) and IRC Section 223(b)(2). The additional contribution amount is $1,000 for 2009 and later years.[5] In 2023, this would allow individuals age 55 and older a total contribution of up to $4,850; the total contribution for a family would be $8,750.

      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 2023 would be able to contribute the full $3,850 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 384). The amount includable in gross income also is subject to a 10 percent penalty tax.

      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, see Q 405). If both spouses have family coverage under different plans, both spouses are treated as having only the family coverage with the lowest deductible.[6]


      Planning Point: Even though the tax code refers to “family” HDHP coverage and provides for a “family” HSA contribution limit, all HSAs are individual accounts.[7] 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’s name.

      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’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’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 “family” 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.


      An HSA may be offered in conjunction with a cafeteria plan (Q 3501). Both a high deductible health plan and an HSA are qualified benefits under a cafeteria plan.[8]

      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.[9]

      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.[10]

      An employer generally can deduct amounts paid to accident and health plans for employees as a business expense (Q 330).

      An individual may not deduct any amount paid into his or her HSA; that amount is excludable from gross income under IRC Section 106(d).[11]

      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 151 for the taxable year.[12]

       

      [1].     IRC Secs. 223(a), 223(b)(2); Rev. Proc. 2010-22, 2010-1 CB 747; Rev. Proc. 2009-29, 2009-1 CB 1050, Rev. Proc. 2015-53, Rev. Proc. 2016-28, Rev. Proc. 2017-37, Rev. Proc. 2018-30, Rev. Proc. 2019-25, Rev. Proc. 2020-32, Rev. Proc. 2021-25.

      [2].     IRC Sec. 223(b)(2), prior to amendment by TRHCA 2006.

      [3].     IRC Sec. 223(b)(1).

      [4].     IRC Sec. 223(b); Notice 2004-2, 2004-1 CB 269, A-12.

      [5].     IRC Sec. 223(b)(3).

      [6].     IRC Sec. 223(b)(5).

      [7].      IRC Sec. 223 (d)(3).

      [8].     IRC Sec. 125(d)(2)(D).

      [9].     IRC Sec. 106(d)(1).

      [10].   IRC Secs. 106(b)(2), 106(d)(2).

      [11].   See IRC Sec. 223(b)(4).

      [12].   IRC Sec. 223(b)(6).

  • 398. What is the HSA establishment date?

    • HSA account owners set an establishment date for their HSAs and can use the HSA to pay for all qualified medical expenses incurred after that date.1

      The establishment date is set the first time a taxpayer opens an HSA. The definition of “established” depends on state law, so the exact date an HSA is established depends on an HSA account owner’s state trust law.2 A common requirement under state law for a trust is that an executed trust agreement exists and potentially that the trust is funded. HSA rules require that HSA custodians use a formal document for HSA establishment; the IRS Forms 5305-C, 5305-B or an IRS approved prototype. The signing of that document would generally be a requirement for establishment.3 The establishment date is not the date when the HSA account owner was eligible to open the HSAor when coverage under an HDHP begins.

      If an HSA account owner opens another HSA, the new HSA is deemed established the same day the first HSA was established so long as the earlier HSA had a positive balance at any point during the eighteen-month period ending on the date of the opening of the new HSA.4 For transfers and rollover of HSA funds, the establishment date stays the same as the date the original HSA was established.5

      Planning Point: Upon a first reading, the establishment date rule appears to be simple and follows a common sense approach. Accordingly, many account owners and even professionals do not give the date much thought. Understanding the establishment date rules; however, can help HSA owners maximize HSA benefits.

      The rule allows HSA owners with a normal amount of medical expenses to maximize HSA tax benefits by paying for most, if not all, qualified medical expenses tax-free through their HSA, even in years when the HSA account owners’ medical expenses exceed the HSA limits or in years when the account owner is not currently eligible to contribute to an HSA. The rule also allows an account owner to maximize tax-deferred earnings by delaying reimbursement of medical expenses from the HSA. The key is that the rule simply requires that the HSA be established in order to use it for qualified medical expenses. The rule does not refer to the amount of money available in the HSA.

