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November 15, 2019

An HSA & HDHP Refresher & Key Changes for 2020

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to individuals enrolled in high deductible health plans (HDHPs). An individual can use their HSA to pay for expenses covered under the HDHP until their deductible has been met or for qualified medical expenses that are not covered under the HDHP, such as dental or vision expenses.

HSAs provide a triple tax advantage; contributions, interest and earnings, and amounts distributed for qualified medical expenses are all exempt from federal income tax, Social Security/Medicare tax and most state income taxes. Due to an HSA’s potential tax savings, federal tax law includes strict rules for HSAs, including limits on annual contributions and HDHP cost sharing.

Get the details on the IRS’ 2020 inflationary adjustments related to HSAs here.

Potential Tax Benefits for Employers

  • Employee contributions are either tax-deductible or pre-tax (if made by salary reduction).
  • Employer contributions are excluded from gross income and are generally not subject to employment taxes.
  • Interest or earnings on amounts in an HSA are not includable in gross income while held in the HSA.
  • The taxpayer can receive tax-free distributions to pay for qualified medical expenses.

Employee Eligibility

An individual is eligible to establish and contribute to an HSA if he or she:

  • Is covered under an HDHP.
  • Is not covered by any other health plan that is not an HDHP (including coverage in a general-purpose health FSA solely as a result of unused carryover amounts from the prior year) except for certain limited types of coverage.
  • Is not enrolled in Medicare.
  • May not be claimed as a dependent on another person's income tax return.

Distributions

Distributions used exclusively to pay for qualified medical expenses of the employee, his or her spouse and dependents are tax-free. Any distribution amount not used exclusively to pay for qualified medical expenses is included in the employee's gross income and may be subject to an additional 20% tax.

Generally, qualified medical expenses are those expenses paid for "medical care" as defined in Internal Revenue Code Section 213(d). Health insurance premiums are generally not considered qualified medical expenses for HSA purposes, unless the premiums are for:

  • Qualified long-term care insurance. (Premiums are subject to limits based on age and are adjusted annually.)
  • Health care continuation coverage required by federal law, for example, COBRA.
  • Health care coverage while an individual is receiving unemployment.
  • Medicare and other health care coverage if the employee is 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

The types of treatments and services that constitute preventive care in relation to HSAs have been expanded. Learn what they are here.

HSA Limits and HDHP Minimum Changes for 2020

Maximum Contribution Limits for HSA – The employee, the employer or both may contribute. There are limits on how much can be contributed to an HSA each year. For 2020, the maximum contribution is $3,550 for self-only coverage or $7,100 for family coverage. The limit is increased by $1,000 for eligible individuals age 55 or older at the end of the tax year. Employer contributions made through a cafeteria plan are subject to the Section 125 nondiscrimination requirements. All other employer contributions are subject to the "comparability rules," meaning that the employer must make comparable contributions to all comparable participating employees’ HSAs.

Minimum Annual HDHP Deductible – For plan years beginning on or after Jan. 1, 2020, the minimum annual deductible is $1,400 for self-only coverage or $2,800 for family coverage.

Maximum HDHP Deductible & Other Out-of-Pocket Expenses – For 2020, the maximum deductible and other out-of-pocket expenses (excluding premiums) is $6,900 for self-only coverage or $13,800 for family coverage.

Further, non-grandfathered HDHPs must also apply the self-only cost-sharing limit for coverage of essential health benefits provided in network ($8,150 in 2020) to each individual covered under the plan, even if this amount is below the family deductible limit.

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