Back to Health Savings Account (HSA)

Health Savings Account (HSA)

  • 8825. What is a health savings account (HSA) and how is it taxed?

    • A health savings account (HSA) is a trust created exclusively for the purpose of paying the qualified medical expenses of an account beneficiary.1

      An HSA must be created by a written governing instrument that states:

      (1)     except in the case of certain rollover contributions, no contribution will be accepted:

      a. unless it is in cash; and

      b. to the extent that the contribution, when added to previous contributions for the calendar year, exceeds the contribution limit for the calendar year;

      (2)     the trustee is a bank, an insurance company, or a person who satisfies IRS requirements for administering the trust;

      (3)     no part of trust assets will be invested in life insurance contracts;

      (4)     trust assets will not be commingled with other property, with certain limited exceptions; and

      (5)     the interest of an individual in the balance of his or her account is non-forfeitable.2

      HSAs are available to any employer or individual for an account beneficiary who participates in a high deductible health insurance plan. An eligible individual or an employer may establish an HSA with a qualified HSA custodian or trustee without IRS permission or authorization. As mentioned above, any insurance company or bank can act as a trustee and, additionally, any person already approved by the IRS to act as an individual retirement arrangement (“IRA”) trustee or custodian automatically is approved to act in the same capacity for HSAs.3

      HSAs are similar to IRAs in some respects although a taxpayer cannot use an IRA as an HSA, nor can a taxpayer combine an IRA with an HSA.4

      Contributions to an HSA generally may be made either by an individual, by an individual’s employer, or by both. If contributions are made by an individual taxpayer, they are deductible from income.5 Contributions made by an employer are excluded from the employee’s income.6 The HSA itself is also exempt from income tax as long as it remains an HSA.7 HSA contributions may be made through a cafeteria plan under IRC Section 125 (see Q 8805).8

      HSA distributions used exclusively to pay qualified medical expenses are not includable in gross income. Distributions used for other purposes are includable in gross income and may be subject to a penalty, with some exceptions.9

      An employer’s contributions to an HSA are not treated as part of a group health plan subject to COBRA continuation coverage requirements.10 Therefore, a plan is not required to make COBRA continuation coverage available with respect to an HSA.11

      According to IRS guidance, a levy to satisfy a tax liability under IRC Section 6331 extends to a taxpayer’s interest in an HSA. A taxpayer is liable for the additional 20 percent tax (10 percent prior to January 1, 2011, under PPACA 2010) on the amount of the levy unless the taxpayer has attained age 65 or is disabled at the time of the levy.12


      1.      IRC § 223(d)(1).

      2.      IRC § 223(d)(1).

      3.      Notice 2004-50, 2004-2 CB 196, A-72; Notice 2004-2, 2004-1 CB 269, A-9, A-10.

      4.      See Notice 2004-2, above.

      5.      IRC § 223(a).

      6.      See IRC § 106(d)(1).

      7.      IRC § 223(e)(1).

      8.      IRC § 125(d)(2)(D).

      9.      IRC § 223(f).

      10.    See IRC §§ 106(b)(5), 106(d)(2).

      11.    See Treas. Reg. § 54.4980B-2, A-1 regarding Archer MSAs.

      12.    CCA 200927019.

  • 8826. Who is an eligible individual for purposes of maintaining an HSA?

    • An “eligible individual” for purposes of maintaining an HSA 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 HDHP.1

      Individuals who are enrolled in Medicare Part A or Part B are not eligible to contribute to an HSA.2 Mere eligibility for Medicare does not preclude HSA contributions.3 Under the 2020 CARES Act, telehealth and other remote health care services are disregarded in determining eligibility for tax years beginning on or before December 31, 2021.