      For individuals that anticipate good health and prefer not to contribute to an HSA, the establishment date rule allows the individual to establish the HSA with a nominal dollar amount. Establishing the HSA before a medical expense is incurred provides the individual the flexibility to fund the HSA periodically only after a medical expense is incurred and the amount known. If the expense is larger than the current year’s HSA contribution limit allows, the individual can pay the expense with non-HSA funds that are not tax-favored (e.g. a FSA or HRA could not be used) and then wait for future year contributions to reimburse from the HSA. This of course assumes the individual remains HSA eligible.

      An individual losing eligibility who wants to maximize tax planning should keep the HSA open with a small balance to maintain the establishment date. This would allow the individual to save medical receipts during the period of ineligibility and potentially use future HSA contributions to reimburse for those qualified medical expenses after the individual regains HSA eligibility and begins making contributions again. The ability to pay for current year expenses with future year HSA contributions provides an opportunity for individuals losing their HSA eligibility before a large reserve has accumulated.

      Some individuals use this rule to maximize tax deferral by fully funding the HSA each year and then not using the HSA for qualified medical expenses. This approach allows the full HSA to grow tax-deferred. Assuming the taxpayer is actually incurring medical expenses, the taxpayer can save those receipts and essentially build a fund within the HSA that is available for immediate tax-free distribution at any time. HSA rules allow for the reimbursement of qualified medical expenses incurred after the establishment date at any point in the future.


      1 .IRS Notice 2004-2, A26.

      2 .IRS Notice 2008-59, A38.

      3 .IRC Sec. 223 (d)(1)(B); Instructions to IRS Form 5305-C.

      4 .IRS Notice 2008-59, A41.

      5 .IRS Notice 2008-59, A40.

  • 399. Must an employer offering Health Savings Accounts (HSAs) to its employees contribute the same amount for each employee?

    • An employer offering HSAs to its employees must make comparable contributions to the HSAs for all comparable participating employees for each coverage period during the calendar year.1 IRC Section 4980G incorporates the comparability rules of IRC Section 4980E by reference.2

      Comparable contributions are contributions that either are the same amount or the same percentage of the annual deductible limit under a high deductible health plan (HDHP).3

      Comparable participating employees are all employees who are in the same category of employee and have the same category of coverage.

      Category of employee refers to full-time employees, part-time employees, and former employees.4

      Category of coverage refers to self-only and family-type coverage. Family coverage may be subcategorized as self plus one, self plus two, and self plus three or more. Subcategories of family coverage may be tested separately, but under no circumstances may an employer contribute less to a category of family coverage with more covered persons.5

      For years beginning after 2006, highly compensated employees are not treated as comparable participating employees to non-highly compensated employees.6

      Planning Point: Employers often want to categorize employees in arrangements other than discussed above and not allowed by the law. Employers may desire to use existing organizational structure and separate employees that work in different locations, different divisions, or have different job descriptions. Employers may desire to reward tenure by categorizing employees based on length of service. Generous employers may want to make the additional $1,000 catch-up contribution for employees over the age fifty-five. Advising employers on this issue is simplified by the IRS’s regulation that states its list is the exclusive list of allowed categories.7 None of the categories suggested above are permitted categories.

      Although not technically categories of employees under the IRS regulations, there are a number of other exceptions that may prove helpful for employers. Employees that are members of a union are not considered comparable employees provided that health benefits were the subject of good faith bargaining between the union and the employer.8 Employees that are not eligible for an HSA are not comparable employees.9 Employers can limit comparable HSA contributions to employees that receive their HDHP coverage through the employer.10 Employers may also elect to make the HSA contribution to employees that are HSA eligible, but obtained HDHP coverage outside of the employer, provided the employer treats similar employees comparably. HSA contributions to sole proprietors, more than 2 percent owners of an S corporation and partners in a partnership are generally not treated as comparable HSA contributions.

