In addition to the tax benefits, HSAs are a popular option because they offer potential health care cost savings to employers and employees. HDHPs tend to have lower monthly premiums and higher deductibles than traditional health plans. HSAs can be used to pay for medical expenses until the HDHP deductible is reached. HSAs can also help employees become better health care consumers by giving them more of a stake in controlling their health care costs until the HDHP deductible is met.

TABLE OF CONTENTS

• HSA Overview
• HSA Eligibility rules
• hdhp—plan design requirements
• HSA contribution rules
• Employer HSA contributions
• HSA withdrawals
• HSA Reporting rules
• HSA Contribution matrix for spouses

HSA Overview

A health savings account (HSA) is a tax-exempt trust or custodial account that an individual sets up with a qualified HSA trustee. Amounts in an HSA can be accumulated over the years or distributed on a tax-free basis to pay for (or reimburse) qualified medical expenses.

HSAs are designed to provide the following federal tax benefits:

• HSA contributions are non-taxable.
• Interest and other earnings on HSA contributions accumulate tax-free.
• Amounts distributed from an HSA for qualified medical expenses are tax-free.

An individual must meet certain eligibility criteria to make HSA contributions (or have them made on his or her behalf), including a requirement that the individual be covered under a high deductible health plan (HDHP). There is a cap on how much an individual can contribute to his or her HSA each year—the amount of the annual limit depends on whether the HSA owner has individual or family HDHP coverage.

In general, money placed into an HSA can be withdrawn at any time. Any HSA withdrawal used for a purpose other than to pay for qualified medical expenses is taxable as income and subject to an additional 20% penalty. After an individual reaches age 65, the additional penalty tax does not apply to HSA withdrawals.

Other key HSA features include the following:

• Unlike other types of medical savings accounts (such as health FSAs or HRAs), HSAs are controlled and owned by the employee. They are also portable, so the employee will continue to own (and have the ability to use) the HSA even if he or she switches jobs or leaves the workforce or changes medical coverage.
• HSA contributions remain in the account and are carried over, without limit, from year to year until they are withdrawn. Because HSA amounts are nonforfeitable, HSAs can be used for future health care needs, even into retirement.
• Even if an employee is no longer HSA-eligible (for example, because he or she is no longer covered by an HDHP), he or she can still use the accumulated HSA funds to pay for qualified medical expenses on a tax-free basis.

What this guide covers

This guide provides answers to common questions regarding HSAs and HDHPs, including the following:

• What eligibility requirements must employees satisfy to make (or receive) HSA contributions?
• What are the cost-sharing limits (that is, minimum deductible and maximum out-of-pocket limits) for employer-sponsored HDHPs?
• How much can employees contribute to their HSAs each year?
• What rules apply to employer HSA contributions, including nondiscrimination requirements?
• What tax rules apply to HSA withdrawals?
• What are the tax reporting rules for HSAs?

Why This Guide Is Useful Although individuals are primarily responsible for their own tax compliance when it comes to HSAs, employers that sponsor HDHPs often get questions from employees on HSA topics. This guide is intended to help employers answer those questions. It also provides detailed information on HDHP plan design, including the permissible cost-sharing limits. Employers should review their HDHP plan design before the start of each plan year to confirm that they are complying with tax rules for HDHPs.

HSA Eligibility rules

General Rules

Only an eligible individual can establish an HSA and make HSA contributions (or have them made on his or her behalf). An individual's eligibility for HSA contributions is generally determined monthly as of the first day of the month. As a general rule, HSA contributions can only be for months in which the individual meets all of the HSA eligibility requirements.

To be HSA-eligible for a month, an individual must:

• Be covered by an HDHP on the first day of the month;
• Not be covered by other health coverage that is not an HDHP (with certain exceptions);
• Not be enrolled in Medicare; and
• Not be eligible to be claimed as a dependent on another person's tax return.

_ Compliance Tip: __ Although only eligible individuals can open an HSA and make contributions, individuals with an HSA can take money out at any time, even when they do not satisfy the HSA eligibility requirements.

Individuals who are HSA-eligible do not need permission or authorization from the IRS to establish an HSA. To set up an HSA, an individual must work with a trustee. A qualified HSA trustee can be a bank, an insurance company or anyone else approved by the IRS to be the trustee. Often, employers that sponsor HDHPs will select an HSA trustee for their employees to use.

Rules for Spouses

Compliance Reminder: Employees are primarily responsible for determining their own eligibility for HSA contributions. 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 a health FSA or HRA.

For married individuals, each spouse who is HSA-eligible and wants to make HSA contributions must open his or her own HSA. Married couples cannot have a joint HSA, even if they are covered by the same HDHP. However, distributions from one spouse's HSA may be used to cover the other spouse's qualified medical expenses.

Employee Status Not Necessary

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 for HSA contributions.

However, since these individuals are not employees, their HSA contributions are subject to different tax rules. For example, self-employed individuals cannot contribute to an HSA with pre-tax salary reductions under a cafeteria plan. IRS Notice 2005-8 provides more information about the tax treatment of HSA contributions for partners and more-than-2% shareholders.

Employer Eligibility Verification

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, and not the employer, is primarily 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 FSAs and HRAs.

HDHP Coverage

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. 15, 2021, and continues to be covered by the HDHP for the rest of 2021. For purposes of HSA contributions, the employee becomes eligible on Sept. 1, 2021.

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. As a general rule, no benefits can be paid by an HDHP until the annual deductible has been satisfied (except for preventive care benefits and the special exceptions related to the COVID-19 nationwide pandemic).

For more information on HDHPs, see the HDHPs—Plan Design Requirements section of this guide.

No Disqualifying Coverage

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.

Being eligible for non-HDHP coverage does not make an individual ineligible for HSA contributions. To determine whether an individual is an HSA-eligible individual, the actual health coverage selected by the individual is controlling. This means that it does not matter that the individual could have chosen, but did not choose, a low deductible health plan or other coverage that would have disqualified the individual from contributing to an HSA.

Permissible Types of Coverage

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.

_ Compliance Tip: __ 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-child care
• Child and adult immunizations
• Obesity weight loss programs
• Screening services

• 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)

• 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 care |
• Vision care
• Long-term care |

Health FSA and HRA Coverage

Individuals who are covered by general-purpose FSAs or HRAs are not eligible for HSA contributions. A general-purpose health FSA or HRA is one that generally pays or reimburses all qualifying medical expenses.

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.

In addition, an individual's HSA eligibility may be affected when a health FSA incorporates a grace period or a carry-over feature.

• Grace period : Coverage by a general-purpose health FSA with a grace period will disqualify an employee from contributing to an HSA during the FSA's grace period, unless the employee had a zero balance in the FSA at the end of the plan year.
• Carry-over feature : An individual who has coverage under a general purpose FSA solely as a result of a carryover of unused amounts from the prior year is not eligible for HSA contributions for the current year. The IRS has provided two alternative approaches that allow health FSA carryovers while preserving HSA eligibility. These approaches include:
  • Carrying over unused amounts to an HSA-compatible health FSA (that is, a limited-purpose FSA or a post-deductible FSA); and
  • Allowing individuals participating in a general-purpose FSA to decline or waive the carryover.

