Health savings accounts (HSAs) have become one of the more popular spending accounts for both employees and employers.
“HSAs are tax-favored IRA-type trust or custodial accounts that can be contributed to by, or on behalf of ‘eligible individuals’ who are covered by certain high-deductible health plans (HDHPs). The HSA can be used to pay for certain qualified medical expenses of the eligible individuals and their spouses and tax dependents,” says Frances Horn, employee benefits compliance officer at JRG Advisors.
Smart Business spoke with Horn about how HSAs typically work within HDHPs and how recent IRS changes will affect that in 2017.
How do HSAs generally work, and who is typically eligible for these plans?
Only an ‘eligible individual’ can establish an HSA and make HSA contributions or have them made on his or her behalf. There are two groups of individuals who are ineligible for HSA contributions — those who can be claimed as tax dependents, and those who are entitled to Medicare. As a side note, entitled to Medicare means enrolled in and receiving Medicare benefits. Thus, mere eligibility for Medicare benefits (without enrollment) will not disqualify an individual from HSA eligibility.
An HSA-eligible individual can make contributions (up to statutory limits) to an HSA and get an above-the-line tax deduction, which means that the contributions reduce the individual’s adjusted gross income before itemized or standard deductions are considered. On the other hand, instead of an above the line deduction, many employers permit employees to contribute to an HSA on a pretax basis through the employer’s cafeteria plan. Please note that an employee having deductions done pretax through an employer cannot also take an above-the-line deduction on tax forms.
Any investment earnings generated on HSA funds are also generally tax-free. HSA funds withdrawn for qualified medical expenses escape federal taxation entirely.
In order to be eligible to establish an HSA, an individual must be covered under an HDHP for the months for which contributions are made to the HSA.
In addition, an eligible individual cannot have coverage under any non-HDHP that provides coverage for any benefit covered by the HDHP. IRS guidance interprets this coverage restriction to mean that any other health coverage that is not a HDHP would disqualify an otherwise eligible individual, unless it only constitutes preventive care, certain permitted coverage or certain permitted insurance. As a reminder, this prohibition on having other non-HDHP coverage includes health plans such as health flexible spending accounts or health reimbursement arrangements.
What are the changes issued by the IRS?
Recently, the IRS issued the inflation-adjusted amounts applicable to HSAs and HDHPs. The following compares the 2016 and 2017 limitations:
2017 2016
HSA contribution amount
Self-only………………$3,400………$3,350
Family………………….$6,750……..$6,750
Catch-up contribution (55
years or older)………$1,000………$1,000
HDHP minimum deductible amount
Self-only………………$1,300………$1,300
Family………………….$2,600………$2,600
HDHP maximum out-of-pocket
Self-only………………$6,550………$6,550
Family………………….$13,100…….$13,100
It’s not too early to start reviewing current employee benefits offered and planning on what to provide in 2017. An employer currently offering a HDHP in conjunction with an HSA needs to ensure that any health plan limitations will meet the IRS requirements.
Insights Employee Benefits is brought to you by JRG Advisors