      Employer contributions made to HSAs through a cafeteria plan, including matching contributions, are not subject to comparability rules but are subject to IRC Section 125 nondiscrimination rules (Q 3504).11

      An employer may make contributions to the HSAs of all eligible employees at the beginning of a calendar year; it may contribute monthly on a pay-as-you-go basis; or it may contribute at the end of a calendar year, taking into account each month that an employee was a comparable participating employee. An employer must use the same contribution method for all comparable participating employees.12

      If an employer does not prefund HSA contributions, regulations provide that it may accelerate all or part of its contributions for an entire year to HSAs of employees who incur, during the calendar year, qualified medical expenses exceeding the employer’s cumulative HSA contributions to date. If an employer permits accelerated contributions, the accelerated contributions must be available on a uniform basis to all eligible employees under reasonable requirements.13

      To deal with employees who may not have established an HSA at the time an employer makes contributions, regulations require employers to provide to each eligible employee by January 15 a written notice that if the employee, by the last day of February, both establishes an HSA and notifies the employer that he or she has done so, the employee will receive a comparable contribution to the HSA for the prior calendar year. The written notice may be delivered electronically. For each eligible employee that notifies an employer that he or she has established an HSA, the employer must, by April 15, make comparable contributions, taking into account each month that an employee was a comparable participating employee, plus reasonable interest.14

      There is a maximum contribution permitted for all employees who are eligible individuals during the last month of the taxable year. An employer may contribute up to the maximum annual contribution amount for the calendar year based on the employees’ HDHP coverage to HSAs of all employees who are eligible individuals on the first day of the last month of the employees’ taxable year, including employees who worked for the employer for less than the entire calendar year and employees who became eligible individuals after January 1 of the calendar year. For example, contributions may be made on behalf of an eligible individual who is hired after January 1 or an employee who becomes an eligible individual after January 1.15

      Employers are not required to provide more than a pro rata contribution based on the number of months that an individual was an eligible individual and employed by the employer during the year. If an employer contributes more than a pro rata amount for a calendar year to an HSA of any eligible individual who is hired after January 1 of the calendar year, or any employee who becomes an eligible individual any time after January 1 of the calendar year, the employer must contribute that same amount on an equal and uniform basis to HSAs of all comparable participating employees who are hired or become eligible individuals after January 1 of the calendar year.16

      Likewise, if an employer contributes the maximum annual contribution amount for the calendar year to an HSA of any eligible individual who is hired after January 1 of the calendar year or any employee who becomes an eligible individual any time after January 1 of the calendar year, the employer also must contribute the maximum annual contribution amount on an equal and uniform basis to HSAs of all comparable participating employees who are hired or become eligible individuals after January 1 of the calendar year.17

      An employer who makes the maximum calendar year contribution or more than a pro rata contribution to HSAs of employees who become eligible individuals after the first day of the calendar year, or to eligible individuals who are hired after the first day of the calendar year, will not fail to satisfy comparability merely because some employees will have received more contributions on a monthly basis than employees who worked the entire calendar year.18


      1 .IRC Secs. 4980E, 4980G.

      2 .Treas. Reg. § 54.4980G-1, A-1.

      3 .IRC Sec. 4980E(d)(2); Treas. Reg. § 54.4980G-4, A-1.

      4 .Treas. Reg. § 54.4980G-3, A-5.

      5 .IRC Sec. 4980E(d)(3); Treas. Reg. §§ 54.4980G-1, A-2, 54.4980G-4, A-1.

      6 .IRC Sec. 4980G(d), as added by TRHCA 2006.

      7 .Treas. Reg. § 54.4980G-3, A6

      8 .Treas. Reg. § 54.4980G-4, A1

      9 .Treas. Reg. § 54.4980G-3, A7.

      10 .Notice 2004-50, A84; Notice 2005-8.

      11 .Notice 2004-50, 2004-2 CB 196, A-47; IRC Sec. 125 (b), (c), and (g); Treas. Reg. § 1.125-1, A-19.

      12 .IRC Sec. 4980E(d)(3); Treas. Reg. § 54.4980G-4, A-4.

      13 .IRC Sec. 4980E(d)(3); Treas. Reg. § 54.4980G-4, A-15.

      14 .IRC Sec. 4980E(d)(3); Treas. Reg. § 54.4980G-4, A-14.