Permissible Types of Health FSAs and HRAs

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:

• Limited-purpose health FSA or HRA —This type of health FSA or HRA pays or reimburses qualifying medical expenses that are permitted coverage, permitted insurance or preventive care (for example, dental or vision coverage).
• Post-deductible health FSA or HRA —This type of health FSA or HRA pays or reimburses medical expenses incurred after the individual has met the minimum annual deductible within the HDHP.
• Suspended HRA —A suspended HRA, pursuant to an election made before the beginning of the HRA coverage period, does not pay or reimburse at any time, any medical expenses incurred during the suspension period, except preventive care, permitted insurance or permitted coverage.
• Retirement HRA —A retirement HRA pays or reimburses medical expenses incurred after the individual retires.

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.

TRICARE, VA and IHS Benefits

TRICARE	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.
VA Benefits	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.
IHS 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.

Medicare Entitlement

An individual who is entitled to Medicare benefits is not eligible for HSA contributions. To be entitled to Medicare benefits, an individual generally must be both eligible and enrolled. Eligibility for Medicare benefits alone does not make an individual ineligible for HSA contributions.

IRS Notices 2004-50 and 2008-59 confirm that a Medicare-eligible individual who is not actually enrolled in Medicare Parts A, B and D, or any other Medicare benefit, may contribute to an HSA until the month that he or she is enrolled in Medicare.

Tax Dependent

An individual who can be claimed as a tax dependent of another individual is not eligible for HSA contributions. This is true even if the other person does not actually claim the dependent. In general, a taxpayer may claim an individual as his or her tax dependent if the individual is:

• The taxpayer's child and under age 19 at the end of the tax year;
• The taxpayer's child, a student and under age 24 at the end of the tax year; or
• A member of the taxpayer's household for whom the taxpayer provided over half of the support for the year and whose gross income does not exceed the personal exemption amount.

hdhp—plan design requirements

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. An HDHP is a health plan that provides "significant benefits" and satisfies requirements for minimum deductibles and out-of-pocket maximums.

_ Compliance Tip: _Employers that sponsor HDHPs should review their plan's design before the beginning of each year to confirm that the plan satisfies the IRS' cost-sharing requirements for HDHPs.

SIGNIFICANT BENEFITS

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 other significant 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 other significant benefits in addition to the benefits subject to the exclusion.

A plan will not qualify as an HDHP if substantially all of its coverage is either permitted insurance or permitted coverage (for example, coverage for accidents, disability, dental care or vision care). Also, if substantially all the coverage that is intended to be an HDHP is provided through a health FSA or HRA, the health plan is generally not an HDHP.

COST-SHARING LIMITS

The minimum annual deductible and maximum out-of-pocket requirements for HDHPs are as follows:

Plan Years Beginning on or after Jan. 1, 2022
Type of Coverage	Minimum Annual Deductible	Annual Out-of-pocket Maximum
Self-only coverage	$1,400	$7,050
Family coverage	$2,800	$14,100

Plan Years Beginning on or after Jan. 1, 2023
Type of Coverage	Minimum Annual Deductible	Annual Out-of-pocket Maximum
Self-only coverage	$1,500	$7,500
Family coverage	$3,000	$15,000

Self-only HDHP coverage is HDHP coverage for only one HSA-eligible individual. Family HDHP coverage is HDHP coverage for one HSA-eligible individual and at least one other individual (regardless of whether the other individual is HSA–eligible).

The minimum annual deductibles and the maximum out-of-pocket expense limits for HDHP coverage are adjusted for increases in the cost of living. By June 1 of each calendar year, the IRS publishes the cost-of-living adjustments that will become effective as of the next Jan. 1.

For HDHPs with non-calendar plan years, IRS Notice 2004-50 clarifies that the adjusted limits for the calendar year in which the HDHP's plan year begins can be applied for that entire plan year.

_ Example—Non-calendar Year Plans: _An individual obtains self-only coverage under an HDHP on June 1, 2022, the first day of the plan year, with an annual deductible of $1,400. The plan must increase its minimum deductible for self-only coverage to $1,500 for the plan year that begins June 1, 2023.

Minimum Annual Deductible

For plan years beginning on or after Jan. 1, 2022, an HDHP must have a minimum annual deductible of $1,400 for self-only coverage and $2,800 for family coverage ($1,500 and $3,000, respectively, for plan years beginning in 2023). Except for preventive care benefits, an HDHP cannot pay benefits for covered services until the minimum annual deductible has been satisfied.

Special Rules Related to COVID-19 Pandemic

On March 11, 2020, the IRS issued Notice 2020-15 to allow HDHPs to pay for COVID-19 testing and treatment before plan deductibles have been met, without jeopardizing their status. The IRS also noted that any COVID-19 vaccination costs count as preventive care and can be paid for by an HDHP without cost sharing.

Effective March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) allows HDHPs to provide benefits for telehealth or other remote care services before plan deductibles have been met, for plan years beginning before Jan. 1, 2022.

Notice 2020-29 clarified that these coverage changes may be applied retroactively to Jan. 1, 2020.

Family Coverage—Embedded Deductibles

When an individual has family coverage under an HDHP, no benefits can be paid under the HDHP (except for preventive care) until the minimum annual deductible for family coverage has been met. Some health plans administer family coverage in a way that includes an "embedded deductible." A plan that has an embedded deductible pays claims for a specific individual if he or she has met the individual deductible, even if the family as a whole has not met the family deductible.

An HDHP is not required to include, or prohibited from including, an embedded deductible. However, a health plan does not qualify as an HDHP if there is an embedded deductible that is lower than the required minimum annual deductible for family coverage.

Also, the HDHP must be designed to ensure that the embedded individual deductibles do not cause the plan to exceed the out-of-pocket maximum expense limit for family coverage.

_ Example—Embedded Deductible: _Susan elected family coverage under a health plan for 2022. The plan year begins on Jan. 1 and includes a $1,400 individual deductible and a $2,800 family deductible. Susan incurs $2,000 in medical expenses on Jan. 15. Since the plan has an embedded deductible, Susan is required to pay $1,400 and the plan pays the remaining $600. Although the family deductible was not met, the plan will pay claims for Susan after she has met the individual deductible. Under the IRS rules, this plan does NOT qualify as an HDHP since claims were paid before the $2,800 HSA-required family deductible was met.

Deductible Carryovers

Some health plans have a deductible carry-over feature that allows expenses that are incurred below a participant's deductible during the last three months of a plan year to be applied to the participant's deductible in the following plan year. IRS Notice 2004-50 provides that a deductible carry-over feature will not prevent a plan from being an HDHP if the required minimum annual deductible for the health plan is proportionately increased to account for the fact that expenses incurred over more than 12 months may be used to satisfy the plan's deductible.

To calculate the adjustment, a health plan must:

• Multiply the applicable required minimum annual deductible for self-only or family HDHP coverage by the number of months allowed in which to satisfy the deductible; and then

• Divide the resulting amount by 12.

The result of this is the adjusted required minimum annual deductible.

To qualify as an HDHP, the annual deductible under a health plan with a carry-over feature must be equal to or greater than the adjusted required minimum annual deductible. Also, the adjusted minimum annual deductible cannot exceed the applicable (self-only or family) maximum out-of-pocket expense limit.

Prior Coverage

If an employer changes health plans mid-year and the period during which expenses are incurred for purposes of satisfying the deductible is 12 months or less, IRS Notice 2004-50 confirms that the new health plan does not fail to qualify as an HDHP merely because it provides a credit toward the deductible for expenses incurred and not reimbursed during the previous health plan's short plan year. It does not matter whether the prior plan was an HDHP.

