This is page six of a Health Savings Account Handbook guide. Start with page one to understand all of the ins and outs of Health Savings Accounts (HSAs).
Contents
- Overview
- Tax breaks and ownership
- Contribution limits
- Eligibility and timing of contributions
- Family changes
- Moving funds between tax-advantaged accounts
- Contributions by others
- Penalties
- Summary
Overview
Your contributions to your Health Savings Account (HSA) come with some great tax benefits. They’re not subject to federal income tax, and in most states, they’re also exempt from state income tax. Plus, the government has set up some generous rules for HSA contributions:
- Anyone can contribute to your HSA, whether it’s your employer, a family member, or anyone else who wants to pitch in.
- Each year, the maximum amount you can contribute goes up a bit, adjusted for inflation.
- Even if you start your HSA partway through the year, you can still put in the full annual maximum amount, as long as you remain eligible for the next year.
- Rollovers and transfers from other accounts don’t count toward your annual contribution limit, though there are a few rules about how you can do this.
Tax breaks and ownership
You won’t ever have to pay federal income tax on the money in your HSA, whether you’re putting it in, letting it grow, or using it for qualified medical expenses.
Even if you’re contributing with taxable income (like if your HSA isn’t linked to your employer’s health plan), you can still deduct those contributions when you file your federal income taxes. This deduction lowers your taxable income, whether you itemize deductions or not.
While almost anyone can chip in to your HSA, only you and your employer get the tax perks. Other contributors can’t claim a tax deduction, but their contributions don’t count as taxable income for you.
If you’re putting money into an adult child’s HSA, you can’t deduct it, but it also doesn’t count as taxable income for them.
Employer contributions don’t impact your eligibility for the earned income credit (EIC).
If you’re self-employed or a 2% owner of an S corporation, you can’t get “employer” contributions to your HSA from your business. But you can make personal contributions and claim that above-the-line deduction on your federal income tax return, reducing your taxable income whether you itemize deductions or not.
HSA ownership
The money in your HSA is all yours, which means if your employer faces financial trouble or legal issues like bankruptcy or lawsuits, your HSA funds are protected. Your employer’s creditors can’t touch them.
However, in situations like personal bankruptcy or divorce, there might be different rules.
Any money you don’t use in your HSA doesn’t disappear at the end of the year—it rolls over. And if you leave your job or your employer changes health plans, you can still keep your HSA and continue using it.
Here’s another important point: your employer can’t take back any money they put into your HSA, except in rare cases like if they contributed by mistake or to the wrong person.
Example: Employee quits before end of the first year Taylor’s employer contributed $2,000 to his HSA on January 1 expecting that he would work through December 31. Taylor terminated his employment on May 3, but his employer may not recoup any portion of its contribution to Taylor’s HSA.
Example: Contribution applied to the incorrect employee Pete Snip’s employer contributed $2,000 to his HSA on January 1. However, the contribution was intended for Pete Snyp. Pete’s employer may fix the mistaken contribution, recouping it from Snip’s account and making the contribution to Snyp’s HSA instead.
Contribution limits
Every year, the IRS sets a limit on how much you can put into your HSA. This limit applies to all the money added to your HSA throughout the year, whether it’s from you, your employer, or anyone else. You’re allowed to contribute less than this limit if you prefer, but you can’t go over it.
| Individual | Family | Catch-up (over 55) | |
|---|---|---|---|
| 2021 | $3,600 | $7,200 | $1,000 |
| 2022 | $3,650 | $7,300 | $1,000 |
| 2023 | $3,850 | $7,750 | $1,000 |
| 2024 | $4,150 | $8,300 | $1,000 |
Example: Employer contributes to employee’s HSA Andre and Taneka, a married couple, have an HSA-qualified health plan with a family deductible of $3,500 effective January 1, 2022. Andre's employer contributes $85 per month to his HSA, for a total of $1,020 per year. Because Andre's HSA contribution limit is $7,300, he can contribute (or receive contributions from others) up to $6,280—though he can choose to contribute less than that, or even nothing at all.