      If an individual has received medical benefits through the Department of Veterans Affairs within the previous three months, the individual may not contribute to an HSA for the current month. Mere eligibility for VA medical benefits will not disqualify an otherwise eligible individual from making HSA contributions.4

      If an individual is covered by a separate prescription drug plan that provides any benefits before a required high deductible is satisfied, the individual normally does not qualify as an eligible individual.5 Despite this general rule, 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.6

      If an individual is covered under an Employee Assistance Program, disease management program, or wellness program, that individual will not fail to be an eligible individual based solely on this coverage if the program does not provide significant benefits in the nature of medical care or treatment.7

      Certain types of insurance are not considered 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.8

      In addition, coverage provided by insurance or otherwise for accidents, disability, dental care, vision care, or long-term care will not adversely impact HSA eligibility.9

      If an employer contributes to an eligible employee’s HSA, in order to receive an employer comparable contribution the employee must:

      (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;

      (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 (such as the account number, name and address of trustee or custodian, etc.) as well as the method by which the account information will be provided (whether in writing, by e-mail, on a certain form, etc.).10

      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.11


      1.      IRC § 223(c)(1)(A).

      2.      IRC § 223(b)(7).

      3.      Notice 2004-50, 2004-2 CB 196, A-3.

      4.      Notice 2004-50, 2004-2 CB 196, A-5.

      5.      Rev. Rul. 2004-38, 2004-1 CB 717, modified by Rev. Proc. 2004-22; 2004-1 CB 727.

      6.      Rev. Proc. 2004-22, 2004-1 CB 727.

      7.      Notice 2004-50, 2004-2 CB 196, A-10.

      8.      IRC § 223(c)(3).

      9.      IRC § 223(c)(1)(B).

      10.    Treas. Reg. § 54.4980G-4 A-14(c).

      11.    TD 9393, 2008-20 IRB.

  • 8827. Can an individual participate in both an HSA and a health FSA?

    • The IRS has issued guidance providing that taxpayers who participate in health flexible spending accounts (FSAs) that reimburse all qualified medical expenses are ineligible to also contribute to health savings accounts (HSAs) because participation in the FSA constitutes “other coverage” prohibited by the rules applicable to HSAs. This is the case even if the individual only participates in the FSA during the tax year because of a permitted carryover from the prior tax year.

      In order to be eligible to contribute to an HSA, a taxpayer must have a high deductible health plan (HDHP), and can also have certain other types of permitted insurance and coverage, as well as preventative care coverage, but not “other coverage.” For these purposes, a taxpayer is not eligible to contribute to an HSA if he or she is covered under a health plan that is not an HDHP that provides coverage for any benefit covered under the HDHP. A health FSA that reimburses for all qualified medical expenses falls within this prohibition.

      The ineligibility for HSA contributions continues throughout the entire tax year, even if the carried over amounts are exhausted early in the year.

      However, a taxpayer can elect to have unused FSA funds carried over into an HSA-compatible FSA (which is either a limited purpose FSA, a post-deductible FSA or a combination of the two). In this case, a taxpayer will be eligible to contribute to an HSA for the year.1


      Planning Point: If the client has the choice between an FSA and an HSA, the client should be advised that the two types of accounts have different rules when it comes to distributions.  For example, HSAs can reimburse account owners for qualified long-term care expenses on a tax-free basis (FSAs cannot).  However, HSAs can only reimburse for health expenses of the account owner’s child if that child qualifies as a dependent.  FSAs, on the other hand, can reimburse for those expenses if the child is under the age of 27 as of the end of the tax year (regardless of whether the child qualifies as a dependent).  HSAs can also make distributions even if the account owner uses the money for non-medical expenses (although penalty taxes will apply).



      1.      ILM 201413005.

  • 8828. What is a high deductible health plan for purposes of an HSA?

    • Editor’s Note: In response to the COVID-19 pandemic, the CARES Act allowed HDHPs to cover the cost of telehealth services without cost to participants before the HDHP deductible is satisfied. HDHPs providing telehealth coverage do not jeopardize their status as HDHPs. Plan members similarly retain the right to fund HSAs after taking advantage of cost-free telehealth services. The Consolidated Appropriations Act of 2022 (CAA 2022) extended the CARES Act relief so that HDHPs could provide first-dollar telehealth services from April 2022 through December 2022 (regardless of the plan year) without jeopardizing HDHP status.  The remote services do not have to be related to COVID-19 or preventative in nature to qualify.  Plans and participants should note that if the HDHP is a calendar year plan, the usual rules regarding the plan deductible applied between January 2022 and March 2022.  The 2023 year-end omnibus spending bill extended this relief again, although it should be noted that instead of beginning on January 1, 2023, the relief is effective for plan years beginning after December 31, 2022 and before January 1, 2025 (that means a gap will exist for non-calendar year plans from January 1, 2023 until the date that the plan year begins).  The ability to provide pre-deductible remote health services is optional for employers.

