A Potpourri of HSA Guidance
Three pieces of HSA guidance were recently issued by IRS and Treasury Department in the form of IRS Notices. The first piece of guidance includes new 42 formal questions and answers about HSAs; the second piece of guidance relates to the annual maximum HSA contribution; and the third relates to a one-time IRA rollover to an HSA.
Questions Answered by IRS Officials
The IRS and Treasury have issued a variety of official questions and answers (Notice 2008-59) relating to health savings accounts (HSA). This Guidance is divided into the following subjects:
- Eligible Individuals
- High deductible health plans
- Prohibited Transactions
- Establishing an HSA
Following are some highlights from this Guidance:
Generally, an employer contribution to an HSA is immediately fully vested, and the employer cannot re-coup the contribution under any circumstances. This Guidance illustrates two instances in which the employer can recover a mistaken contribution:
- Accountholder Ineligibility
- If an employer makes an HSA contribution to an individual’s account, and if the individual is not HSA-eligible, the employer can recover the contribution based on the theory that an HSA never existed. The employer can recover the contribution by advising the account trustee of the mistake and asking for reimbursement. If this is not accomplished by the end of the tax year, the employer must show the mistaken contribution as taxable compensation on the employee’s Form W-2.
- Employer contribution when an individual becomes ineligible. If an individual is HSA-eligible, but later becomes HSA-ineligible, employer contributions made after the individual becomes ineligible cannot be recovered by the employer.
- Excess Contributions. If an employer mistakenly makes a contribution in excess of the HSA statutory limit (see2009 HSA Cost of Living Adjustments from the June ’08 edition of Benefit Beat), the employer can re-coup the excess, as described above; or if this is not accomplished by the end of the tax year, the excess amount would be reflected on the individual’s Form W-2. Important note: If the employer mistakenly makes a contribution in excess of what the employer intended to make, but the contribution is not in excess of the statutory limit, then no refund would be available.
HSA Account Establishment
Medical expenses can only be reimbursed from an HSA after the date the HSA (not the high deductible health plan, “HDHP”) is established. The establishment date for the HSA, as clarified by this Guidance, is the date determined by state trust law. Many, if not most, state laws require that for a trust to exist, the trust must hold ‘some asset’. If this is the case, the HSA will not be deemed established until some amount of money is contributed to the HSA.
Generally, if more than one HSA is established, or if amounts are rolled from one HSA or medical savings account, to another HSA, the HSA establishment date is the original date. This is true even if there is a zero balance in the HSA, as long as the zero balance is no longer than 18 months before the establishment of a subsequent HSA.
This Guidance makes clear that a prohibited transaction would occur if a loan or extension of credit occurs between the trustee and the HSA. It would also be a prohibited transaction if an HSA is used as security for a loan. A prohibited transaction would result in disqualification of the HSA, distribution of the account balance, and assessment of taxes and penalties.
Qualifying Other Coverage
This Guidance clarifies that:
- On-site health clinics, or health discounts, will not disqualify an individual from being HSA-eligible, as long as the on-site health clinic or discount provides only preventive care, and certain other kinds of care, but no significant medical services. If the alternative services provide significant medical services, it would disqualify the individual from being HSA-eligible.
- So-called “mini-med” type plans that provide a fixed dollar amount for medical services, such as office visits, are HSA-disqualifying.
- A health reimbursement account can reimburse the premium for the HDHP without disqualifying the individual from being HSA-eligible.
- An employer cannot directly or indirectly reimburse expenses, other than permitted expenses, such as dental and vision benefits, below the statutory minimum deductible. The employer can, for example, through a health reimbursement arrangement (HRA) or flexible medical spending account (FSA), reimburse expenses between the statutory minimum deductible and the HDHP deductible.
This Guidance clarifies that:
- If both spouses are eligible for the aged-55 catch-up contribution, each spouse’s contribution must be made to his/her own account. A spouse cannot make a catch-up contribution to the other spouse’s account.
- Medicare premium, such as for Medicare Part D, can be reimbursed from an HSA account, but only after the account holder has reached age 65. The account holder must have attained that age in order for the spouse’s Medicare premiums to be reimbursed as well, according to this Guidance.
- An employer can make a contribution anytime prior to the tax filing due date, without extensions (April 15th). If the employer contribution is made in Year 2 (January to April), but is intended as a Year 1 contribution, the employer must advise the HSA trustee, as well as the account holder, that the contribution is for Year 1. The amount would be reflected on the Year 2 Form W-2, and an adjustment would be made on the Form 8889.
The Guidance gives several examples of how premium credits can be given when an individual moves from family coverage to individual coverage. In summary, as long as it is consistent with state insurance law, premium credit can be given for actual expenses incurred, or on a per capita basis.
Annual Maximum HSA Contributions
In 2006, the Tax Relief and Health Care Act of 2006 changed the maximum that can be contributed to an HSA from the ‘lesser of the deductible amount and a statutory figure’, to a statutory figure. For 2008, the statutory maximum that can be contributed to an HSA for an individual is $2,900 and for family is $5,800 (in 2009, these figures will be $3,000 and $5,950, respectively). The law was also changed to provide that if an individual is HSA-eligible on the 1st day of the last month of the tax year (for calendar-year taxpayers, this would be December 1st), then the individual could make a full HSA contribution for that year. To remain entitled to the contribution, the individual is required to remain HSA-eligible for the following 12 months (in the case of a calendar-year taxpayer, this would be for the entire next calendar year).
The guidance(IRS Notice 2008-52) lists 15 examples of how the maximum is calculated. It is important to note that if an individual is HSA-ineligible on the last day of the tax year (December 1st for calendar-year taxpayer), then the individual’s HSA contribution for that year is limited to a pro-rated amount, based upon the number of months the individual was actually HSA-eligible.
IRA Rollover to HSA
The law allows a one-time rollover from an IRA to an HSA (seeChanges Ahead for HSAs from the February ’07 edition of Benefit Beat). Notice 2008-51 spells out some of the requirements for accomplishing an IRA-to-HSA rollover.
First of all, the rollover is only permitted from an IRA or Roth IRA, not from a SEP IRA, a SIMPLE IRA, or any other retirement vehicle.
Only one IRA rollover to an HSA is permitted.
If an individual wants to roll over money from more than one IRA, the individual would have to combine the IRAs into a single IRA, before the transfer to the HSA occurs. The only exception to this rule is if, during a single tax year, an HSA individual moves from individual to family HDHP coverage. In this instance, if an individual makes an IRA to HSA rollover, based on individual HDHP coverage, and later, in that same tax year, has family HDHP coverage, then the individual can make an additional IRA rollover, up to the family statutory limit.
Once the IRA rollover to an HSA is accomplished, the rollover amount is counted toward the annual maximum HSA contribution; it does not increase the annual maximum that can be contributed to the HSA.
For the rollover to be valid, the individual must remain HSA-eligible until the end of the 12th month, following the month in which the rollover occurs.
The rollover must be a direct transfer from the IRA to the HSA; though, it is permissible for the IRA to issue a check to the HSA.
IRA rollovers to HSAs are only available through December 31, 2011.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.