HSA Eligibility & Contributions Reminders (Benefit Minute)
Individuals enrolled in a qualified high deductible health plan (QHDHP) are generally eligible to contribute to a health savings account (HSA) on a tax favored basis up to limits established by the IRS. However, certain situations may adversely impact the ability to make an HSA contribution and/or impact the amount that may be contributed. These situations are discussed below.
General Eligibility & Contribution Requirements
To be eligible to establish or contribute to an HSA, an individual must be covered under a QHDHP, not have other disqualifying health coverage, and not be claimed as a dependent on someone else’s tax return. For 2019, the IRS has set the annual HSA contribution limits to $3,500 for single coverage and $7,000 for family coverage. Contribution limits are generally determined monthly (1/12th for each month of QHDHP coverage). Contributions attributable to a tax year can be made up to the federal tax filing due date (without extension).
Other Health Coverage
The following types of other health coverage will make an individual ineligible to contribute to an HSA:
General purpose health care flexible spending account (HCFSA) or health reimbursement arrangement (HRA) – Enrollment in a HCFSA or HRA that can be used to reimburse medical expenses that are subject to the QHDHP deductible will disqualify an individual from HSA eligibility for the full HCFSA or HRA plan year. This includes a HCFSA or HRA sponsored by another employer (e.g. a spouse’s employer). An employer may offer several types of HSA-compatible HCFSAs or HRAs, including a limited purpose option which only reimburses preventive care, dental and vision expenses, a post-deductible option which only reimburses medical expenses once the minimum QHDHP deductible is met, or a combination of both.
If a general purpose HCFSA has adopted the 2½ month grace period, the individual remains ineligible during the grace period unless the HCFSA balance was exhausted prior to the end of the plan year. If the carryover provision was adopted, the individual remains ineligible for the entire plan year if there is a carryover balance, unless the individual agrees to waive the carryover prior to the end of the plan year or the carryover is converted to an HSA-compatible HCFSA (if the plan document so allows).
Standalone telemedicine – When telemedicine benefits that are free or subject to a co-payment are available to individuals who are enrolled in a QHDHP, the telemedicine is other health coverage that disqualifies an individual from HSA eligibility. To solve this HSA eligibility issue, participants should be required to pay the fair market value of the telemedicine services at least until the QHDHP minimum deductible is met. This will always be the case when the telemedicine services are embedded in the QHDHP.
Enrollment in Medicare – Beginning with the first month an individual is enrolled in Medicare, including Part A, HSA eligibility is lost, so an individual can no longer make contributions. An individual who has not applied for Social Security retirement benefits may delay Medicare enrollment beyond age 65 to maintain HSA eligibility. However, subsequent enrollment is often backdated by as much as 6 months, and contributions attributable to the period of retroactive enrollment may be considered excess contributions that have to be withdrawn and taxed.
If an individual has QHDHP coverage that includes a spouse who is not enrolled in Medicare, one possible solution is for the spouse to establish an HSA or increase contributions to an existing HSA up to the permitted IRS limit.
An individual enrolled in a QHDHP who is eligible to contribute to an HSA and who is age 55 or older at the end of the tax year may contribute an additional $1,000. This amount is pro-rated if the individual was not covered by the QHDHP for all 12 months of the calendar year (unless the last-month rule described below applies). If an individual has QHDHP coverage that includes a spouse and the spouse is age 55 or older, the spouse is also entitled to a catch-up contribution as long as the spouse has their own HSA.
In general, the HSA contribution limit is determined on a month-by-month basis, based on enrollment in a QHDHP (without other disqualifying health coverage) on the first day of the month. However, under the last-month rule, an eligible individual enrolled in a QHDHP on the first day of the last month of the tax year (generally December 1) is treated as having QHDHP coverage for the entire year and may contribute the full annual contribution limit for that year.
When contributions are made based on the last-month rule, the individual must remain an eligible individual for the 13-month period that begins on the first day of the last month of the current tax year and ends on the last day of the last month of the next tax year. If an individual fails to remain eligible during this entire period, for reasons other than death or disability, the portion of the contributions that would not have been made in the prior year without application of the last-month rule become taxable and are also subject to a 10% additional tax.
Contribution Limit for Spouses and Other Individuals
An HSA is an individually owned account; however in certain cases, each spouse who is otherwise eligible may establish their own HSA. If either spouse has family coverage under the QHDHP, both spouses are treated as having family coverage for HSA purposes; therefore, the IRS contribution limit for family coverage is split between them. The spouses may determine how the limit will be divided between them. In addition, as stated above each spouse is also separately entitled to the catch-up contribution at age 55.
An individual covered under a QHDHP as an enrolled dependent who is not a tax dependent (e.g. a grown child or domestic partner) may establish their own HSA and contribute up to the IRS contribution limit for family coverage since the underlying QHDHP coverage is subject to the family deductible.