      Under the Inflation Reduction Act, HDHPs will be permitted to cover insulin prior to the participant satisfying the plan deductible effective for tax years beginning after December 31, 2022.  This insulin coverage will not adversely affect a participant’s eligibility to contribute to an HSA.  Going forward, HDHPs will be permitted to cover selected insulin products before the deductible is satisfied regardless of whether the participant has been diagnosed with diabetes. “Selected insulin products” is defined to include any dosage form, including vials, pumps, or inhalers of any type of insulin.

      The requirements for a high deductible health plan (HDHP) differ depending on whether individual or family coverage is provided. In this context, family coverage includes any coverage other than self-only coverage.1

      For 2023, an HDHP is a plan with an annual deductible of not less than $1,500 for self-only coverage ($1,400 in 2020-2022). The family coverage deductible limit is $3,000 in 2023 ($2,800 in 2020-2022). Annual out-of-pocket expenses for an HDHP cannot exceed $7,500 in 2023 ($7,050 in 2022) for self-only coverage. For family coverage, the annual out-of-pocket expense limitation is increased to $15,000 ($14,100 in 2022).2 These annual deductible amounts and out-of-pocket expense amounts are adjusted for cost of living.3

      Deductible limits for HDHPs are based on a 12-month period. If a plan deductible may be satisfied over a period longer than twelve months, the minimum annual deductible under IRC Section 223(c)(2)(A) must be increased on a pro-rata basis to take the longer period into account.4

      An HDHP may impose a reasonable lifetime limit on benefits provided under the plan as long as the lifetime limit on benefits is not designed to circumvent the maximum annual out-of-pocket limitation.5 A plan with no limitation on out-of-pocket expenses, either by design or by its express terms, does not qualify as a high deductible health plan.6 Beginning in 2016, the CMS has provided guidance stating that the self-only limitation applies to each individual, regardless of whether the individual is enrolled in self-only or family coverage. This is the case even if the limitation for self-only coverage is below the family deductible limit. Family coverage can continue to be offered as long as the self-only limitation is applied separately to each individual under the plan.7

      An HDHP may provide preventive care coverage without application of the annual deductible.8 The IRS has provided guidance and safe harbor guidelines on what constitutes preventive care. Pursuant to the IRS safe harbor, preventive care includes, but is not limited to, periodic check-ups, routine prenatal and well-child care, immunizations, tobacco cessation programs, obesity weight-loss programs, and various health screening services. Preventive care may include drugs or medications taken to prevent the occurrence or reoccurrence of a disease that is not currently present.9


      Planning Point: In 2020, the IRS announced that high deductible health plans can cover costs associated with COVID-19. HDHPs can cover coronavirus-related testing and equipment needed to treat the virus. Generally, HDHPs are prohibited from covering certain non-specified expenses before the covered individual’s deductible has been met. Certain preventative care expenses are excepted from this rule. HDHPs will not jeopardize their status if they pay coronavirus-related expenses before the insured has met the deductible, and the insured will remain HSA-eligible. The guidance applies only to HSA-eligible HDHPs. Participants in HDHPs should pay attention to IRS guidance in specific future situations.10


      Notice 2013-57 clarifies that a health plan will not fail to qualify as an HDHP merely because it provides preventative services under the ACA without requiring a deductible.11

      For months before January 1, 2006, a health plan would not fail to qualify as an HDHP solely based upon its compliance with state health insurance laws that mandate coverage without regard to a deductible or before the high deductible is satisfied.12 This transition relief only applied to disqualifying benefits mandated by state laws that were in effect on January 1, 2004. This relief extended to non-calendar year health plans with benefit periods of twelve months or less that began before January 1, 2006.13