_ Example—Prior Plan Coverage: _An employer with a calendar year health plan switches from a non-HDHP plan to a new plan. Coverage under the new plan begins on July 1. The annual deductible under the new plan satisfies the minimum annual deductible for an HDHP and counts expenses incurred under the prior plan during the first six months of the year in determining if the new plan's annual deductible is satisfied. The new plan satisfies the HDHP deductible limit.

In addition, if an individual changes coverage during the plan year from self-only HDHP coverage to family HDHP coverage, the family HDHP can take into account the expenses incurred by the individual during the portion of the plan year in which the individual had self-only coverage. This will not affect the plan's HDHP status.

Out-of-pocket Maximum

To qualify as an HDHP, the sum of the plan's annual deductible and any other annual out-of-pocket expenses that the insured is required to pay, such as copayments and coinsurance (but not premiums), cannot exceed the annual out-of-pocket maximum. The IRS has clarified that copayments must be taken into account for purposes of an HDHP's out-of-pocket maximum, even if the plan does not apply copayments to the deductible.

| Compliance Tips—Specific Plan Designs

• Special rules apply to health plans that use a network of providers. Network plans may qualify as HDHPs even if they have an out-of-pocket maximum for out-of-network services that exceeds the HDHP annual out-of-pocket maximum.
• A health plan without an express limit on out-of-pocket expenses is generally not an HDHP, unless this limit is not necessary to prevent an individual from exceeding the required out-of-pocket maximum (for example, the plan pays 100% of covered benefits after the deductible is reached).

• Some health plans impose penalties or higher coinsurance payments on individuals who fail to obtain precertification for a specific provider or for certain medical procedures. These penalties or increased copayments are not out-of-pocket expenses and do not count against the maximum out-of-pocket limit.

Also, many health plans provide coverage for services only up to the usual, customary and reasonable (UCR) cost for the service. When the UCR cost is exceeded, the covered individual is generally responsible for paying the excess, even after the plan's deductible has been satisfied.

According to IRS Notice 2004-50, restricting benefits to UCR costs is a reasonable restriction on benefits. Thus, amounts paid by covered individuals in excess of UCR that are not paid by an HDHP are not included in determining maximum out-of-pocket expenses.

Impact of ACA Cost-sharing Limit

The Affordable Care Act (ACA) imposes an annual limit (or out-of-pocket maximum) on total enrollee cost sharing for essential health benefits. The ACA's cost-sharing limit, which applies to all non-grandfathered health plans, is higher than the out-of-pocket maximum for HDHPs.

For a health plan to qualify as an HDHP, the plan must comply with the lower out-of-pocket maximum limit for HDHPs.

ACA Out-of-pocket Maximum

• For 2022 plan years, the ACA’s out-of-pocket maximum is $8,700 for self-only coverage and $17,400 for family coverage.
• For 2023 plan years, the ACA’s out-of-pocket maximum is $9,100 for self-only coverage and $18,200 for family coverage.

HDHP Out-of-pocket Maximum

• For 2022 plan years, the HDHP out-of-pocket maximum is $7,050 for self-only coverage and $14,100 for family coverage.
• For 2023 plan years, the HDHP out-of-pocket maximum is $7,500 for self-only coverage and $15,000 for family coverage.

In addition, under the ACA's rules, the self-only annual limit on cost sharing applies to each individual, regardless of whether the individual is enrolled in self-only coverage or family coverage. This means that some HDHPs will need to embed an individual out-of-pocket maximum in family coverage so that an individual's cost sharing for essential health benefits cannot exceed the ACA's out-of-pocket maximum for self-only coverage.

In an FAQ, the Department of Health and Human Services (HHS) provides guidance on how this ACA rule affects HDHPs with family deductibles that are higher than the ACA's cost-sharing limit for self-only coverage.

Embedded ACA Limit

According to HHS, an HDHP plan that has a $10,000 family deductible must apply the annual limitation on cost sharing for self-only coverage ($8,700 in 2022) to each individual in the plan, even if this amount is below the $10,000 family deductible limit. Because the $8,700 self-only maximum limitation on cost sharing exceeds the minimum annual deductible amount for HDHPs ($2,800 for 2022), it will not cause a plan to fail to satisfy the requirements for a family HDHP.

PREVENTIVE CARE

To qualify as an HDHP, a health plan cannot pay benefits until the required minimum deductible has been satisfied—with the exception of preventive care benefits. An HDHP may apply a low deductible (or no deductible) to its coverage of preventive care. Notice 2004-23 indicated that preventive care includes, but is not limited to the following:

• Periodic health examinations, such as annual physicals (including tests and diagnostic procedures ordered in connection with routine examinations);
• Routine prenatal and well-child care;
• Child and adult immunizations;
• Obesity weight-loss programs;
• Screening devices and tests (for example, cancer screening, heart and vascular diseases screening, infectious diseases screening, mental health conditions and substance abuse screening, and pediatric conditions screening); and
• Tobacco cessation.

Preventive care does not generally include any service or benefit intended to treat an existing illness, injury or condition.

Under the ACA, non-grandfathered group health plans are required to provide coverage for preventive care on a "first-dollar basis" (that is, without any copayments, deductibles or other cost sharing), effective for plan years beginning on or after Sept. 23, 2010. The ACA's definition of "preventive care" is different from the IRS' definition of "preventive care" for HSA eligibility purposes. IRS Notice 2013-57 provides that a health plan will not fail to qualify as an HDHP merely because it provides the preventive care services required by the ACA without a deductible.

In addition, on July 17, 2019, the IRS released Notice 2019-45 to add care for a range of chronic conditions to the list of preventive care benefits that can be provided by a HDHP without a deductible. Notice 2019-45 provides that certain medical care services and items, including prescription drugs, for certain chronic conditions should be classified as preventive care under the HDHP rules for individuals with those chronic conditions. These medical services and items are limited to the ones listed below for individuals with the corresponding conditions:

Preventive care for specified conditions	For individuals diagnosed with
Angiotensin converting enzyme (ACE) inhibitors	Congestive heart failure, diabetes and/or coronary artery disease
---	---
Anti-resorptive therapy	Osteoporosis and/or osteopenia
Beta-blockers	Congestive heart failure and/or coronary artery disease
Blood pressure monitor	Hypertension
Inhaled corticosteroids	Asthma
Peak flow meter	Asthma
Insulin and other glucose-lowering agents	Diabetes
Retinopathy screening
Glucometer
Hemoglobin A1c testing
International normalized ratio (INR) testing	Liver disease and/or bleeding disorders
Low-density lipoprotein (LDL) testing	Heart disease
Selective serotonin reuptake inhibitors (SSRIs)	Depression
Statins	Heart disease and/or diabetes

HSA contribution rules

Only an eligible individual can establish an HSA and make HSA contributions. An individual's eligibility for HSA contributions is generally determined monthly, as of the first day of the month. HSA contributions can be made by the HSA account holder or by any other person on his or her behalf, including an employer or family member. An individual who is no longer HSA-eligible may still contribute to his or her HSA (or have contributions made on his or her behalf) for the months of the year in which he or she was HSA-eligible.

contribution limits

For each month an individual is HSA-eligible, he or she may contribute one-twelfth of the applicable maximum contribution limit for the year. This limit is called the general monthly contribution rule. The applicable maximum contribution limit depends on whether the individual has self-only HDHP coverage or family HDHP coverage on the first day of the month.