      15 .Treas. Reg. §54.4980G-4.

      16 .Treas. Reg. §54.4980G-4.

      17 .Treas. Reg. §54.4980G-4.

      18 .Treas. Reg. §54.4980G-4.

  • 400. Are there any exceptions to the general rule that an employer offering Health Savings Accounts (HSAs) to its employees must make comparable contributions for all comparable participating employees?

    • The IRC provides an exception to comparability rules (Q 399) that allows, but that does not require, employers to make larger contributions to HSAs of nonhighly compensated employees than to HSAs of highly compensated employees.Regulations provide that employers may make larger HSA contributions for nonhighly compensated employees who are comparable participating employees than for highly compensated employees who are comparable participating employees.Employer contributions to HSAs for highly compensated employees who are comparable participating employees may not be larger than employer HSA contributions for nonhighly compensated employees who are comparable participating employees.Comparability rules continue to apply with respect to contributions to HSAs of all nonhighly compensated employees and all highly compensated employees. Thus, employers must make comparable contributions for a calendar year to the HSA of each nonhighly compensated comparable participating employee and each highly compensated comparable participating employee.4


      1 .IRC Sec. 4980G(d); Preamble, TD 9457, 74 Fed. Reg. 45994, 45995 (9-8-2009); see Treas. Reg. §54.4980G-6.

      2 .Treas. Reg. §54.4980G-6, Q&A-1.

      3 .Treas. Reg. §54.4980G-6, Q&A-2.

      4 .Treas. Reg. §54.4980G-6, Q&A-1.

  • 401. Do the comparability rules that apply to employer-provided health savings accounts (HSAs) apply to qualified HSA distributions (rollovers)?

    • An employer who offers a rollover, namely, a qualified HSA distribution (Q 413), from a health reimbursement arrangement (Q 349) or a health flexible spending arrangement (Q 3519) for any employee must offer a rollover to any eligible individual covered under an HDHP of the employer. Otherwise, the comparability requirements of IRC Section 4980G do not apply to qualified HSA distributions.1

      There are special comparability rules for qualified HSA distributions contributed to HSAs on or after December 20, 2006, and before January 1, 2012. Effective January 1, 2010, the comparability rules of IRC Section 4980G do not apply to amounts contributed to employee HSAs through qualified HSA distributions. To satisfy comparability rules, if an employer offers qualified HSA distributions to any employee who is an eligible individual covered under any HDHP, the employer must offer qualified HSA distributions to all employees who are eligible individuals covered under any HDHP. If an employer offers qualified HSA distributions only to employees who are eligible individuals covered under an employer’s HDHP, the employer is not required to offer qualified HSA distributions to employees who are eligible individuals but are not covered under the employer’s HDHP.2


      1 .IRC Sec. 106(e)(5).

      2 .Treas. Reg. §54.4980G-7, Q&A-1.

  • 401. What are the employee’s responsibilities regarding HSAs?

    • The bulk of the compliance burden for meeting the HSA rules rests with the individual employee. The following are key employee responsibilities.

      (1)Substantiation. The employee must substantiate that the distributions from the HSA were in fact used for qualified medical expenses by saving medical receipts in case of an IRS audit.1 Placing this burden on the individual relieves the employer of the arduous task of reviewing receipts and issuing reimbursement checks or otherwise facing some potential liability for failure by an employee to use the money appropriately. Employers generally welcome this change even though employers lose some control. Employee substantiation simplifies the process of paying or reimbursing for medical expenses, allows for more employee privacy, and gives employees the opportunity to be more aggressive in interpreting the definition of qualified medical expenses.

      (2)Eligibility. Although an employer and a custodian can help educate employees on the requirements to be eligible for an HSA and the employer should verify that the employee is covered by an HDHP, the ultimate responsibility to determine eligibility rests with the employee.An employee’s participation in a spouse’s health insurance plan or general purpose flexible spending account (FSA) could jeopardize the employee’s HSA eligibility, as could participation in a government health care system such as the Veterans Administration’s plan or Medicare. (See Q 393.)