Considerations related to age
55 and older
Individuals who are 55 years old or older have the option to make extra contributions to their HSAs, called catch-up contributions. If you’re 55 or older and have an HSA, you can add an extra $1,000 to your HSA each year on top of the regular contribution limit. This allows you to boost your savings as you approach retirement.
If both spouses are 55 or older, they can each make catch-up contributions, but they need to have their own individual HSAs to do so. This means that a married couple with two HSAs can collectively contribute an extra $2,000 per year towards their HSA savings.
Example: Married couple makes catch-up contributions Mik (56) and Alison (55), each have HSAs, and neither has Medicare coverage, so they can contribute a combined additional $2,000 ($1,000 each) to their individual HSAs for 2022 and 2023. If only Mik had an HSA, he could contribute an extra $1,000 as a catch-up contribution. Alison could also establish her own HSA and make a catch-up contribution to her account.
Enrolling in Medicare
Once you enroll in Medicare, you’re no longer allowed to contribute to your HSA. However, you can still use the money in your account for qualified medical expenses and manage your investments.
If you delay enrolling in Medicare, you can keep making contributions to your HSA, including catch-up contributions, as long as you meet the eligibility requirements, like having an HSA-qualified health plan and no other disqualifying coverage.
Mid-year HSA enrollment
If you open an HSA midyear while covered by an HSA-qualified health plan, you have options for contributions.
You can either prorate your contribution based on the number of months you’re eligible, or you can use the IRS full-contribution rule and contribute the maximum amount allowed for the year based on your age and coverage level.
Certain life changes, which will be discussed in the “Family changes” section later in this chapter, can also impact your contribution decisions.
Applying the full contribution rule
The full-contribution rule, also known as the last-month rule, allows individuals with HSA-qualified health coverage on December 1st of their tax year to contribute up to their full yearly maximum.
For instance, if someone becomes eligible for an HSA on December 1, 2022, and has family HSA-qualified health coverage, they’re considered to have had family coverage for the entire year of 2022 for contribution limit purposes.
This rule also applies to catch-up contributions for those aged 55 and older, regardless of whether they were eligible for the entire year or had disqualifying coverage for part of the year.
When you use the full-contribution rule to make HSA contributions, there’s a testing period. If you don’t keep your HSA-qualified health plan for the entire testing period (usually the following plan year), you might have to pay taxes and penalties for overcontributing to your HSA.
Examples: Using the full-contribution rule Chappie’s individual HSA-qualified health coverage starts on November 10, 2022. Because he has HSA-qualified health coverage by December 1, he can contribute $3,650 to his HSA, as if he had qualifying coverage for the entire year. Craig‘s coverage by an HSA-qualified health plan begins on November 30, 2022 but he waits until February 1, 2023, to open his HSA. The IRS allows account holders to make 2022 contributions until April 15, 2023, so Craig makes a lump sum contribution of $3,650 for 2022. He also starts contributing for 2023 by setting up regular payroll deductions. Elise joins her HSA-qualified health plan on December 2, 2022. She cannot make a full-year contribution for 2022, like Chappie and Craig, because she misses the December 1 deadline for having HSA-qualified health coverage. In fact, she cannot contribute for the month of December, because she must have an HSA-qualified health plan on the first day of the month in which she contributes to her HSA. She cannot make any contributions for the 2022 tax year and must wait until January 1 2023, to begin making contributions.
Adjusting the contribution proportionally
If you’re not sure whether you’ll keep your HSA-qualified health plan for the whole next tax year, it’s safer to contribute only for the months you’re covered this tax year.
To do this, divide the yearly maximum contribution by 12, then multiply by the number of months you have HSA-qualified coverage this tax year.