The maximum HSA contribution limits are subject to an annual adjustment for inflation. By June 1 of each calendar year, the IRS publishes the cost-of-living adjustments that will become effective as of the next Jan. 1.

The HSA contribution limits for 2022 are as follows:

Type of Coverage	Contribution Limit
Self-only coverage	$3,650 ($3,850 for 2023)
Family coverage	$7,300 ($7,750 for 2023)

_ Example: _Gina, age 38, enrolls in family HDHP coverage on Jan. 1, 2022, and is an HSA-eligible individual on that date. Her coverage changes to self-only HDHP coverage on July 1, 2022, and she retains that coverage through Dec. 31, 2022. She is an eligible individual for all 12 months in 2022. She can contribute $5,475 ((6/12 × $7,300) + (6/12 × $3,650)) to an HSA for 2022.

Except for rollover contributions, all HSA contributions made by or on behalf of an HSA-eligible individual are aggregated for purposes of applying the maximum contribution limit. However, HSA administrative fees or account maintenance fees paid by the HSA account holder (or someone on his or her behalf) are not HSA contributions, and do not count toward the annual contribution limit.

Also, all HSA contributions, except rollover contributions, must be made in cash. For example, HSA contributions cannot be made in stock or other property.

Compliance Reminder: There are some special contribution rules for individuals who are age 55 or older, mid-year HDHP enrollees and married spouses with family HDHP coverage. These rules, which are discussed below, may impact how much can be contributed to an individual's HSA each year.

Catch-up Contributions (Age 55 or older)

Individuals who are age 55 or older by the end of the tax year are permitted to make additional HSA contributions, called "catch-up contributions." The maximum annual catch-up contribution is $1,000. Because the catch-up contribution limit is not adjusted for inflation, it remains the same year after year. As with the general HSA contribution limit, the catch-up contribution limit is determined on a monthly basis.

Example: On Jan. 1, 2022, Mary begins participating in self-only coverage under an HDHP. Mary turns age 65 on July 1, 2022, and enrolls in Medicare. She ceases to be an eligible individual for HSA purposes when she becomes enrolled in Medicare (on July 1, 2022). Thus, she will be eligible to make HSA contributions for six months in 2022 (January through June) at a monthly contribution limit of approximately $387.50 (1/12 of $3,650 (the statutory maximum) + 1/12 of $1,000 (the annual HSA catch-up limit)). Her maximum HSA contribution limit for 2022 is approximately $2,325 (6 × $387.50).

The HSA catch-up contribution limit is not reduced for the year in which the individual reaches age 55 if he or she reaches age 55 after Jan. 1. For example, an individual who is HSA-eligible for all of 2022 and who turns age 55 on Dec. 1, 2022, may make a full $1,000 catch-up contribution for 2022.

_ Compliance Tip: _A married couple may make two HSA catch-up contributions, if both spouses are at least age 55. However, for a married couple to make two HSA catch-up contributions, a separate HSA must be established in the name of each spouse.

Full Contribution Rule (Mid-year Enrollees)

The full-contribution rule is an exception to the general rule that the maximum amount of HSA contributions for a year is determined monthly, based on the individual's HSA eligibility for that month.

Under the full-contribution rule, an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if he or she becomes covered under an HDHP in a month other than January and is HSA-eligible on Dec. 1 of that year.

The eligible individual is treated as enrolled in the same HDHP coverage (that is, self-only or family coverage) as he or she has on the first day of the last month of the year. For example, if an individual first becomes HSA-eligible on Dec. 1, 2022, and has family HDHP coverage, he or she is treated as an eligible individual who had family HDHP coverage for all 12 months in 2022.

Compliance Reminder —The full-contribution rule does not change the requirement that expenses incurred before the date the HSA was established cannot be reimbursed by the HSA. An HSA is not established before the date that the HSA is actually established, even when individuals are treated as HSA–eligible for the entire year under the full-contribution rule.

The full-contribution rule applies regardless of whether the individual was an eligible individual for the entire year, had HDHP coverage for the entire year, or had disqualifying non-HDHP coverage for part of the year. However, 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.

The full-contribution rule applies to both the general monthly contribution limit and to the additional HSA catch-up contribution limit for eligible individuals who reach age 55 by the end of the year.

How Does the Full-contribution Rule Work?

The full-contribution rule can increase, but not decrease, the amount that an individual would otherwise be eligible to contribute to his or her HSA under the general monthly contribution rule.

An individual who is eligible for the full-contribution rule can contribute the greater of:

• The maximum amount determined under the general monthly contribution rule for the taxable year, based on the individual's HDHP coverage—that is, self-only or family coverage—for each month of the year that he or she is HSA-eligible (without regard to the full-contribution rule); OR
• The full HSA contribution limit for the taxable year based on the type of HDHP coverage (self-only or family coverage) that he or she had on Dec. 1 of that year.

This means that, under the full-contribution rule, an individual who has self-only HDHP coverage for most of the taxable year, but who switches to family HDHP coverage late in the year and who still has family HDHP coverage on Dec. 1 of that year, will be able to contribute significantly more to his or her HSA for the year than if he or she had kept self-only HDHP coverage for all 12 months of the year.

_ Example: _Bob, age 39, enrolls in self-only HDHP coverage on Jan. 1, 2022, and is an HSA-eligible individual on that date. Bob's coverage changes to family HDHP coverage on Nov. 1, 2022, and Bob retains family HDHP coverage through Dec. 31, 2022. Bob remains HSA-eligible through Dec. 31, 2023 (testing period).

Bob is an eligible individual with family HDHP coverage on Dec. 1, 2022. Bob's full contribution limit for 2022 is $7,300. Bob's sum of the monthly contribution limits is approximately $4,258.33 ((2/12 × $7,300) + (10/12 × $3,650)). Bob's annual contribution limit for 2022 is $7,300—the greater of $7,300 or $4,258.33.

Testing Period

If an individual makes additional HSA contributions (or if contributions are made on his or her behalf) under the full-contribution rule, and the individual does not remain HSA-eligible during the 13-month testing period, he or she will experience adverse tax consequences.

The testing period begins on Dec. 1 of the year for which the HSA contributions were made, and it ends on Dec. 31 of the following year.

These adverse tax consequences do not apply, however, if an individual loses his or her HSA eligibility during the testing period due to disability or death.

Also, to remain HSA-eligible during the testing period, an individual is not required to keep the same level of HDHP coverage during the testing period. Thus, if an HSA-eligible individual merely changes his or her HDHP coverage level (from self-only to family coverage, or vice versa) during the testing period, he or she will not suffer any adverse tax consequences.

Adverse Tax Consequences

If an individual makes additional contributions under the full-contribution rule and then ceases to be HSA-eligible during the testing period, the additional contributions that were made under the full-contribution rule will be:

• Includible in the individual's gross income (for the taxable year containing the first month of the testing period for which the individual ceases to be HSA-eligible); and
• Subject to an additional 10% tax.

The amount that is included in the individual's gross income is computed by subtracting the amount that could have been contributed under the general monthly contribution rule from the amount actually contributed under the full-contribution rule. Earnings on the taxable amount are not included in gross income and are not subject to the 10% additional tax, as long as the earnings remain in the individual's HSA or are used for qualified medical expenses.