      (3)Maximum Contribution Limit. The employee is primarily responsible for ensuring that the amount contributed to the HSA is within federal guidelines.Employers and custodians share some of the responsibility, as employers cannot deduct more than the maximum HSA contribution limit for an employee (the employer can assume eligibility based on HDHP coverage) and custodians cannot accept more than the family HSA limit plus one catch-up contribution ($8,000 in 2019, $8,100 in 2020, $8,200 in 2021, and $8,300 in 2022). An employee that exceeds the limit may cause additional administrative work for the employer, the custodian and the individual. It is in everyone’s best interest to educate the employee on the limits.

      (4)Management of HSA. Employees manage the balance in the HSA, select investments, choose beneficiaries, update contact information, pay for medical expenses and perform other maintenance issues generally without employer involvement.

      (5)Tax Reporting/Payments. Employees are required to file an attachment (IRS Form 8889) to their income tax return each year they make a contribution or take a distribution.This includes employees who receive an employer-made contribution. This form is used by the IRS to ensure that the individual does not take a larger than permitted deduction and also ensures that the individual pays any taxes and penalties owed for non-eligible distributions. The employer provides a W-2 to the employee documenting pre-tax HSA contributions.

      (6)Termination of Employment. Another positive feature of HSAs for both employers and employees is that the HSA remains open and viable after the employee’s separation from service (some situations may require the account owner to transfer the HSA to a new custodian). Other than discontinuing any employer contributions into the HSA, the employer generally does not need to take any action regarding the separating employee’s HSA. The employee is responsible for maintaining or closing the HSA after separation from service.


      1 .Notice 2004-2, A30.

      2 .Notice 2004-50, A81.

      3 .Notice 2004-50, A81.

      4 .IRS Instructions to Form 8889.

  • 402. What are the consequences if an employer does not meet the comparability requirements applicable to health savings accounts (HSAs)?

    • If an employer fails to meet comparability requirements applicable to HSAs (Q 399 to Q 401), a penalty tax is imposed, equal to 35 percent of the aggregate amount contributed by an employer to HSAs of employees for their taxable years ending with or within the calendar year.1


      1 .IRC Secs. 4980E(a), 4980E(b), 4980G(b). For filing requirements for excise tax returns, see Treas. Reg. §§54.6011-2 (general requirement of return), 54.6061-1 (signing of return), 54.6071-1(c) (time for filing return), 54.6091-1 (place for filing return), and 54.6151-1 (time and place for paying tax shown on return).

  • 404. What are the employer responsibilities regarding employee HSAs?

    • If an employer offers pre-tax employer contributions, then the employer has the following responsibilities:

      (1)Make Comparable Contributions. If the employer is making a pre-tax employer contribution (non-payroll deferral), it must do so on a comparable basis.1(See Q 399.)

      (2)Maintain Section 125 Plan for Payroll Deferral. If the employer allows pre-tax payroll deferral, then the employer must adopt and maintain a Section 125 plan that provides for HSA deferrals.This includes collecting employee deferral elections, sending the deferred amount directly to the HSA custodian, and accounting for the money for tax-reporting purposes.

      (3)HSA Eligibility and Contribution Limits. Employers should work with employees to determine eligibility for an HSA and the employee’s HSA contribution limit. Although it is legally the employee’s responsibility to determine eligibility beyond HDHP coverage and contribution limit, a mistake in HSA contribution limits generally involves work by both the employer and the employee to correct. Mistakes are best avoided by upfront communication. Also, the employer does have some responsibility not to exceed the known federal limits. An employer may not know if a particular employee is ineligible for an HSA due to other health coverage, but an employer is expected to know the current HSA limits for the year and not exceed those limits.3

      (4)Tax Reporting. The employer needs to properly complete employees’ W-2 forms4 and its own tax-filing regarding HSAs. HSA employer contributions are generally deductible.5

      (5)Business Owner Rules. Business owners (sole proprietors, partners in a partnership or LLC, and more than 2 percent owners of an S corporation) are generally not treated as employees and employers need to review HSA contributions for business owners for proper tax reporting.