      Out-of-pocket expenses include deductibles, co-payments, and other amounts that a participant must pay for covered benefits. Premiums are not considered out-of-pocket expenses.14


      1.      IRC § 223(c)(5).

      2.      Rev. Proc. 2019-25, Rev. Proc. 2020-32, Rev. Proc. 2021-25, Rev. Proc. 2022-24.

      3.      IRC § 223(g).

      4.      Notice 2004-50, 2004-2 CB 196, A-24.

      5.      Notice 2004-50, 2004-2 CB 196, A-14.

      6.      Notice 2004-50, 2004-2 CB 196, A-17.

      7.      See DOL FAQ, available at www.dol.gov/ebsa/faqs/faq-aca27.html.

      8.      IRC § 223(c)(2)(C).

      9.      Notice 2004-50, 2004-2 CB 196, A-27; Notice 2004-23, 2004-1 CB 725.

      10.    Notice 2020-15.

      11.    2013 IRB LEXIS 465.

      12.    Notice 2004-43, 2004-2 CB 10

      13.    Notice 2005-83, 2005-2 CB 1075.

      14.    Notice 2004-2, 2004-1 CB 269, A-3; Notice 96-53, 1996-2 CB 219, A-4.

  • 8829. What are the contribution limits on an 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. The HSA contribution limits for the 2023 taxable year and the eight previous years are provided in the table below.[1]

      2015 2016 2017 2018 2019 2020 2021 2022 2023
      Individual HSA Limit $3,350 $3,350 $3,400 $3,450 $3,500 $3,550 $3,600 $3,650 $3,850
      Family HSA Limit $6,650 $6,750 $6,750 $6,900 $7,000 $7,100 $7,200 $7,300 $7,750

      For years prior to 2007, the allowable 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 of whether a plan offers self-only or 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. See Q 8816 for a discussion of the individual requirements for HSA eligibility. An example illustrating calculation of the HSA contribution limit is provided below.

      Example: Lola has self-only coverage under an HDHP in 2023 and wishes to contribute to an HSA. She has been an eligible individual for all of 2023, so her monthly contribution for self-only coverage is calculated by dividing the 2023 annual limit ($3,850) by the twelve months in her eligibility period. Lola can contribute $320 per month in 2023. If Lola was only an eligible individual for the first eight months of 2023, she still must first calculate her monthly contribution based on a twelve-month year. However, her annual contribution limit is prorated to $2,566 (her monthly limit multiplied by the eight months of eligibility). Although the annual contribution level is determined for each month, Lola is entitled to contribute her entire annual contribution amount in a single payment, if desired.[3] If Lola had been an eligible individual for the last month of 2023, she would have been treated as though she were an eligible individual for the entire year.

      Individuals who attain age fifty-five before the close of a taxable year are eligible for an additional “catch-up” 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.[4] In 2023, this would allow individuals age fifty-five and older to contribute up to $4,650 and 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 is 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. The amount includable in gross income also is subject to a 10 percent penalty tax.[5]

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

      An HSA may be offered in conjunction with a cafeteria plan. Both a HDHP and an HSA are qualified benefits under a cafeteria plan.[7]

      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.[8] Further, an employee is not required to include any amount in income simply because the employee may choose between employer contributions to an HSA and employer contributions to another health plan.[9]

      An individual may not deduct any amount paid into an HSA. Instead, that amount is excludable from gross income under IRC Section 106(d).[10]

      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 (on dependency exemptions) for the taxable year.[11] Dependency exemptions were suspended for 2018-2025 by the 2017 tax reform legislation.  See Q 8816 to Q 8820 for the rules governing employer contributions to employee HSAs. See Q 8823 for a discussion of the treatment of HSA distributions.

      [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. 2018-27, Rev. Proc. 2018-30, Rev. Proc. 2019-25, Rev. Proc. 2020-32, Rev. Proc. 2021-25, Rev. Proc 2022-24.

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

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

      [4].      IRC Sec. 223(b)(3).

      [5].      IRC Sec. 223(b)(8).

      [6].      IRC Sec. 223(b)(5).

      [7].      IRC Sec. 125(d)(2)(D).

      [8].      IRC Sec. 106(d)(1).

