Many employers offer high-deductible health plans (HDHPs) to control premium costs, and then pair this coverage with health savings accounts (HSAs) to help employees with their health care expenses. An HSA is a tax-favored trust or account that can be used by an eligible individual to pay qualified medical expenses. Contributions to an HSA can be made by individuals and their employers.
HSAs provide a triple tax advantage—contributions, investment earnings, and amounts distributed for qualified medical expenses are all exempt from federal income tax, FICA tax, and most state income taxes. Due to an HSA’s potential tax savings, federal tax law imposes strict eligibility requirements for HSA contributions.
Only an eligible individual can establish an HSA and make HSA contributions (or have them made on his or her behalf). An individual’s HSA eligibility is determined monthly and, generally, contributions can only be made for the months in which the individual satisfies all of the HSA eligibility criteria.
An individual’s eligibility for HSA contributions is generally determined monthly as of the first day of the month. The HSA contribution limit is calculated each month, and a contribution can only be made for months in which the individual meets all the HSA eligibility requirements.
To be HSA-eligible for a month, an individual must:
There is an exception to the general rule that eligibility for HSA contributions is determined monthly. The “last-month rule” says that an individual who is eligible on the first day of the last month of his or her tax year, which, for most taxpayers, is December 1, can make a full-contribution for the year. An individual who relies on this special rule must generally remain HSA-eligible during a 13-month testing period, with exceptions for death and disability.
An individual does not need to be an employee to be eligible for HSA contributions. Partners in a partnership, more-than-2% shareholders in a subchapter S corporation, sole proprietors and other self-employed individuals may be eligible to make HSA contributions. However, since these individuals are not employees, they cannot contribute to an HSA with pre-tax salary reductions under a cafeteria plan, and they cannot receive pre-tax employer contributions to their HSAs. IRS Notice 2005-8 provides more information about the tax treatment of HSA contributions for partners and more-than-2% shareholders.
When an employer makes a pre-tax contribution to an employee’s HSA, the employer should have a reasonable belief that the contribution will be excluded from the employee’s income. However, the employee—not the employer—is responsible for determining eligibility for HSA contributions. IRS Notice 2004-50 states that an employer is only responsible for determining whether the employee is covered under an HDHP or any low-deductible health plan sponsored by the employer, including health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs).
To be eligible for HSA contributions for a month, an individual must be covered under an HDHP as of the first day of the month and have no other impermissible coverage.
Example—HDHP coverage begins mid-month: An employee begins HDHP coverage on the first day of a pay period, which is Aug. 16, 2023, and continues to be covered by the HDHP for the rest of 2023. The employee becomes eligible to make HSA contributions on Sept. 1, 2023.
An HDHP is a health plan that provides “significant benefits” and satisfies requirements for minimum deductibles and out-of- pocket maximums. An HDHP can be insured or self-funded. No benefits can be paid by an HDHP until the annual deductible has been satisfied, with limited exceptions for certain types of benefits (for example, preventative care benefits).
For plan years beginning on or after Jan. 1, 2023, the annual deductible, and out-of-pocket requirements for HDHPs are as follows:
|HIGH DEDUCTIBLE HEALTH PLAN (HDHP)
|Type of Coverage
|Minimum Annual Deductible
|Annual Out-of-pocket Maximum
|$1,500 ($1,400 for plan years beginning in 2022)
|$7,500 ($7,050 for plan years beginning in 2022)
|$3,000 ($2,800 for plan years beginning in 2022)
|$15,000 ($14,100 for plan years beginning in 2022)
An HDHP must provide “significant benefits,” although it may be designed with reasonable restrictions limiting the plan’s covered benefits. The restrictions will be reasonable only if significant other benefits remain under the plan in addition to the benefits subject to the restrictions. For example, a plan that restricts benefits to expenses for hospitalization or in-patient care, and excludes out-patient services, is not an HDHP because it does not provide significant other benefits in addition to the benefits subject to the exclusion. Also, a plan will not qualify as an HDHP if substantially all its coverage is either “permitted insurance” or “permitted coverage” (for example, coverage for accidents, disability, dental care or vision care).
To be eligible for HSA contributions, an individual generally cannot have health coverage other than HDHP coverage. This means that an HSA-eligible individual cannot be covered under a health plan that provides coverage below the HDHP minimum annual deductible.
There are some exceptions to the general rule that an individual cannot have non-HDHP coverage in order to be eligible to make HSA contributions. In addition, the fact that an individual could have chosen non-HDHP coverage does not matter. To determine whether an individual is an HSA-eligible individual, the actual health coverage selected by the individual is controlling. An individual who could have chosen a low-deductible health plan or other non-HDHP coverage, but did not, is still eligible to contribute to an HSA.
