Did you enroll in an HDHP mid-year?

 If an individual becomes eligible for an HSA anytime on or before December 1^st of any year (last-month rule), they may contribute the full contribution maximum for that year as long as they meet the “testing period”.  The testing period states they must remain an eligible individual through December 31 of the following calendar year.    If the individual does not remain covered by HDHP during this “testing period,” the extra amount (i.e., the difference between the amount actually contributed and the pro-rated amount that would have been allowed) must be included in the individual’s income and will be subject to a 10 percent additional tax.

 Did you change coverage from single to family during the year?

 Individuals with changes in coverage type during the year (i.e. single to family coverage) may also take advantage of the last month rule.  For example, if an individual had single coverage during the year but switched to family coverage no later than December 1st, they would be eligible to contribute the family maximum for the tax year.  These individuals are still required to meet the testing period and must remain covered in a HDHP through December 31^st of the following year.

 However, if an individual is unsure or knows that they will not keep the HDHP coverage through December 31 of the following year, pro-rating the contributions based on the actual HSA eligibility remains a choice and may be the better option for the individual.

 For more information, see IRS Publication 969 (pages 5 & 6).

The 2012 tax year limits are:

Single Coverage:  $3,100

Family Coverage (2 or more people on your policy): $6,250

Catch up Contribution:  If you are age 55 or older at any time during the tax year, you may contribute an additional $1,000 to the numbers above.

The IRS  released their guidance on the recent changes to regulations regarding tax free HSA withdrawals. As of January 1, 2011, withdrawals (distributions)  from your HSA or Archer MSA to pay for medications are tax-free ONLY  if:

1. the medicine or drug requires a prescription,
2. it is an over-the-counter medicine or drug and the individual obtains a prescription, or
3. it is insulin.

If amounts are distributed from an HSA or Archer MSA for any medicine or drug which does not satisfy this requirement, the amounts will be considered “distributions for nonqualified medical expenses”, which must be included in your gross income and are subject to a 20% penalty. This change does not affect HSA or Archer MSA distributions made before January 1, 2011 for medicines or drugs , nor does it affect distributions made after December 31, 2010, for medicines or drugs purchased on or before  December 31, 2010.

• You must be covered by a qualified high deductible health plan on the first day of the month
• You cannot be covered by any other health plan that is not a qualified high deductible health plan, including spouse’s health insurance
• You cannot be covered by spouse’s Medical FSA
• You cannot be enrolled in Medicare Part A or Part B
• You cannot be covered by TriCare
• To make contributions you cannot have accessed your VA medical benefits in the past 90 days
• You may not be claimed as dependent on another person’s tax return

Please feel free to contact us if you have any questions about HSAs with Health Savings Administrators.

It is possible that the penalty for non-medical withdrawals from the HSA could increase from 10% to 20%. For most HSA owners this would be a non-issue.

And it is possible that the over-the-counter drug expense allowance would be repealed.

In any case, it appears that nothing will be done until September when Congress returns form its recess.

The maximum contribution that can be made to an HSA for  2010 and 2011  for employees with single coverage will be $3,050. The maximum HSA contribution for those with family coverage is $6,150.

Account holders age 55 or older may add $1,000 to the numbers above (each year)  as their catch-up contribution.

Additionally, the maximum out-of-pocket expense, including deductibles, that employees can be required to pay next year will rise to $5,950 for single coverage, and $11,900 for family coverage.

The minimum deductible of the high-deductible health insurance plan to which HSAs must be linked has increased to $1,200 for single coverage and $2,400 for family coverage.

The confusion stems from the label of “employer contributions.” Both the employee and employer contributions should be showing in box 12, code W.   IRS Publication 969, for tax year 2008 ( page 10)  indicates that contributions made by the employer via salary reduction are not included in the employee’s  income.  Contributions to an employee’s account by an employer using the amount of  an employee’s salary reduction through a cafeteria plan are treated as employer contributions.  Thus the total is displayed on the W2.

Therefore, the amount in Box 12 will include all of the employee payroll deductions and any employer money contributed. This is PRE-TAX money and gets reported on Form 8889 (required of all HSA account owners) as an EMPLOYER contribution (Line 9). Because there were no taxes deducted form this amount the employee/taxpayer cannot deduct it from gross income.

However, if the employee were to send money directly to the HSA, that amount would be reported on line 2 of Form 8889. The total of lines 2 and 9 cannot exceed the maximum annual contribution limits set by the IRS for the applicable tax year.

A friendly reminder to employees enrolled in the HSA informing them of the requirement to complete Form 8889, along with the explanation above, might reduce some of the questions directed to your HR department.

More info for the employees – Two tax forms will be sent to the employee/taxpayer, and to the IRS. The first is Form 1099-SA. This form is sent no later than January 31. Form 1099-SA tells you what distributions have been made from the health savings account during the calendar year. The amount in Box 1 of your 1099-SA will be reported on Form 8889.

The second form is Form 5498-SA. This form is sent out no later than May 15, but definitely after the tax filing deadline of April 15. Form 5498-SA cannot be sent any earlier because taxpayers have until April 15 to make contributions to the prior year’s HSA. This form included ALL contributions made between January 1 of the reportable tax year (e.g. 2008) and April 15 of the following tax year (e.g. 2009). Box 1 will be blank unless you have an MSA. Box 2 will have all the contributions to your HSA made in 2008, including any contributions made for 2007 in 2008. Do not report this on your Form 8889. Box 3 has the HSA contributions made in 2009 for 2008. Note that both boxes 2 and 3 may, or may not, match the amount reported on line 2 of Form 8889.

 Q-2. May an otherwise eligible individual who is eligible for Medicare, but not enrolled in Medicare Part A or Part B, contribute to an HSA?

 A-2. Yes. Section 223(b)(7) states that an individual ceases to be an eligible individual starting with the month he or she is entitled to benefits under Medicare. Under this provision, mere eligibility for Medicare does not make an individual ineligible to contribute to an HSA. Rather, the term “entitled to benefits under” Medicare means both eligibility and enrollment in Medicare.

Thus, an otherwise eligible individual under section 223(c)(1) who is not actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that individual is enrolled in Medicare.

Example (1). Y, age 66, is covered under her employer’s HDHP. Although Y is eligible for Medicare, Y is not ctually entitled to Medicare because she did not apply for benefits under Medicare (i.e., enroll in Medicare Part A or Part B). If Y is otherwise an eligible individual under section 223(c)(1), she may contribute to an HSA.  

Example (2). In August 2004, X attains age 65 and applies for and begins receiving Social Security benefits. X is automatically enrolled in Medicare. As of August 1, 2004, X is no longer an eligible individual and may not contribute to an HSA.  

Q-4. Is a government retiree who is enrolled in Medicare Part B (but not Part A) an eligible individual under section 223(c)(1)?

 A-4. No. Under section 223(b)(7), an individual who is enrolled in Medicare may not contribute to an HSA.

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