Example: Contributing a prorated amount Sparkes starts a new job in September and begins coverage as an individual in his company’s HSA-qualified health plan on October 1, 2022, but his assignment does not become permanent until the end of his company’s standard six-month probationary period. Sparkes wants to contribute as much as possible to his HSA, but has only three months left in the year, with no guarantee of employment and coverage by an HSA-qualified health plan in the coming year. Sparkes decides to prorate his contribution during his health plan enrollment in the current year. He divides his yearly maximum contribution by 12. $3,650 ÷ 12 months = $304.17/month He multiplies the prorated amount by the number of eligible months to determine the amount he can safely contribute without penalty in the event he does not have the opportunity to enroll in an HSA-qualified health plan next year. $304.17 x 3 months = $912.50
Testing period
According to the full-contribution rule, the testing period starts in the last month of your tax year and goes on until the end of the twelfth month after that month. For example, if your tax year ends on December 1, 2022, the testing period runs until December 31, 2023.
If you put money into your HSA following this rule, you need to stay eligible for HSA during the whole testing period.
If you become ineligible during this time (unless it’s due to death or disability), you’ll have to pay taxes on the extra money you contributed, along with a 10% penalty.
Here’s a simple way to figure out how much extra you contributed to your HSA:
- First, divide the maximum yearly contribution allowed by 12 to find out how much you can contribute each month.
- Then, multiply this monthly amount by the number of months you were eligible during the year when you followed the full-contribution rule.
- Finally, subtract this total from the amount you actually contributed. This difference is what the government will consider as extra income.
Example: Eligible for only part of the testing period Stephen, age 53, becomes eligible for an HSA on December 1, 2021, with family HSA-qualified health coverage. Under the full-contribution rule, he contributes $7,200 to his HSA for 2021. Stephen loses his eligibility in June 2022 when he drops his HSA-qualified health coverage. Because Stephen does not remain an eligible. individual during the testing period (December 1, 2021 to December 31, 2022), he must include the contributions made in 2021 under the full-contribution rule with his 2022 income, the year he became ineligible (not 2021, the year in which he made the excess contribution). Stephen uses the worksheet for line 3 of IRS Form 8889 instructions to determine this amount. January 0 February 0 March 0 April 0 May 0 June 0 July 0 August 0 September 0 October 0 November 0 December $7,200 Total for all months $7,200 Total for one month $600 Stephen includes $6,600 ($7,200 minus the $600 that was allowed for the one month he was eligible in 2021) in his gross income on his 2022 tax return. Also, an additional 10% tax ($660) applies to the $6,600 he over-contributed in 2021.
Example: Eligible for only part of the testing period Sixty-year-old Katie started a new job and enrolled in her HSA-qualified health plan and HSA on June 1, 2021. Because she plans to retire in five years, she wants to contribute as much as she can to her retirement accounts. She decides to take advantage of the full-contribution rule and contributes the maximum annual amount in her HSA ($3,600 + catch-up contribution of $1,000 = $4,600). Because her new job began on June 1, Katie had qualified health coverage for seven months in 2021. Katie needs to remain in an HSA-qualified health plan until December 31, 2022 to avoid taxes and penalties on the extra amount she contributes in 2021. Unfortunately, Katie’s employer lays her off in March 2022. Because Katie does not stay in her employer’s HSA-qualified health plan for the entire testing period (December 1, 2021 through December 31, 2022), she must pay income tax and a 10% excise tax on the amount she over-contributed in 2021. To calculate the amount that she must reclassify as taxable income, she divides the amount she contributed in 2021 by 12 to find the prorated monthly amount. $4,600/12 = $383.33 Then, she multiplies the monthly prorated amount by five to calculate the amount she overcontributed (for the five months she was not enrolled in an HSA-qualified health plan in 2021): 5 x $383.33 = $1,916.67 She prepares to add $1,916.67 to her adjusted gross income on her 2021 tax return and pay an additional 10% tax ($191.67) but finds out she doesn’t need to. By continuing her HSA-qualified health coverage under COBRA until December 31, 2022, she satisfies the testing period. In addition, the law allows Katie to use her HSA funds to pay the COBRA premiums. By purchasing COBRA coverage, she not only avoids additional tax and the penalty, but she also continues her health insurance coverage throughout the rest of 2022, even though she did not have a job. Her decision turned out well: she maximized her HSA balance and probably paid lower COBRA premiums, because HSA-qualified health plan premiums generally cost less than those for traditional low-deductible health plans.