      (6)Detailed Rules. There are various detailed rules that fall within the responsibility of the employer that are too numerous to list here but include items such as: (1) holding employer contributions for an employee that fails to open an HSA,6 (2) not being able to “recoup” money mistakenly contributed to an employee’s HSA,7 (3) actually making employer HSA contributions into employees HSAs on a timely basis, (4) educating employees on HSAs (not legally required but necessary for a successful program), and (5) other detailed rules.


      1 .Treas. Reg. §54.4980G-1.

      2 .IRC Sec. 125.

      3 .Notice 2004-50, A82.

      4 .Notice 2004-2, A34 (W-2 reporting only).

      5 .IRC Sec. 106.

      6 .Treas. Reg. §54.4980G-4, A7.

      7 .Notice 2004-50, A82.

  • 405. What is the result if a same sex couple contributed amounts to a Health Savings Account (HSA) that exceed the applicable contribution limit for married couples?

    • 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 397). As a result, the IRS has 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 may choose to reduce one or both members’ contribution to the HSAs in order to avoid exceeding the contribution limit. In the alternative, if their contributions have already exceeded the threshold, the excess may be distributed to the spouses prior to the due date for filing their tax return. Any remaining excess contributions will be subject to the penalty tax typically imposed under IRC Section 4973. These rules apply for the 2013 tax year and beyond.1


      1 .Notice 2014-1, 2014-2 IRB 270.

  • 405. What is the tax consequence to individuals when excess contributions are made to a Health Savings Account (HSA)?

    • If an HSA receives excess contributions for a taxable year, distributions from the HSA are not includable in income to the extent that the distributions do not exceed the aggregate excess contributions to all HSAs of an individual for a taxable year if (1) the distribution is received by the individual on or before the last day for filing the individual’s income tax return for the year, including extensions; and (2) the distribution is accompanied by the amount of net income attributable to the excess contribution. Any net income must be included in an individual’s gross income for the taxable year in which it is received.1

      Excess contributions to an HSA are subject to a 6 percent tax. The tax may not exceed 6 percent of the value of the account, determined at the close of the taxable year.2

      Excess contributions are defined, for this purpose, as the sum of (1) the aggregate amount contributed for the taxable year to the accounts, excluding rollover contributions, which is neither excludable from gross income under IRC Section 106(b) nor allowable as a deduction under IRC Section 223, and (2) this amount for the preceding taxable year reduced by the sum of (x) the distributions from the accounts that were included in gross income under IRC Section 223(f)(2), and (y) the excess of the maximum amount allowable as a deduction under IRC Section 223(b)(1), for the taxable year, over the amount contributed for the taxable year.3

      For these purposes, any excess contributions distributed from an HSA are treated as amounts not contributed.4


      1 .IRC Sec. 223(f)(3)(A), Notice 2004-50, 2004-2 CB 196

      2 .IRC Sec. 4973(a).

      3 .IRC Sec. 4973(g).

      4 .IRC Sec. 4973(g).

  • 406. What is the “testing period” for HSAs?

    • An HSA testing period is a rule that requires HSA account owners in some circumstances to maintain their HSA eligibility for a period of time after making an HSA contribution.1 Congress created the testing period rules when it passed the Health Opportunity and Patient Empowerment Act of 2006, a law allowing HSA account owners to fully fund an HSA up to the IRS limits for a year even if they were not HSA eligible for the full year (this is commonly referred to as the “full contribution rule” or the “last month rule”).2 The full contribution rule only applies to individuals eligible on the first day of the last month of the tax year (December 1 for calendar year taxpayers). The full contribution rule partially replaced the sum-of-the-months rule that limited HSA contributions to a pro-rata amount of the IRS maximum based on the number of months a person was eligible for an HSA (see Q 397). The testing period serves to plug a potential loophole that would have allowed individuals to make a full HSA contribution and then switch to traditional health insurance (i.e. allow individuals to benefit from the HSA tax deduction without being exposed to the high deductible required under an HDHP).

