Basics of the HSA, Health Savings Account
An HSA, Health Savings Account, is an account owned by a qualified individual that can be an employee or former employee of a business. Contributions by the owner of the company to the HSA become the property of the account owner. Contributions to the account are used to pay current or future medical expenses of the account owner, their spouse, or dependents. Payments of medical expenses out of the account can only be made for expenses not reimbursable by insurance or other sourcesi.
Eligibility for the HSA
The HSA qualified individual must be covered by a HDHP, High Deductible Health Plan, and cannot be covered by other health insurance except for:
- Insurance for accidents, disability, dental care, vision care, or long term care.
- For plan years beginning on or before December 31, 2021, telehealth, and other remote care.
For calendar year 2022, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage and $2,800 for family coverage. There are no income limits restricting an individual’s contributions, nor or they required to have earned income to make the contribution.
Exceptions to HSA Qualification
If a person can be claimed as a dependent on another person’s return, they would not be a qualified individual for the HSA. A person would also generally be disqualified if they are a member of a health FSA or health reimbursement arrangement (HRA). However, an individual may qualify to participate in an HSA if the individual is participating only in a limited purpose FSA or HRA.
HSA Employer Contributions
Up to specified limits, cash contributions to a qualified individual’s HSA are exempt from federal income tax withholding, social security taxes, Medicare tax, and FUTA tax. For 2022, the contribution can be up to $3,650 for an individual HDHP or $7,300 for a family. The contribution limit is increased by $1,000 for individuals over 55 years of age.
Nondiscrimination
Contribution amounts for all employees must be comparable for those having comparable coverage during the same period. Violations will result in an excise tax equal to 35% of the amount you contributed to all employee’s HSAs.
Contribution Exceptions
The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for employees considered as non-highly compensated. This would be employees who do not meet one of these conditions:
- The employee was a 5% owner at any time during the year or the preceding year.
- The employee received more than $130,000 in pay for the preceding year.
The second test of pay amount can be ignored if the employee was not in the top 20% of employees when ranked by pay for the preceding year.
Partnerships and S-Corporations
Partners and 2% shareholders of an S-Corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. Contributions for those participants are treated as distributions or guaranteed payments as determined by the facts and circumstances.
This is a broad big-picture overview of some complex legal issues. This information can help you to begin a discussion with your tax advisors to determine if Health Savings Accounts are right for your business.
i Employers’ Guide to Fringe Benefits – IRS.gov