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

      [10].    See IRC Sec. 223(b)(4).

      [11].    IRC Sec. 223(b)(6).

  • 8830. What rules govern employer contributions to employee HSAs? Must an employer who offers HSAs to its employees contribute the same amount for each employee?

    • An employer offering HSAs to its employees is required to 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” for this purpose 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” include 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 coverage 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 an employer may not contribute less to a category of family coverage with more covered persons than to another category with fewer covered persons.5

      For years beginning in 2007 and thereafter, participating highly compensated employees may not be treated as comparable to non-highly compensated employees.6

      Employer contributions made to HSAs through a cafeteria plan, including matching contributions, are not subject to the comparability rules, but are instead subject to IRC Section 125 nondiscrimination rules.7

      An employer may make contributions to HSAs of all eligible employees either:

      (1)     at the beginning of a calendar year;

      (2)     monthly, on a pay-as-you-go basis; or

      (3)     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.8

      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.9 See Q 8831 for a detailed discussion of the rules that apply when an employee does not participate in the employer’s HSA for the entire year.


      1.      IRC §§ 4980E, 4980G.

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

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

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

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

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

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

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

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

  • 8831. What are the contribution rules for employers who establish HSAs for employees when an employee has not established an HSA at the time the employer makes contributions or is not eligible to participate for the entire year?

    • If there are employees who have not established an HSA at the time the employer makes contributions, the employer must provide each such eligible employee a written notice containing certain information no later than January 15. The notice must explain that if the employee, by the last day of February, (a) establishes an HSA and (b) notifies the employer that he or she has done so, the employee will receive a comparable contribution to that HSA for the prior calendar year. This notice may be delivered electronically.

      The employer must then make comparable contributions by April 15, taking into account each month that the employee was a comparable participating employee, for each eligible employee that notifies an employer that he or she has established an HSA. These retroactive comparable contributions must also include reasonable interest.1

      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. This rule also applies to 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 1.2

      Employers are only required to provide 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.3

      Similarly, 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.4

      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 does 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.5


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

      2.      Treas. Reg. § 54.4980G-4.

      3.      Treas. Reg. § 54.4980G-4.

      4.      Treas. Reg. § 54.4980G-4.

      5.      Treas. Reg. § 54.4980G-4.

  • 8832. Are there any exceptions to the comparability rules that govern employer contributions to employee HSAs?

    • Yes, the IRC provides an exception to the comparability rules that allows, but that does not require, employers to make larger contributions to HSAs of non-highly compensated employees than to HSAs of highly compensated employees.1

      Regulations provide that employers may make larger HSA contributions for non-highly compensated employees who are comparable participating employees than for highly compensated employees who are comparable participating employees.2 However, the reverse does not apply: employer contributions to HSAs for highly compensated employees who are comparable participating employees may not be larger than employer HSA contributions for non-highly compensated employees who are comparable participating employees.3

      Comparability rules continue to apply with respect to contributions to HSAs of all non-highly compensated employees and all highly compensated employees. Thus, employers must make comparable contributions for a calendar year to the HSA of each non-highly compensated comparable participating employee and each highly compensated comparable participating employee.4


      1.      IRC § 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.

  • 8833. Is there a penalty if an employer fails to meet the HSA comparability requirements with respect to contributions to employee HSAs?

    • If an employer fails to meet comparability requirements (see Q 8830), 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 §§ 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).

  • 8834. Can employers allow employees to roll funds into their HSAs from HRAs or FSAs? What is a qualified HSA distribution?

    • Employers may offer a rollover, known as a qualified HSA distribution, from a health reimbursement arrangement (HRA) or a health flexible spending arrangement (FSA) for any employee. However, if the employer offers a rollover option to one employee, it 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 § 106(e)(5).

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

  • 8835. What is the penalty for making excess contributions to an HSA? How does an excess contribution impact the taxation of distributions from the 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 the following are true:

      (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.

      (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. However, the penalty tax may not exceed 6 percent of the value of the account, as 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)     the amount calculated in (1), above, 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 § 223(f)(3)(A).