Certain types of non-HDHP coverage will not prevent an individual from being HSA-eligible. These types of coverage include preventive care, permitted insurance, or permitted coverage. An individual who has non-HDHP coverage with a deductible below the minimum HDHP deductible that is not preventive care, permitted coverage or permitted insurance will not be an eligible individual for HSA purposes.
|Preventive care includes (but is not limited to):
Periodic health examinations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals; Routine prenatal and well-childcare; Child and adult immunizations; Obesity weight loss programs; Screening services; and Tobacco cessation.
Permitted insurance includes:
|Insurance in which substantially all of the coverage relates to liabilities incurred under workers’ compensation laws, tort liabilities, liabilities relating to ownership or use of property (for example, homeowners or auto insurance) or similar liabilities as specified by the IRS; Insurance for a specified disease or illness (for example, cancer insurance); or •Insurance that pays a fixed amount per day (or other period) of hospitalization (for example, hospital indemnity insurance).
|Permitted coverage includes coverage for:
Accidents; Disability; Dental; Vision; or •Long-term care
Individuals who are covered by general-purpose health FSAs or HRAs are not eligible for HSA contributions. A general- purpose health FSA or HRA is one that pays or reimburses all qualifying medical expenses of the employee. It does not matter whether an individual is covered by a general-purpose health FSA or HRA as an employee or as a dependent whose medical expenses can be reimbursed—both types of individuals are ineligible for HSA contributions.
Example—spouse covered by HRA: An employee, Dan, has family HDHP coverage through his spouse’s employer. Dan’s spouse is also covered by her employer’s HRA, which reimburses out-of-pocket medical expenses of employees and their eligible family members, including Dan’s medical expenses. Because of this general purpose HRA coverage, both Dan and his spouse are ineligible for HSA contributions.
In addition, an individual’s HSA eligibility may be affected when a health FSA incorporates a grace period or a carry-over feature.
Although general-purpose health FSA or HRA coverage will prevent an individual from being eligible for HSA contributions, certain health FSA or HRA designs preserve HSA eligibility. These include:
|An individual who receives health benefits under TRICARE (the federal health care program for active duty and retired members of the uniformed services, their families, and survivors) is NOT eligible to make HSA contributions. IRS Notice 2004-50 explains that the coverage options under TRICARE are disqualifying coverage because they do not meet the minimum deductible requirements for an HDHP.
|An individual who is eligible to receive benefits through the Department of Veteran Affairs (VA), but who has not actually received VA benefits during the previous three months, is eligible for HSA contributions. However, an individual is not eligible to make HSA contributions for a month if he or she has received medical benefits from the VA at any time during the previous three months, other than benefits for preventive care or permitted coverage.
As a special rule, an individual will not lose his or her HSA eligibility for any month solely because he or she receives hospital care or medical services from the VA for a service-connected disability. To simplify the administration of this special rule, any hospital care or medical services received from the VA by a veteran with a disability rating from the VA is considered hospital care or medical services for service-connected disability.
|Indian Health Services (HIS) benefits
|An individual who is eligible to receive medical services from an Indian Health Services (IHS) facility but has not received these services during the previous three months will be considered HSA-eligible. However, an individual who has received medical services from an IHS facility during the previous three months generally will be ineligible to make HSA contributions unless the medical services qualified as permitted coverage or preventive care.
An individual enrolled in Medicare is not eligible for HSA contributions. Eligibility for Medicare benefits alone does not make an individual ineligible for HSA contributions. The individual must also be enrolled in Medicare.
IRS Notices 2004-50 and 2008-59 confirm that a Medicare-eligible individual who is not actually enrolled in Medicare Part A, Part B, Part D or any other Medicare benefit may contribute to an HSA until the month that he or she is enrolled in Medicare.
Retroactive Effective Date—In general, an individual’s Medicare coverage starts six months before the date the individual applied for Medicare, but no earlier than the first month of Medicare eligibility (that is, turning age 65). Individuals cannot contribute to an HSA for the period of retroactive coverage. Thus, to avoid making excess HSA contributions, individuals may need to stop contributing to their HSAs before applying for Medicare.
An individual who can be claimed as a tax dependent of another individual is not eligible for HSA contributions. In general, a taxpayer may claim an individual as his or her tax dependent if the individual is:
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This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2014-2023 Zywave, Inc. All rights reserved.