This additional tax cannot be avoided by withdrawing the taxable amounts from the HSA. An amount included in an individual's federal gross income because the individual failed to remain HSA-eligible during the testing period is not an "excess contribution." Withdrawing the taxable amount (and not using the withdrawn amount for qualified medical expenses) will result in double taxation because the withdrawn amount will again be included in the individual's gross income and (unless the individual has died, become disabled or attained age 65) will also be subject to the additional 20% tax on nonmedical distributions.

Contribution limits for spouses

There is a special contribution rule for married individuals, which provides that if either spouse has family HDHP coverage, then both spouses are treated as having only that family coverage.

The HSA contribution limit calculated under this special contribution rule is a joint limit, which is divided equally between the spouses (unless they agree on a different division). This means that if both spouses are HSA-eligible and either has family HDHP coverage, the spouses' combined contribution limit is the annual maximum limit for individuals with family HDHP coverage.

This special contribution rule applies even if one spouse has family HDHP coverage and the other has self-only HDHP coverage, or if each spouse has family HDHP coverage that does not cover the other spouse.

The special contribution rule for married spouses does not apply to catch-up contributions. Married couples who both are over age 55 may each make an additional catch-up contribution ($1,000) to their separate HSAs.

Example: In 2022, Tony (age 53) and Barb (age 56) are married and both have family coverage under separate HDHPs. Together, they will be able to contribute up to the annual maximum limit for family HDHP coverage ($7,300 for 2022). They have not made any special agreement about the division of their combined HSA limit. Consequently, Tony may contribute $3,650 to his HSA (half of the $7,300 contribution limit) and Barb may contribute $4,650 to her HSA (half of the $7,300 limit plus an additional $1,000 catch-up contribution).

Spouses who are HSA-eligible may allocate the joint contribution limit in any way they want. They may divide the limit equally or allocate it between their HSAs in any proportion, including allocating it entirely to one spouse.

In addition, keep in mind that HSAs are individual trusts or accounts, which means that spouses cannot share a joint HSA. Also, if a spouse has non-HDHP coverage (such as a low deductible health plan, general purpose FSA or HRA) that covers the other spouse, both spouses are ineligible for HSA contributions.

The special contribution limit for married spouses does not apply when:

• Only one spouse is HSA-eligible. The contribution limit is determined based on the HSA-eligible spouse's coverage, without applying the special contribution rule. This means that the HSA–eligible spouse may contribute the full amount based on his or her HDHP coverage and no allocation is made to the ineligible spouse.
• Neither spouse has family coverage. Contributions to each eligible spouse's HSA are subject to the limit on contributions for individuals with self-only coverage, plus any available catch-up contributions. One spouse cannot reduce his or her own HSA contributions in order to allow the other spouse to make contributions greater than the self-only coverage limit.

For more information, see this guide's HSA contribution matrix for spouses.

Special rules for medicare enrollees

An individual is not eligible for HSA contributions once his or her Medicare coverage begins. There are some special timing rules regarding the effective date for Medicare coverage that sometimes come as a surprise to individuals who have been contributing to HSAs.

Under these rules, Medicare Part A coverage begins the month an individual turns age 65, provided the individual files an application for Medicare Part A (or for Social Security or Railroad Retirement Board benefits) within six months of when the individual becomes age 65. If the individual files an application more than six months after turning age 65, Medicare Part A coverage will be retroactive for six months.

Individuals who delay applying for Medicare and are later covered by Medicare retroactively to the month they turned 65 (or six months if later) cannot make contributions to an HSA for the period of retroactive coverage. In other words, an individual's annual HSA contribution limit is reduced for any months of Medicare coverage, including retroactive Medicare coverage.

_ Compliance Tip: _To avoid excess contributions, individuals may need to stop making HSA contributions in advance of when they apply for Medicare coverage.

other contribution rules

Employee Elections

HSAs are commonly offered with HDHPs under an employer's Section 125 plan (or a cafeteria plan). This allows employees to make their HSA and HDHP contributions as pre-tax salary reductions. As a general rule, cafeteria plan elections are irrevocable for an entire plan year. This means that participants ordinarily cannot make changes to their cafeteria plan elections during a plan year. The IRS, however, allows a cafeteria plan to be designed to permit mid-year election changes in limited situations.

Compliance Reminder —Many employers with HDHPs allow employees to make HSA contributions on a pre-tax basis through their Section 125 plans. Unlike other types of qualified benefits, individuals can make changes to their HSA contribution elections at any time. The Section 125 mid-year election change restrictions do not apply to HSA contributions.

IRS Notice 2004-50 confirms that the irrevocable election rules do not apply to a cafeteria plan's HSA benefit. An employee who elects to make HSA contributions under a cafeteria plan may start or stop the election or increase or decrease the election at any time during the plan year, as long as the change is effective prospectively. If an employer places additional restrictions on HSA contribution elections under its cafeteria plan, then the same restrictions must apply to all employees.

Also, to be consistent with the HSA monthly eligibility rules, HSA election changes must be allowed at least monthly and upon loss of HSA eligibility.

Contribution Timing

Although the dollar limit for HSA contributions is determined on a monthly basis, HSA contributions do not have to be made in equal amounts each month. An eligible individual can contribute in a lump sum or in any amounts or any frequency that he or she wants.

All HSA contributions for the eligible individual's taxable year must be made by the date for filing his or her federal income tax return for that year, without extensions. For example, all contributions for 2021 would have to be made by April 18, 2022, the date for filing the 2021 federal income tax return, without extensions.

Rollovers or Transfers

Rollovers from Other HSAs

HSAs may accept rollover contributions from another HSA. These rollover contributions do not count toward the annual HSA contribution limit, and they are not required to be in cash. Also, an individual does not need to be HSA-eligible to make a rollover contribution from his or her existing HSA to a new HSA.

To qualify as a rollover distribution, the amount must be distributed from the other HSA to the HSA account holder and then deposited into the individual's HSA within 60 days of when the distribution was received. This rollover exception only applies once every 12 months. In addition, HSA funds may be moved from one HSA trustee directly to another HSA trustee (called a trustee-to-trustee transfer). There is no limit on the number of trustee-to-trustee transfers allowed during a year.

Transfers from IRAs—Qualified HSA Funding Distributions

An HSA-eligible individual may irrevocably elect a direct trustee-to-trustee transfer of a qualified HSA funding distribution from his or her traditional IRA or Roth IRA into his or her HSA. Qualified funding distributions may not be made from ongoing SEP IRAs or SIMPLE IRAs.

Generally, only one qualified HSA funding distribution is allowed during the lifetime of an individual. Also, the distributions must be from an IRA to an HSA owned by the individual who owns the IRA, or, in the case of an inherited IRA, for whom the IRA is maintained. This means a qualified HSA funding distribution cannot be made to an HSA owned by any other person, including the individual's spouse.

Qualified HSA funding distributions are counted as contributions when applying the annual HSA contribution limit for the taxable year in which they are contributed to the HSA.

In addition, the qualified HSA funding distribution rules require the individual to remain HSA-eligible during a testing period. The testing period begins with the month in which the qualified funding distribution is contributed to the HSA and ends on the last day of the 12th month following that month.