Eligibility and timing of contributions
Eligibility determined monthly
The IRS checks your eligibility monthly.
- You need to be enrolled in an HSA-qualified health plan by the first day of the month to contribute to or use funds from your HSA that month.
- Unless you’re following the full-contribution rule, you can only put money into your HSA for the months you’re covered by an HSA-qualified health plan.
Contributions associated with the tax year
When it comes to reporting your HSA contributions for taxes, it’s all about the tax year, not when your health coverage starts or when your insurance plan kicks in.
For example, you can’t make contributions for the 2022 tax year before 2022 begins or after the tax year deadline, unless you get an extension.
Most people pay taxes based on the calendar year, meaning you can make HSA contributions anytime between January 1 of a year and Tax Day of the following year.
Even though your health coverage plan lasts for 12 months, your HSA contributions follow the tax year. So, you have the freedom to decide when to put money into your HSA throughout the tax year.
You can spread out your contributions or make them all at once. You and your employer can both contribute any amount at any time during the tax year, as long as the total contributions don’t exceed the legal limit.
Example: Front-loading the HSA early in the year Mark and Danielle learn that their first baby, due early in the year, may have a gastrointestinal defect that will require a multi-week stay in the neonatal intensive care unit (NICU). Their hospital requires that they pay the entire out-of-pocket maximum immediately upon their child’s birth. If they do not have enough money in their HSA at that time, they will have to make those payments with post-tax (non-HSA) dollars. Danielle works until a month before the baby’s due date. She and Mark decided to contribute her entire paycheck to their HSA, up to the 2022 limit of $7,300. After the baby’s birth, they pay their deductible and coinsurance from their HSA until meeting their out-of-pocket maximum, at which time their HSA-qualified health plan pays 100% of their remaining expenses. Mark compares their expenses with what they would have paid without the HSA. Considering premiums, coinsurance, deductibles, tax savings, and the interest they would have paid if they financed their portion of the bill with the hospital, they spent significantly less than they would have under their previous traditional, low-deductible PPO plan.
Multiple HSAs
If you happen to have more than one HSA, like if you open a new account with a different employer instead of transferring your old one, just remember this: the total amount you put into all your HSAs in a year can’t go over what the IRS says is the limit.
Family changes
Including a spouse or child
If you tie the knot, welcome a new baby, or adopt a child, your healthcare needs might shift. Thanks to a law called the Health Insurance Portability and Accountability Act (HIPAA), you can request your insurance plan to cover your new family members right away, even if it’s not the usual time for changes.
Enrolling a new spouse or baby in your plan
Sign up your new family members for insurance as soon as you can. When you switch from a plan just for you to one that covers your whole family, your HSA contribution limit goes up.
This change happens on the first day of the first full month after you get the family coverage that qualifies for an HSA.
You’ve got two choices: you can either increase your contributions for the year based on the time left, or you can put in the maximum amount for the whole year in one go, if you plan to stick with the family plan.
Stepchildren
You can usually include a stepchild in your employer’s health plan, even if you haven’t legally adopted them.
The key is that the child lives with you like a parent and you provide financial support. Some plans might ask you or your current spouse to claim the child as a dependent for tax purposes before adding them to the plan.
Adding a stepchild to your HSA-qualified plan might also let you boost your HSA contribution. When deciding how to cover a stepchild, think about what your plan offers and what options your spouse or partner has.
Spouse loses coverage
There are other life events that might mean switching from self-only to family coverage. If you have coverage just for yourself and your spouse loses their coverage, you might be able to switch to family coverage for your HSA without waiting for the usual enrollment period.
This change would affect your HSA contribution too, starting from the first day of the month when your spouse joins your HSA-qualified health plan.
Example: Spouse’s family coverage disqualifies the HSA Akon and Monica each have self-only coverage through their employers. Akon has an HSA-qualified health plan, while Monica has a traditional plan that does not qualify as an HSA-qualified health plan. Monica acquires custody of her daughter, Felicia, who comes to live with them. Monica wants to cover Felicia under her plan. However, her plan only offers self-only or family coverage. If Monica elects family coverage, Akon loses his HSA eligibility, because he has coverage under her plan—even if he doesn’t use it. If Akon’s plan offers self-plus-child coverage, it may save the family money if he covers Felicia under his plan.