      The testing period rules apply in two circumstances:3

      (1) HSA account owners that were HSA eligible on the first day of the last month of their tax year must meet a testing period (December 1 for calendar year taxpayers). This includes people that just started their HSA eligibility on the first day of the last month (December 1) as well as someone that started eligibility during the tax year and remained eligible on the first day of the last month. It does not include someone who was eligible for part of the year not including the first day of the last month of their tax year (i.e. an individual that lost HSA eligibility before the last month of the individual’s tax year).

      (2) An HSA account owner using a tax-free distribution from an IRA to fund an HSA must meet a testing period.

      In other words, any calendar-year taxpayer who makes a regular HSA contribution and remains eligible on December 1 is subject to a testing period. Or, anyone who completes an HSA qualified funding distribution from an IRA is also subject to the testing period rules. This means that most participants in an HSA, those who make contributions every year and remain eligible year after year, are subject to the testing period rules. However, the impact of the rule only applies to individuals that start eligibility after the beginning of the tax year and remain eligible on the first day of the last month of the tax year or move money from an IRA to an HSA in an HSA qualified funding distribution. Individuals who are eligible every month of a year will not face any additional taxes or penalties based on a failed test period for that year. Individuals that are eligible during the year but lose eligibility prior to the first day of the last month of the tax year are not subject to the testing period rule because they are not granted the benefit of the full contribution rule.

      The testing period for regular HSA contributions runs from the first day of the last month of the tax year (December 1 for calendar year taxpayers) until the last day of the twelve month period following that month (December 31 of the following year for calendar year taxpayers). For HSA qualified funding distributions from an IRA, the testing period runs from the month of the rollover until the last day of the twelfth month following that month (i.e. thirteen months counting the month of the rollover). The individual must remain eligible for an HSA during the testing period or fail the testing period. If an individual faces both testing periods, the two tests are run separately.

      The individual is responsible to understand the testing period rules, track the testing period and report any failures of the testing period. Neither the HSA custodian nor an employer bears any responsibility for tracking the testing period.

      Individuals that fail to meet the testing period must calculate the amount of an HSA contribution they could have made under the sum-of-the-months rule and then compare that amount to their actual contribution for the year being tested. If their actual contribution is larger, the HSA account owner will owe taxes and penalties on the difference. If their actual contribution is the same or less than the sum-of-the-months rule, then no tax or penalty is owed. The sum-of-the-months calculation determines the amount that a taxpayer would have been allowed to contribute under the pre-2007 law and a failed testing period essentially results in a taxpayer having to return to that potentially lower contribution amount.

      Accordingly, HSA account owners that fail the testing period first need to calculate their sum-of-the months’ amount. The IRS provides a sample calculation in its HSA Publication 969.4

      The penalty is 10 percent of the amount of excess contribution (the difference between the amount contributed and the sum-of-the-months calculated amount). Plus, the HSA account owner owes federal and possible state income taxes on that amount. An exception exists if the failure to remain HSA eligible while under a testing period for the HSA results from death or disability. This exception applies to both the full contribution year testing and to IRA to HSA funding testing periods.5

      HSA account owners pay the tax and penalty on IRS Form 8889, Part III. This form is a required attachment to the IRS Form 1040 series for HSAs account owners in any year an HSA account owner makes a contribution or takes a distribution, so most HSA account owners are filing this form anyway and will simply need to complete the additional section.

      Planning Point: Failing a testing period is not treated in the same manner as an excess contribution (see Q 405). The two issues share a common origin, because, in either case, an account owner contributed too much money to an HSA. Accordingly, some individuals mistakenly correct failed testing periods using the excess contribution rules. This is incorrect and creates more taxes and penalties.

      An excess contribution results from contributing more than the HSA limits allow. An excess contribution is corrected by removing the excess. A failed testing period results from an individual subject to the testing period not remaining HSA eligible for the testing period. A failed testing period is corrected by paying taxes and penalties on the calculated amount (the amount contributed under the full contribution less the amount calculated under the sum-of-the-months rule). This tax is paid directly by the individual on IRS Form 8889. The actual dollars are not removed from the HSA. This is counterintuitive for most people. The IRS has trained the industry over the years that if someone puts too much money into an HSA or IRA, they need to take it out. Excesses are removed. Despite this, in this case, the calculated overage amount remains in the HSA for a failed testing period.

