Fringe Benefits

Eligible Individual

Only an “eligible individual” may establish and contribute to an HSA. This is someone who on the first day of any month: (1) is covered by a high-deductible health plan (HDHP); (2) is not covered by another health plan; (3) is not enrolled in Medicare (generally, under age 65) and (4) may not be claimed as a dependent on someone else’s tax return.

High-deductible Health Plan

A health plan that meets certain requirements (will adjust annually for inflation) regarding deductibles and out-of-pocket expenses.

Individuals who may contribute: Contributions may be made by an eligible individual, either directly or through a cafeteria plan, or by the individual’s employer. Any person, including family members, may also contribute on behalf of an eligible individual.

Death of Account Owner

At death, funds in an HSA pass to a named beneficiary. If the beneficiary is a surviving spouse, the account becomes the HSA of the surviving spouse, subject to the normal rules that apply to all HSA’s. If the funds in an HSA pass to a non-spousal beneficiary, the account ceases to be an HSA as of the date of death, and the non-spousal beneficiary must include the value of the HSA asset in their taxable income.

The maximum contribution limits for 2021 are:

• Individual: $3,600

• Family: $7,200

• Catch-up: $1,000

The maximum contribution limits for 2022 are:

• Individual: $3,650

• Family: $7,300

• Catch-up: $1,000

Federal law will allow an individual who becomes covered under a high-deductible plan in a month other than January to make a full standard limit HSA contribution for the year.

Individuals over age 55 may also make a “catch up” contribution. While a married couple under a family qualified high deductible health plan share one family HSA contribution limit, they can contribute up to that shared limit in separate accounts and, if both are age 55 or older, each can make a separate $1,000 catch-up contribution to an account in their own name.

An individual may make an HSA contribution for the preceding calendar year up until April 15th of the new year.

Income Tax Treatment of Contributions

Qualified contributions (including family contributions) to the HSA by an eligible individual are deductible from the eligible individual’s gross income. Employer contributions to an HSA are excludable from an employee’s income and are not subject to withholding for federal income taxes or for federal payroll taxes. Growth or earnings on the contributions are not taxable while held inside the account. Excess contributions may be subject to a 6% excise tax.

If contributions are not deducted via payroll, then an above the line tax deduction will be allowed at year’s end to calculate an individual’s adjusted gross income. The only downside would be that FICA taxes (~6.2%) are not refundable for purposes of an above the line HSA tax deduction.

Distributions From an HSA

Distributions from an HSA may be made at any time. Distributions used solely to pay for qualified medical expenses for the account owner, spouse, and dependents are excludable from gross income (tax free).

Qualified Medical Expenses

Qualified medical expenses are expenses (incurred after the HSA has been established) for “medical care.” This generally includes amounts spent for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body, to the extent not reimbursed by insurance (see HSA eligible expenses).

Taxation of Amounts Not Used for Qualified Medical Expenses Taxed

Any distribution from an HSA that is not used for qualified medical expenses is included in the income of the account owner and a 20% penalty is added. The 20% penalty does not apply if a distribution is made because of an account owner’s death, disability, or reaching the age 65.

No Longer an Eligible Individual

If an account owner is no longer an “eligible individual” (for example, becoming enrolled in Medicare or no longer being covered by a HDHP), the HSA may continue to be used solely for qualified medical expenses and continue to accrue tax-free.

Some useful HSA links:

• HSA Eligible Medical Expenses

• IRS Publication 969 which includes important tax information and FAQ’s

Limited Purpose FSA

If an FSA is used in conjunction with an HSA, then only dental and vision expenses are allowable while all medical expenses would have to be incurred through the HSA.

Dependent Care FSA

This vehicle allows you to be reimbursed for custodial or day care expenses for children that are tax dependents under the age of 13, or for a disabled adult tax dependent that lives with you.

The maximum tax exclusion allowable during the calendar year is $5,000* per individual or married couple. This amount could be reduced if: 1) You are married and file a separate return, the maximum you may elect is $2,500; 2) If your spouse earns less than $5,000, you may not elect more than your spouse earns; 3) If your spouse is a full time student or incapable of self care, the maximum election is $3,000 for one child or $5,000 for two or more children.

* With the onset of the American Rescue Plan Act in April 2021, the maximum allowable limit has been temporarily increased to $10,500 per household.

Sole proprietors, partners in an LLC, or S-corporation owners with a 2% or more shareholder interest cannot participate in an HRA per IRS guidelines.

An HRA must pass non-discrimation testing by one of the following two tests to be permissible by the IRS:

1. The 70% Test - At least 70 percent of eligible employees must benefit from the plan

2. The Fair Cross-Section Classification Test - HRA participants must represent a fair cross-section of the employee population. Both HCEs (High Compensated Employees - earning more than $130k annually) and non-HCEs must participate in the plan.