When a spouse has an HSA-qualified health plan and an HSA
If both you and your spouse have individual HSA-qualified health plans, you can each open your own HSA and contribute up to the yearly maximum allowed for an individual.
If one spouse has family HSA-qualified health coverage and the other doesn’t have any disqualifying coverage, the IRS sees both of you as having family coverage for contribution limit purposes.
If both spouses have separate HSAs and family coverage under their own plans, you can divide the yearly contribution limit for families between you. You can split it equally or in any way you agree on, as long as your combined contributions don’t go over the yearly maximum. For 2022, the IRS caps family HSA contributions at $7,300, and for 2023, it’s $7,750.
Each spouse who is 55 years old or older (and not enrolled in Medicare) can add an extra $1,000 catch-up contribution, regardless of whether they’re in a family or individual HSA-qualified health plan, as long as they each have their own HSA. Some HSA providers might let you open another HSA without charging you extra fees.
Adult children
Adult children aging out
Once your child reaches 26 and moves from your health plan to their own, both you and your child can contribute to their HSA if they still have HSA-qualified health coverage. While they were covered under your plan, they could contribute up to the family maximum.
Once they have their own coverage, their contribution limit depends on whether they have self-only or family coverage. You can find more details about contributing to adult children in Page 5, “Opening an HSA.”
When you contribute to your child’s HSA, you use money that’s already been taxed. However, your contributions don’t count as taxable income for your child because they can claim the HSA contributions you make as an above-the-line income tax deduction.
Example: Adult child ages off parents’ HSA-qualified coverage Lena received coverage under her parents’ HSA-qualified health plan, but ages out. Her parents have not claimed her as a tax dependent for several years, but she has her own HSA to which she and her parents both contributed to reach the family limit of $7,200 for 2021. She begins coverage under her own, self-only HSA-qualified health plan beginning in January of 2022. She (and her parents, if they wish) can contribute toward Lena’s HSA, up to the self-only annual limit of $3,650.
Legal separation and divorce
Spouses cannot jointly own an HSA; each spouse must qualify individually to contribute to their own HSA. If a divorce or legal separation occurs, the court may decide to allocate part or all of an HSA owned by one spouse to the other as part of the settlement.
Switching from family to self-only HSA-qualified health coverage
If you previously contributed the maximum amount allowed for a family to your HSA and maintain your family coverage following a divorce or legal separation, there’s no risk of exceeding contribution limits.
However, if either you or your spouse had family coverage under an HSA-qualified health plan and switch to self-only coverage after the divorce, you might face income tax and penalties on any excess contributions.
It’s important to adjust your contributions accordingly to avoid over-contributing in the future. Consult your tax preparer for guidance on managing additional taxes and penalties related to potential excess contributions.
If you made a maximum yearly contribution for a family under the full-contribution rule, divorced mid-year, and changed your coverage to self-only, you’ll fail the testing period for eligibility under family coverage.
In this case, you’ll need to either return the excess contribution before the tax filing deadline or include the amount in your gross income and pay a 6% penalty on the excess. For more details about the testing period, refer to the “Testing period” section earlier in this page.
Avoiding excise tax
If you’ve contributed too much to your HSA, you can avoid paying the excise tax by withdrawing the excess contribution and any interest earned before the tax deadline. However, you’ll still need to pay income tax on the excess amount.
When you withdraw the excess contributions and interest earned, report them as “other income” on your tax return for the year in which you made the withdrawal. Keep in mind that some states may impose separate excise taxes.
For further details on returning excess contributions, refer to the “Penalties” section at the end of this page.