For example, if a qualified funding distribution is made on June 4, 2021, the testing period would begin in June 2021 and continue until June 30, 2022. If an individual loses his or her HSA eligibility at any time during the testing period, the amount of the qualified HSA funding distribution is included in the individual's gross income, and the amount is subject to a 10% additional tax. These adverse tax consequences do not apply if an individual ceases to be HSA-eligible due to disability or death.

Tax rules

All HSA contributions receive tax-favored treatment (unless they are excess contributions). The specific tax treatment, however, depends on who is making the contribution, as described in the table below.

Source of Contributions	Tax Treatment
HSA owner	Individuals who make contributions to their own HSAs get an above-the-line deduction for the contributions.Note: An employee's pre-tax salary deferral contributions are treated as employer contributions for tax purposes.
Family member or other person/entity (but not employer)	These contributions may be subject to applicable gift taxes. Contributions made by anyone other than an employer are deductible by the HSA account holder (but not necessarily by the contributor) in computing adjusted gross income (that is, as an above-the-line deduction).
Employer contributions (including employees' pre-tax salary deferrals)	In general, these contributions are deductible by the employer and excludable from employee's gross income. Also, they are not subject to income tax withholding or Social Security/Medicare taxes, if, at the time of contribution, it is reasonable to believe that the contribution will be excluded from the employee's income.

excess contributions

HSA contributions that exceed an individual's maximum contribution amount, or that are made by or on behalf of an individual who is not HSA-eligible, are considered " excess contributions." Excess contributions are not deductible by the HSA owner. Also, employer HSA contributions are included in the gross income of the employee to the extent that they exceed the individual's maximum contribution amount or are made on behalf of an employee who is not an eligible individual.

A 6% excise tax is imposed on the HSA owner for all excess contributions.

Compliance Tip: The excise tax can be avoided if the excess contributions for a taxable year (and the net income attributable to those excess contributions) are distributed to the HSA owner by the deadline for filing the owner's federal income tax return for the taxable year (that is, the following April 15).

If a corrective distribution is made, then:

• The net income attributable to the excess contributions is included in the HSA owner's gross income for the taxable year in which the distribution is received;
• The 6% excise tax is not imposed on the excess contributions; and
• The distribution of the excess contributions is not taxed (but the excess contribution is included in the owner's gross income because it is not deductible or excludable for tax purposes).

The 6 percent excise tax is cumulative and will continue in future years if a corrective distribution is not made. For each year, the HSA owner must pay excise tax on the total of all excess contributions in the account. However, the amount on which the tax is assessed is reduced in certain circumstances. For example, if HSA contributions for any year are less than the maximum limit for that year, the amount subject to the excise tax is reduced (for that year and subsequent years) by the difference between the maximum limit for the year and the amount actually contributed.

Compliance Reminder: If an employee contributes too much to his or her HSA for a year, the excess amount is included in the employee's gross income for tax purposes and subject to a 6% excise tax. An employee can avoid the excise tax if the excess contribution for the year is distributed to the employee by the following April 15.

Employer HSA contributions

Employers may contribute to the HSAs of current or former employees. An individual's HSA contribution limit is reduced by any employer contributions (including pre-tax salary deferrals under a cafeteria plan) made to his or her HSA (or Archer MSA).

Generally, employer contributions are excluded from an employee's income. They are reported on Form W-2, Box 12, using code W.

Compliance Tip: 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 primarily responsible for determining eligibility for HSA contributions._

With respect to determining HSA eligibility, 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 FSAs and HRAs.

| _ Nondiscrimination Rules _An employer's HSA contributions are subject to nondiscrimination requirements, which are designed to prevent employers from impermissibly favoring certain highly compensated or key employees.The specific nondiscrimination rules that apply to an employer depend on whether HSA contributions are made through a Section 125 cafeteria plan. Employer contributions to employees' HSAs are made through a cafeteria plan when the cafeteria plan allows eligible participants to make pre-tax salary deferrals to fund their HSAs.

• When HSA contributions are made through a cafeteria plan, the employer's contributions are subject to the nondiscrimination tests for Section 125 cafeteria plans.

• When HSA are not made through a cafeteria plan, the employer's contributions are subject to the tax code's comparability rules.

Section 125 nondiscrimination rules

The comparability rules do not apply to employer HSA contributions made through a Section 125 cafeteria plan. Employer contributions to employees' HSAs are made through the cafeteria plan when the cafeteria plan allows eligible participants to make pre-tax salary deferrals to fund their HSAs.

When employer HSA contributions are made through a Section 125 cafeteria plan, however, the employer's contributions are subject to the nondiscrimination rules governing cafeteria plans. If a cafeteria plan fails to pass nondiscrimination testing, highly compensated employees lose the tax benefits of participating in the plan (that is, they must include the benefits or compensation in their income).

Under the Section 125 rules, a highly compensated employee generally means any individual who is:

• An officer;
• A shareholder owning more than 5% of the voting power or value of all classes of stock of the employer;
• Highly compensated; or
• A spouse or dependent of a person described above.

In general, a Section 125 plan must satisfy the following three nondiscrimination tests:

Eligibility Test	This test looks at whether a sufficient number of non-highly compensated employees are eligible to participate in the cafeteria plan. If too many non-highly compensated employees are ineligible to participate, the plan will fail this discrimination test.
Benefits and Contributions Test	This test is designed to make sure that a plan's contributions and benefits are available on a nondiscriminatory basis and that highly compensated employees do not select more nontaxable benefits than non-highly compensated employees select.
Key Employee Concentration Test	This test looks at whether key employees impermissibly utilize the plan's benefits more than non-key employees. Under this text, key employees must not receive more than 25% of the aggregate nontaxable benefits provided to all employees.

Certain exceptions and safe harbors apply to the cafeteria plan nondiscrimination tests. Because these tests are so complex, employers should work with their benefit advisors or legal counsel when performing cafeteria plan nondiscrimination testing.

Comparability rules

If an employer makes HSA contributions outside of a cafeteria plan, the employer must make comparable contributions to the HSAs of all comparable participating employees. As a general rule, contributions are comparable if they are the same dollar amount or the same percentage of the HDHP deductible.

If an employer fails to comply with the comparability requirement during a calendar year, it will be liable for an excise tax equal to 35% of the aggregate amount contributed by the employer to the HSAs of its employees during that calendar year. These excise taxes are reportable on IRS Form 8928.

Comparable Participating Employees

Comparable participating employees are HSA-eligible individuals who are in the same category of employees and have the same category of HDHP coverage. Non-collectively bargained employees can be separated into three categories for comparability testing:

Current full-time employees	Current part-time employees	Former employees

These are the only categories of employees for comparability testing. An employer is not allowed to create any additional categories. For example, an employer cannot create separate categories of employees based on their salaried or hourly status for purposes of comparability testing.

_ Compliance Tip: _If an employer contributes to the HSA of any comparable participating employee, the employer must make comparable contributions to the HSAs of all comparable participatingemployees.

However, some employees are not considered comparable participating employees, which means they are not taken into account for purposes of comparability testing. For example, collectively bargained employees and employees who are not HSA-eligible are not considered comparable participating employees. In addition, former employees who have elected COBRA coverage under the employer's HDHP are not included for purposes of comparability testing.

For purposes of making a contribution to the HSA of an employee who is not a highly compensated employee (as defined by the IRS), highly compensated employees (HCEs) are not treated as comparable participating employees. This makes it possible for an employer to make greater HSA contributions to employees who are not considered highly compensated without failing to meet the comparable contribution requirement.