      2.      IRC § 4973(a).

      3.      IRC § 4973(g).

      4.      IRC § 4973(g).

  • 8836. How are funds accumulated in an HSA taxed prior to distribution?

    • Funds accumulated in an HSA are generally exempt from income tax unless the account ceases to be an HSA.1

      In addition, rules similar to those applicable to individual retirement arrangements (IRAs) regarding the loss of the income tax exemption for an account where an employee engages in a prohibited transaction2 and those regarding the effect of pledging an account as security3 apply to HSAs. Any amounts treated as distributed under these rules will be treated as not used to pay qualified medical expenses.4


      1.      IRC § 223(e)(1).

      2.      See IRC § 408(e)(2).

      3.      See IRC § 408(e)(4).

      4.      IRC § 223(e)(2).

  • 8837. How are amounts distributed from HSAs taxed?

    • If a distribution from an HSA is used exclusively to pay the qualified medical expenses of an account holder, the distributed amount is not includable in gross income.1 In contrast, any distribution from an HSA that is not used exclusively to pay qualified medical expenses of an account holder must be included in the account holder’s gross income.2

      In addition, a penalty tax applies to any distribution that is includable in income because it was not used to pay qualified medical expenses.3 The penalty tax is 20 percent of includable income for a distribution from an HSA.4 For distributions made prior to January 1, 2011, the additional tax on nonqualified distributions from HSAs was 10 percent of includable income.5

      The penalty tax does not apply to includable distributions received after an HSA holder becomes disabled within the meaning of IRC Section 72(m)(7), dies, or reaches the age of Medicare eligibility.6

      “Qualified medical expenses” are amounts paid by the account holder for medical care7 for the individual, his or her spouse, and any dependent to the extent that expenses are not compensated by insurance or otherwise.8 For tax years beginning after December 31, 2010 and before 2020, medicines constituting qualified medical expenses were limited to doctor-prescribed drugs and insulin. The 2020 CARES Act eliminated this restriction, so that over-the-counter medicines are once again qualified expenses even without a prescription.9

      With several exceptions, the payment of insurance premiums is not a qualified medical expense. The exceptions include any expense for coverage under a health plan during a period of COBRA continuation coverage, a qualified long-term care insurance contract10 or a health plan paid for during a period in which the individual is receiving unemployment compensation.11

      An account holder may pay qualified long-term care insurance premiums with distributions from an HSA even if contributions to the HSA were made by salary reduction through a cafeteria plan. Amounts of qualified long-term care insurance premiums that constitute qualified medical expenses are limited to the following age-based limits in 2023, which are adjusted annually: 12

      (1)     for persons age 40 or less, the limit is $480,

      (2)     for ages 41 through 50, the limit is $890;

      (3)     for ages 51 through 60, the limit is $1,790;

      (4)     for ages 61 through 70, the limit is $4,770; and

      (5)     for those over age 70, the limit is $5,960.13

      The age is the individual’s attained age before the close of the taxable year.

      An HSA account holder may make tax-free distributions to reimburse qualified medical expenses from prior tax years as long as the expenses were incurred after the HSA was established. There is no time limit on when a distribution must occur.14

      HSA trustees, custodians, and employers need not determine whether a distribution is used for qualified medical expenses. This responsibility falls on individual account holders.15


      1.      IRC § 223(f)(1).

      2.      IRC § 223(f)(2).

      3.      IRC § 223(f)(4)(A).

      4.      IRC § 223(f)(4)(A).

      5.      IRC § 223(f)(4)(A), as amended by PPACA 2010, as further amended by HCERA 2010.

      6.      IRC §§ 223(f)(4)(B), 223(f)(4)(C).

      7.      As defined in IRC Section 213(d).

      8.      IRC § 223(d)(2).

      9.      IRC § 106(f), as added by PPACA 2010.

      10.    As defined under IRC § 7702B(b).

      11.    IRC § 223(d)(2).

      12.    Notice 2004-50, 2004-2 CB 196, A-40.

      13.    Rev. Proc. 2019-44.

      14.    Notice 2004-50, 2004-2 CB 196, A-39.

      15.    Notice 2004-2, 2004-1 CB 269, A-29, A-30.