Example: Changing to single coverage during testing period Janelle enrolls with family coverage in her HSA-qualified health plan on October 1, 2021. Her husband, Jameson, a freelance cake maker, does not have his own insurance, so Janelle puts him on her plan. They have no children Although she enrolls in her HSA-qualified health plan late in the plan year, she can lawfully contribute on December 1, 2021, so she makes the maximum family contribution of $7,200 under the full-contribution rule. Janelle and Jameson divorce in September 2022. In the divorce settlement, Janelle keeps her HSA and changes her HSA-qualified health plan to self-only coverage. Although she fulfilled the testing period by remaining in an HSA-qualified health plan, she does not fulfill the testing period for family coverage. After the divorce, Janelle qualifies only for the maximum contribution for a single person under the full-contribution rule. To determine her excess contribution for 2021, she subtracts the maximum contribution for single-only coverage ($3,600) from the $7,200 family contribution: $7,200 – $3,600 = $3,600 When she calculates her 2021 taxes, Janelle adds the excess $3,600 to her adjusted gross income and pays an additional 10% tax on that amount because she failed the testing period for family coverage and the additional amount is not considered an excess contribution. In January 2022, Janelle makes a lump sum contribution of $7,300 thinking she will have family coverage all year. Because she is still eligible for family coverage on September 1, 2022, she can make nine months of family contributions. She divides $7,300 and $3,650 by 12 to get the prorated monthly contribution for family and single-only coverage. Family prorated monthly contribution: $7,300/12 = $608.33 Single-only prorated monthly contribution: $3,650/12 = $304.17 She multiplies the family monthly contribution by nine to calculate the amount of the family-level contributions she can make during 2022. Then she does the same for the single-level contributions for the three months after her divorce. She adds the two amounts to get her maximum allowable contribution for the 2022: $608.33 x 9 = $5,474.97 $304.17 x 3 = $912.51 $5,474.97 + $912.51 = $6,387.48 Then she subtracts the amount from the $7,300 she contributed to determine her excess contribution for 2022: $7,300 – $6,387.48 = $912.52 Janelle adds the $912.52 to her adjusted gross income on her 2022 return and pays the 6% excise tax for the excess contribution.
COBRA coverage for the divorced spouse
If you or your spouse have a family health plan that covers both of you, and you end up getting divorced, the spouse who isn’t covered by the employer’s plan might be able to buy COBRA continuation coverage under the other spouse’s plan. COBRA stands for Consolidated Omnibus Budget Reconciliation Act.
Divorce qualifies as an event for COBRA coverage. Those eligible may need to pay up to 102% of the employer’s cost of coverage for COBRA.
This coverage lasts for a limited period, usually from 18 to 36 months, depending on the reason for eligibility. In certain cases, the eligibility period may extend beyond 36 months if another qualifying event occurs during the COBRA eligibility period. For more details about COBRA, you can visit the U.S. Department of Labor website.
Moving funds between tax-advantaged accounts
Trustee-to-trustee transfers
Trustee-to-trustee transfers are when funds move directly from one trustee or custodian to another without you needing to handle the money yourself.
You can transfer money from other Health Savings Accounts (HSAs) or from Archer Medical Savings Accounts (MSAs) into your HSA if you own both accounts. However, you can’t transfer money from someone else’s HSA, even if it belongs to a family member like your spouse.
These transfers, which may include balances from previous tax years, don’t impact the contribution limits for the current year.
They follow similar rules to moving funds from one Individual Retirement Account (IRA) to another. You’re allowed to make unlimited trustee-to-trustee transfers within any 12-month period.
Rollover transfers
Rollovers involve moving funds from one Health Savings Account (HSA) or Archer Medical Savings Account (MSA) to another, but unlike trustee-to-trustee transfers, the funds are sent to you rather than directly to the trustee or custodian. You then have 60 days to deposit the funds into another HSA without facing taxes or penalties.
You’re only allowed to do one rollover within a 12-month period. Similar to trustee-to-trustee transfers, rollovers don’t count towards your annual contribution limits.