However, an employer is still required to make comparable contributions to the HSAs of all HCEs who are comparable participating employees and to the HSAs of all non-HCEs who are comparable participating employees. Also, within a group of comparable participating employees, an employer is not allowed to make larger contributions to HCEs than to non-HCEs.

HDHP Categories

There are four categories of coverage for purposes of comparability testing:

• Self-only
• Self-plus-one
• Self-plus-two
• Self-plus-three or more.

Employees with self-only HDHP coverage are tested separately from employees with family HDHP coverage. Similarly, employees with different categories of family HDHP coverage may be tested separately. An employer is not required to contribute the same amount or the same percentage of the deductible for employees who are eligible individuals with one category of HDHP coverage that it contributes for employees who are eligible individuals with a different category of HDHP coverage.

For example, an employer that satisfies the comparability rules by contributing the same amount to the HSAs of all employees who are eligible individuals with family HDHP coverage is not required to contribute any amount to the HSAs of employees who are eligible individuals with self-only HDHP coverage, or to contribute the same percentage of the self-only HDHP deductible as the amount contributed with respect to family HDHP coverage.

However, there is a special comparability rule with respect to family coverage. Under this rule, an employer's contribution with respect to the self-plus-two category may not be less than the employer's contribution with respect to the self-plus-one category, and the employer's contribution with respect to the self-plus-three or more category may not be less than the employer's contribution with respect to the self-plus-two category.

Employer HDHP Coverage

An employer may restrict its HSA contributions to comparable participating employees who are participating in the employer's own HDHP without violating the comparability rules. Thus, an employer that contributes only to the HSAs of employees who are eligible individuals with coverage under the employer's HDHP is not required to make comparable contributions to the HSAs of employees who are eligible individuals but who are not covered under the employer's HDHP.

However, an employer that contributes to the HSA of any employee who is an eligible individual with coverage under an HDHP that is not provided by the employer must make comparable contributions to the HSAs of all comparable participating employees, regardless of whether they are covered under the employer's HDHP.

HSA withdrawals

Funds that are contributed to an HSA remain in the account and are carried over, without limit, from year to year, until the HSA owner uses them. There is no deadline by which an employee must use the funds in his or her HSA.

HSA funds may be used on a tax-free basis if they are used to pay for qualified medical expenses that were incurred after the HSA was established. Individuals do not need to meet the eligibility criteria for making HSA contributions in order to receive a tax-free distribution from their HSAs.

Employers that offer HSA programs generally have no involvement with HSA distributions. HSA owners have sole discretion for how and when to use HSA funds, and an HSA custodian or trustee tracks and reports all HSA activity.

HSA owners are free to take money from an HSA for any purpose. However, if any portion of a distribution is not used in accordance with HSA rules, that portion is taxable as income to the HSA owner. When an HSA distribution is taxable, it is also subject to a 20% penalty unless the HSA owner is over age 65, disabled or deceased.

Administering distributions

Compliance Reminder: Expenses incurred before an HSA was established are not qualified medical expenses. Under the full-contribution rule, an individual may be considered eligible for the entire year. However, only those expenses incurred after actually establishing the HSA are qualified expenses.

HSA funds must be held by an approved HSA custodian or trustee. Once money is in an HSA, it belongs solely to the account owner, who has complete control over how to spend it. An employer that contributes funds to an employee's HSA cannot make a custodian or trustee refund the money, even if the amounts deposited exceed contribution limits.

Employers can choose the custodian or trustee to set up employees' HSAs, but they cannot restrict employees from making withdrawals or transferring HSA funds to a different HSA. An HSA custodian or trustee can place reasonable administrative restrictions on HSA owners' distributions, generally limited to setting a minimum dollar amount for single distributions and a maximum number of distributions per month. The custodian or trustee may also withdraw funds from an HSA to cover its administrative fees, but these amounts are not considered distributions.

_ Compliance Tip: _Neither an employer nor an HSA custodian or trustee is required to determine whether HSA distributions are used for qualified medical expenses. This is one of the main features that distinguishes HSAs from health FSAs and HRAs.

Distribution timing

HSA funds cannot be used for expenses incurred prior to the date the HSA was established. In other words, a distribution is taxable (and possibly subject to the 20% penalty) if the HSA owner uses it to pay for medical care that was obtained before the HSA existed. State law determines the exact HSA establishment date for this purpose.

For medical expenses incurred after an HSA is established, there is no time limit for when an HSA owner may take a distribution. Similarly, HSA owners are not obligated to take distributions at any time. All unused funds remain in an HSA from year to year and may be used for qualified medical expenses incurred in the future.

Even if an HSA owner becomes ineligible to receive contributions into an HSA, he or she may still use tax-free distributions from an existing HSA to pay qualified medical expenses at any time, as long as the expenses were incurred after the HSA establishment date. For example, an HSA owner who only qualifies to have contributions made into an HSA in Year 1 may still use the HSA funds to pay qualified medical expenses that are incurred in Year 2 or later.

In addition, the money used to pay a qualified medical expense does not have to be in the HSA at the time the expense is incurred. For example, if an existing HSA has $1,000 and the HSA owner incurs $3,000 in medical expenses that year, he or she can pay the first $1,000 from the current HSA funds and then wait for future HSA contributions to pay or reimburse him- or herself for the remaining $2,000.

Qualified medical expenses

Generally, employees will pay medical expenses during the year without being reimbursed by the HDHP until the plan's annual deductible is reached. An employee can take a tax-free distribution from his or her HSA to pay these unreimbursed medical expenses, if they were incurred after the employee established the HSA.

Section 213(d) Medical Expenses

HSA distributions are not tax-free unless they are used to pay for qualified medical expenses.

_ Qualified Medical Expenses _A qualified medical expense means an amount spent for medical care, as defined in Code Section 213(d), for the HSA owner, his or her spouse and dependent, to the extent the expense is not reimbursed by insurance or any other source.

For HSA purposes, qualified medical expenses generally include the expenses listed in IRS Publication 502 for the medical and dental expenses tax deduction. Medical expenses are the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Examples—Qualified Medical Expenses

• Acupuncture
• Addiction treatment
• Ambulance services
• Annual physical exams
• Artificial limbs
• Artificial teeth
• Bandages
• Birth control pills
• Body scans
• Braille books and magazines
• Breast pumps and supplies
• Chiropractor |
• Contact lenses
• Crutches
• Dental treatment
• Diagnostic devices
• Eye exams
• Eyeglasses and contact lenses
• Eye surgery (including laser eye surgery)
• Fertility enhancement (for example, in vitro fertilization)
• Hearing aids
• Home care |
• Hospital services
• Laboratory fees
• Medicine and drugs (including over-the-counter drugs, effective in 2020)
• Menstrual care products (effective in 2020)
• Psychiatric care
• Smoking cessation
• Surgery
• Transplants
• Wheelchairs
• Wigs |

Examples—Non-qualified Expenses

• Babysitting
• Controlled substances that are not legal under federal law, even if the substance is legal under state law
• Cosmetic surgery
• Dancing lessons
• Diaper services |
• Hair removal
• Hair transplants
• Health club dues
• Maternity clothes
• Nutritional supplements
• Personal use items (such as toothpaste and deodorant) |
• Swimming lessons
• Teeth whitening
• Vacation or travel
• Veterinary fees
• Weight-loss programs |

Health Insurance Premiums

In general, payments for insurance are not qualified medical expenses for HSA purposes. However, there are exceptions for:

• Long-term care coverage;
• Health care coverage for an HSA owner who has reached age 65; and
• Health care coverage during:
  • Periods of coverage continuation (such as under COBRA); and
  • Periods during which an individual is receiving unemployment compensation under any federal or state law.