      An HSA account owner that treats a failed testing period as an excess contribution will owe taxes and penalties twice.6 Once for failing the testing period (taxes plus a 10 percent penalty) and a second time for a non-qualified HSA distribution (subject to taxes plus a 20 percent penalty). An HSA account owner that is disabled or deceased is granted an exception for a failed testing period. Disability, death and attainment of the age sixty-five are exceptions to the 20 percent distribution from the HSA.


      1 .IRC Sec. 223(b)(8).

      2 .Health Opportunity Patient Empowerment Act of 2006 included in the TRHCA 2006.

      3 .Notice 2008-52.

      4 .IRS Pub 969.

      5 .IRC Sec. 223(b)(8)(B)(ii).

      6 .Notice 2008-52, Ex-9; Notice 2004-50, A-35.

  • 408. How are HSAs treated in the case of same-sex couples?

    • Two recent Supreme Court cases now provide same-sex married couples the same treatment as opposite sex married couples for HSAs.

      In 2013, the Supreme Court ruled the Defense of Marriage Act (DOMA) as unconstitutional.1 This ruling allowed same-sex couples to meet the definition of “spouse” for the purpose of HSA law (DOMA defined “spouses” as one man and one woman). Spouses are granted some special rights under HSA law, as discussed below.

      In 2015, Supreme Court rules that all states were required to allow same-sex marriage.2 Same-sex couples must to be legally married under state law to gain the benefits of “spouse” status under HSA law. The IRS states that for federal tax purposes the term “spouse” does not include “registered domestic partnerships, civil unions, or other similar formal relationships recognized under state law that are not denominated as a marriage under that state’s law…”3 This is true for same-sex and opposite sex relationships. “Spouse” is the key word with respect to HSA laws, but “marriage” is generally the state classification that results in couples becoming “spouses”.

      Planning Point: One likely result of the Supreme Court’s ruling is that employers will drop health insurance benefits for domestic partners now that same-sex marriage is allowed. This change would make legal marriage financially important to same-sex domestic partners.

      Whether or not marriage is financially preferable over domestic partner status from an HSA perspective depends on the situation. Most of the special HSA rules for spouses are favorable, making marriage the better financial decision. However, domestic partners enjoy a significant HSA loophole allowing each partner to contribute the family HSA limit. This could result in the couple getting a combined tax deduction of $14,600 for 2022 ($7,300 family limit x 2) plus potentially catch-up contributions.

      Spouses (but not domestic partners) are subject to a couple of special rules in this regard: (1) if either spouse has family HDHP coverage both spouses are deemed to have family HDHP coverage and (2) combined, the spouses cannot exceed the family HDHP limit. Same-sex couples avoided that cap when they were not considered spouses. Whether the loophole is still available to same-sex couples depends on whether or not the couple is legally married under state law.

      HSA law provides special treatment for spouses in the following areas:

      •    Tax-Free Distributions. 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).

      •     Beneficiary Treatment. 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.

      •     Divorce Transfer. An HSA owner can transfer assets into an HSA of former spouse in the case of a divorce.

      •     Estate Tax Treatment. If a spouse is named as the beneficiary of the HSA, the treatment of the HSA may change for estate tax purposes.

      •     Family HDHP Treatment. 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.

      •     Child of Former Spouse. 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).


      1 .United States v. Windsor, 570 U.S. 744 (2013), 133 S.Ct. 2675 (2013); see also Rev. Rul. 2013-17.

      2 .Obergefell v. Hodges, 575 U.S. 644 (2015), 135 S. Ct. 2584.

      3 .Rev. Rul. 2013-17.

  • 409. What are the advantages to an employer of offering an HDHP and HSA combination?

    • 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.

      (1) Lower Premiums. HDHPs, with their high deductibles, are usually less expensive than traditional insurance.

      (2) Consumer Driven Healthcare. 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.

      (3) Lower Administration Burden. 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.

      (4) Flexibility. 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.

      (5) Tax Deductibility at Employee Level. 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.

      (6) HSA Eligibility. 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.