Health care is an important part of an employee benefits package, albeit an expensive one. With health care costs rising, businesses are looking for alternatives to the customary managed care plans. One of the options available is a Health Savings Account (HSA).
What Is an HSA?
An HSA is a type of consumer-driven health care account. HSAs are a type of account that allows individuals to save for qualified medical expenses tax-free. They were modeled after Archer MSAs, brought about when President Bush signed in the Medicare Modernization Act in 2003.
HSAs are open to anyone who is enrolled in a qualified High Deductible Health Plan (HDHP). Account funds are contributed into the account tax-free. Money in the HSA is allowed to accumulate in the account and earn interest. When the account holder has a qualified medical expense, that person would withdraw the money tax-free for those expenses. Some types of qualified medical expenses include deductibles, co-insurance costs, and copays. The money stays in the account from year to year and just keeps rolling over.
HSAs are owned by the individual, not by employers. Any money contributed into the account, whether by employer or employee, is the employee’s to use for their qualified medical expenses.
Who Is Eligible for an HSA?
Employers who wish to set up an HSA for their employees must also enroll their employees in an HDHP.
To qualify for an HSA, employees
- Must have coverage through an HDHP
- Not have coverage through any other health insurance
- Not have coverage through Medicare
- Cannot be claimed as a dependent on anyone’s tax return
Anyone can qualify for an HSA regardless of income. There are no income minimums or maximums to sign up for an HSA.
Who Is Not Eligible for an HSA?
Employees that have any of the following cannot sign up for an HSA:
There are some exceptions. Employees can have an HSA with an HRA or FSA under certain conditions.
If the HRA and FSA are used only for vision, dental, or preventive care benefits and not for medical benefits, it’s fine to use either alongside an HSA
HRAs and FSAs can be used for medical accounts ONLY after the minimum annual deductible has been met for the HDHP.
An HRA that is set up to fund health care costs after retirement can be used along with an existing HSA.
If an existing HRA is already established and an employee agrees to forgo health care reimbursements during the period when there’s a contribution to their HSA, both would be allowed to exist at once.
Who Can Contribute to the HSA?
HSA contributions can be made by the employer, employee, or through a shared contribution through both parties. A contribution can also be made by a third party on behalf of the employee. Employees can also make a one-time transfer from their IRA to their HSA. Anyone self-employed, a partner, or S-Corporation owner is not considered an employee of a company and cannot receive an employer contribution. They may open up an HSA, but it would have to be self-funded.
If an employer contributes to the HSA, they can do it in a couple of ways:
- Contributions can be made through salary reductions through a cafeteria section 125 plan on a pre-tax basis
- An employer can automatically make contributions through a cafeteria plan on behalf of the employee
Certain rules do apply, though. If the employer makes the contribution or any portion of the contribution to the HSA, then that portion is not taxable to the employee as income or wages. Additionally, contributions must stop once an individual is enrolled in any type of Medicare plan.
Remember that once money is contributed by an employer into an employee’s account, any money is deemed the employee’s, even if they leave the company on a voluntary or involuntary basis. The individual owns the account and decides how the money is allocated to medical expenses and invested, while employed with the company, and once the individual no longer works for the company.
Can the Money in the HSA be Used for Anything Else?
The amount contributed to the HSA must be used for qualified expenses related to the HDHP. Receipts for expenses should be kept in a safe place. If an employee must withdraw HSA money, it is similar to the penalties for withdrawing from an IRA before its time limit. The withdrawn amount is subject to income tax, plus a 20% penalty.
HSA and HDHP Contribution Limits
The following amounts are for 2021; figures are adjusted for inflation annually.
HDHP minimum deductible
- $1,400 (individual coverage)
- $2,800 (family coverage)
HDHP annual out-of-pocket
Amount (including deductibles and co-pays) cannot exceed:
- $6,900 (individual coverage)
- $13,800 (family coverage)
HSA Maximum Contribution Amount
- $3,600 (individual coverage)
- $7,200 (family coverage)
Catch-Up Contributions (Age 55 or Older)
Any contribution made to an HSA that is in excess of the maximum contribution level must be withdrawn, otherwise, it is subject to an excise tax. If the HSA amount for the year was not reached, there are no penalties. All contributions are pro-rated for the year based on how many months the employee is in the plan.