HSA Owners, Spouses and Dependents

Qualified medical expenses do not necessarily have to be incurred by the HSA owner. As long as an expense is not paid or reimbursed by any other source (such as the HDHP), an HSA distribution can also be used to pay qualified medical expenses incurred by the HSA owner's:

• Spouse (same-sex or opposite-sex);
• Dependents whom the HSA owner claims on a tax return (including some domestic partners); and
• Dependents whom the HSA owner could claim on a tax return, but:
  • The person filed a joint return;
  • The person had a gross income of more than the federal exemption amount; or
  • The HSA owner, or his or her spouse if filing jointly, could have been claimed as a dependent on someone else's tax return.

For this purpose, if parents of a child are divorced, separated or living apart for the last six months of the calendar year, the child is treated as the dependent of both parents regardless of which parent claims a child's exemption.

Also, it is important to note that dependents are defined differently for HSA purposes than they are for purposes of the ACA. While the ACA allows parents to keep their adult children on their health care policies until age 26, the laws applicable to HSAs generally do not allow HSA owners to pay for their child's medical care after age 19 (age 24 if the dependent is a full-time student).

In addition, spouses and dependents do not have to be HSA-eligible in order to have their qualifying medical expenses reimbursed on a tax-free basis.

Unreimbursed Expenses

HSAs are designed to pay expenses that an HSA owner would otherwise pay out of pocket using after-tax income. HSA funds cannot be used, on a tax-free basis, to pay expenses that any other source covers or pays. For example, if the HSA owner's spouse has a separate health plan that reimburses him or her for a certain expense, the HSA owner cannot use HSA funds to pay the expense and then later receive reimbursement from the spouse's health plan. Similarly, an HSA owner cannot use HSA funds to reimburse an expense that he or she claimed as a medical expense deduction on a tax return.

HSA Reporting rules

EMPLOYER REPORTING

Contributions

In general, when an employer makes contributions to employees' HSAs, the employer must report them on the Form W-2 for each employee that received a contribution. The amount an employer reports on Form W-2 must also include any money the employee elected to contribute to the HSA through a cafeteria plan. These HSA contributions are non-taxable wages that the employer must enter in Box 12 of Form W-2 along with the code letter W.

If, at the time of payment, it is not reasonable to believe that an HSA contribution will be excludable from an employee's income, the contribution is subject to federal income tax withholding, Social Security and Medicare taxes, and federal unemployment taxes. A contributing employer must report these contributions in Boxes 1, 3 and 5 of the employee's Form W-2 and on the employer's Form 940.

Distributions

Because employers have no involvement in how HSA owners spend HSA funds, they do not have any HSA reporting responsibilities relating to HSA distributions.

HSA OWNER REPORTING

HSA owners must report all HSA distributions and contributions (regardless of the source) on IRS Form 8889 and file this form with the IRS as an attachment to Form 1040.

Contributions

HSA owners must report any HSA contributions that were made by employers (including any amount the employee elected to contribute through a cafeteria plan) on Line 9 of Form 8889. This should match the amount reported by the employer in Box 12 of the W-2. All other contributions (except amounts rolled over to the HSA from other specific accounts) must be reported on Line 2 of Form 8889.

An HSA owner should receive a copy of IRS Form 5498-SA from the HSA trustee showing the total contributions made to the HSA. Any amount above the applicable HSA contribution limit may be taxable as income and subject to a 6% penalty. Excess contribution taxes and penalties can be calculated using Part VII of IRS Form 5329.

Distributions

When distributions were made from an HSA, the HSA trustee must report them to the IRS on Form 1099-SA and provide a copy to the HSA owner. The HSA owner must then enter the distribution amount from Form 1099-SA onto Line 14a of Form 8889.

The total amount that an HSA owner used to pay qualified medical expenses is entered on Line 15 of Form 8889.

If Form 1099-SA from an administrator contains a "5" in Box 3, this indicates that the HSA owner did not use a distribution for qualified medical expenses. An HSA owner must enter the total amount that he or she did not use to pay qualified medical expenses on Line 16 of Form 8889. This amount may or may not be the same as the amount listed by the administrator in Box 3 of Form 1099-SA.

The HSA owner must enter the taxable amount from Line 16 of Form 8889 onto Line 21 of Form 1040. Any 20% penalty amount from Line 17b of Form 8889 must be entered onto Line 62 of Form 1040. The HSA owner must also write "HSA" next to each of these amounts on Form 1040.

HSA Contribution matrix for spouses

	Spouse has no health plan coverage	Spouse has self-only non-HDHP coverage	Spouse has self-only HDHP coverage	Spouse has family non-HDHP coverage	Spouse has family HDHP coverage
Married employee with self-only non-HDHP coverage	No HSA contributions	No HSA contributions	Spouse may contribute up to $3,650 for 2022 ($3,850 for 2023). No contributions for employee.	No HSA contributions	Spouse may contribute up to $7,300 for 2022 ($7,750 for 2023). No contributions for employee.
Married employee with self-only HDHP coverage	Employee may contribute up to $3,650 for 2022 ($3,850 for 2023). No contributions for spouse.	Employee may contribute up to $3,650 for 2022 ($3,850 for 2023). No contributions for spouse.	Both employee and spouse are eligible for HSA contributions. Each may contribute up to $3,650 for 2022 ($3,850 for 2023) to their respective HSAs.	No HSA contributions if employee is covered under spouse's coverage. If not covered, employee may contribute up to $3,650 for 2022 ($3,850 for 2023). No contributions for spouse.	Both employee and spouse are eligible for HSA contributions and are treated as having only the family coverage. The maximum contribution limit (to be allocated between them) is $7,300 for 2022 ($7,750 for 2023).
Married employee with family non-HDHP coverage	No HSA contributions	No HSA contributions	No HSA contributions if spouse is covered under employee's coverage. If not covered, spouse may contribute up to $3,650 for 2022 ($3,850 for 2023). No contributions for employee.	No HSA contributions	No HSA contributions if spouse is covered under employee's coverage. If not covered, spouse may contribute up to $7,300 for 2022 ($7,750 for 2023). No contributions for employee.
Married employee with family HDHP coverage	Employee may contribute up to $7,300 for 2022 ($7,750 for 2023). No contributions for spouse.	Employee may contribute up to $7,300 for 2022 ($7,750 for 2023). No contributions for spouse.	Both employee and spouse are eligible for HSA contributions and are treated as having only the family coverage. The maximum contribution limit (to be allocated between them) is $7,300 for 2022 ($7,750 for 2023).	No HSA contributions if employee is covered under spouse's coverage. If not covered, employee may contribute up to $7,300 for 2022 ($7,750 for 2023). No contributions for spouse.	Both employee and spouse are eligible for HSA contributions and are treated as having only the family coverage. The maximum contribution limit (to be allocated between them) is $7,300 for 2022 ($7,750 for 2023).