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— Background —

Health Savings Accounts (HSAs) are special savings accounts that enable qualified participants to pay for current health expenses or save for medical and retiree health expenses on a tax-free basis.  HSAs were created as part of the Medicare reform legislation that was signed into law on Dec. 8, 2003. Section 303 of the Health Opportunity Patient Empowerment Act of 2006 changed the maximum contribution for HSAs to allow the indexed statutory amount, without reference to the High Deductible Health Plan (HDHP) deductible.

— Eligibility Rules and Requirements —

The accounts are available to individuals who are covered by a HDHP with no other non-HDHP insurance coverage (excluding injury-specific insurance, dental care, disability, vision care, or long-term care).  Eligible individuals also may not be enrolled in Medicare or be claimed as a dependent on someone else’s tax return.

What is a High Deductible Health Plan?

An HDHP is a health insurance plan with a minimum deductible of $1,400 for self-only coverage and $2,800 for family coverage for the calendar year 2021.

What are the advantages of Health Savings Accounts?

HSAs encourage participants to save for future medical expenses and are completely owned by the participant, not the employer.  The accounts empower participants to take full advantage of investment opportunities that can be used to increase the amount of money that will be available in the account to pay for medical expenses.  HSAs benefit from favorable tax treatment.  The money invested in an HSA also rolls over year after year.

Who Can be a HSA Trustee or Custodian?

HSA trustees or custodians can be banks, credit unions, insurance companies, and entities that have been approved by the Internal Revenue Service (IRS) to be an Individual Retirement Account (IRA) or Archer MSA trustee or custodian.  Other entities can apply to the IRS in order to be approved as a non-bank trustee or custodian.

What is the HSA Safe Harbor Provision?

HSAs include a safe harbor provision that enables participants to take advantage of a number of services including periodic health evaluations, screening services, routine pre-natal and well childcare, child/adult immunizations, tobacco cessation programs, and obesity weight-loss programs.  Participants can use these services without violating the HSA’s minimum deductible requirements.

— Contribution Guidelines —

Contributions to HSAs can be made by employees and their employers.  If a contribution is made by the employer, it is not taxable to the employee (excluded from income and wages).

If a contribution is made by the individual, it is an “above-the-line” deduction. IRS rules will allow employees to make a one-time tax-free transfer of funds from an individual retirement account (IRA) to an HSA.  Employees also will not have to pay a 10% additional tax if they use their IRA funds to pay for medical expenses.1

Contributions can also be made by others on behalf of the individual and deducted by the HSA account holder.

The U.S. Treasury Department and IRS in Revenue Procedure 2016-28 list the indexed amounts, adjusted for inflation, for HDHPs and HSAs.

The following table lists the 2020 and the 2021 amounts.

 

Contribution and Out-of-Pocket Limits 
for Health Savings Accounts and High-Deductible Health Plans
2021 2020 Change
HSA Contribution Limit 

(employer + employee)

Self-only: $3,600
Family: $7,200
Self-only: $3,550
Family: $7,100
Self-only: +$50
Family: +$100
HSA Catch-up Contributions 

(age 55 or older) *

$1,000 $1,000 No change**
HDHP Minimum Deductibles Self-only: $1,400
Family: $2,800
Self-only: $1,400
Family: $2,800
Self-only: No change
Family: No change
HDHP Maximum Out-of-pocket Amounts 

(Deductibles, co-payments and other amounts, but not premiums)

Self-only: $7,000
Family: $14,000
Self-only: $6,900
Family: $13,800
Self-only: +$100
Family: +$200
*Catch-up contributions can be made by HSA-eligible participants age 55 and older.
**Unlike other limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.

(Source: 2021: https://www.irs.gov/pub/irs-drop/rp-20-32.pdf

There also is a funding strategy for HSAs, known as hybrid financing.  Under this strategy, the employer pays 100 percent of an HDHP for each of his or her employees and gives each employee a defined cash allowance each month, and the employee can decide how to use that cash.  An employee can put it into their HSA and save for future health expenses or use it to purchase a better health plan.

Revenue Procedure 2021-37, issued September 1, 2021

HSA Distributions

Distributions from HSAs are tax-free if taken for “qualified” medical expenses, including over-the-counter drugs, but generally not for insurance premiums.  Individuals who use their HSA funds for non-medical purposes will be penalized with an additional 20% tax, unless he/she dies, becomes disabled, or becomes eligible for Medicare.  Distributions from an HSA can be used to pay for medical expenses from prior years if the expenses were incurred on or after the date the HSA was established.

Estate Treatment of HSAs

If the participant was married, his/her spouse inherits the HSA and is treated as the owner.  If the participant was not married, the account will no longer be treated as an HSA and will be taxable to the recipient.

— Other Resources —

  • Please click here for more information about Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans

For More Information —

If you need additional information, please contact NJBIA’s Member Action Center at 1-800-499-4419, ext. 3 or member411@njbia.org.

 

This information should not be construed as constituting specific legal advice. It is intended to provide general information about this subject and general compliance strategies. For specific legal advice, NJBIA strongly recommends members consult with their attorney.