Example: Transferring an HSA to another bank or trustee Omarion has an HSA with $5,000 at Bank A and he wants to transfer the entire balance to an HSA at Bank B. He can roll over his HSA by withdrawing the balance from Bank A and re-depositing it into Bank B, but only if the two transactions occur within 60 days of each other. He also has the option of requesting a trustee-to-trustee transfer, in which Bank A sends the money directly to Bank B. Omarion may choose either of these options and still make contributions for that tax year, without having to consider the rolled over amount in his yearly limit calculations. However, if Omarion withdraws the money and does not re-deposit it or spend it on qualified medical within 60 days, a 20% penalty will apply, and he will have to pay income tax on the amount withdrawn.
IRA transfers
To contribute to their HSA, an account holder can make a one-time trustee-to-trustee transfer from a traditional or Roth IRA (Simple or SEP IRAs are not eligible). This transfer counts towards the annual contribution limit and cannot exceed the maximum allowed for the year.
The individual must maintain their eligibility throughout the entire 12-month testing period following the month of the transfer. If they become ineligible during this period, the transferred amount is treated as income for tax purposes and incurs an additional 10% penalty.
Contributions by others
Spouses
HSAs are individual accounts, meaning they are not shared between spouses. Even if a husband and wife work for the same employer and have the same health coverage, they each have their own separate HSAs and contributions.
For married couples where both spouses qualify for HSAs, different rules apply based on their coverage:
- If one spouse has family HSA-qualified health coverage (covering dependents) and the other spouse has self-only coverage, the IRS considers them as having one family health plan for contribution limit purposes.
- If each spouse has family coverage under separate plans, they can together contribute up to $7,300 in 2022 ($7,750 in 2023). They usually split the contributions equally but can decide on a different division.
- If both spouses are 55 or older, each can make a $1,000 catch-up contribution. If both qualify, the total contributions under family coverage cannot exceed $9,300 in 2022 or $9,750 in 2023. Each spouse must make their catch-up contribution to their own HSA.
Example: A married couple both have family coverage Darrell, age 59, and Alice, age 53, are married and each have family coverage under separate HSA-qualified health plans. Because both plans provide family coverage, Darrell and Alice can together contribute the $7,300 family maximum for 2022. They decided to split the contribution equally, so Darrell contributes $4,650 to his HSA (half of $7,300, plus a $1,000 catch-up contribution). Alice can contribute only $3,650 to her HSA (half of the $7,300 annual maximum for a family). Because she is only 53, she cannot make a catch-up contribution. Darrell and Alice can agree to contribute different amounts, but their total annual 2022 contributions cannot exceed $8,300 ($7,300 + $1,000) and Alice’s total contribution cannot exceed $7,300.
Example: A married couple both have self-only coverage Ben, age 35, and Jane, age 33, are married. Each has self-only HSA-qualified health coverage, and each has an HSA. Ben can contribute $3,650 to his HSA in 2022, and Jane can contribute $3,650 to hers. The same limits apply—whether Ben and Jane work for different employers, one is self-employed and one is an employee, or both are self-employed.
Example: Only one spouse has qualifying coverage Damon and Sarah are married. Damon’s employer offers an HSA-qualified health plan. Sarah’s employer offers a traditional PPO plan that does not meet eligibility requirements for an HSA-qualified health plan. Sarah chooses family coverage, covering Damon under her non-qualifying plan. Damon may not contribute to an HSA because Sabrina’s traditional plan covers him whether or not he uses the coverage. However, if Sarah elected coverage under her plan solely for herself, or for herself and their children, Damon could participate in his employer’s HSA-qualified health plan and contribute to his own HSA.
Example: One spouse eligible to contribute to HSA Eric, age 65, and Freya, age 56, are married. When Eric turned 65, he enrolled in Medicare. Eric and Freya have separate HSAs, each with self-only coverage. Eric can no longer contribute to his HSA, but he can continue to use the funds in either his account or Freya’s to pay qualified medical expenses for either himself or Freya — though they cannot use Freya’s HSA to pay Eric’s Medicare premiums because she has not yet reached age 65. Freya has an HSA-qualified health plan, so she can contribute up to $3,650 to her HSA in 2022 ($3,850 in 2023), plus a catch-up contribution of $1,000 each year, because she is over 55.
Example: Simultaneous family and single coverage Kristof and Izzy are married. Because he has young children from a previous marriage, Kristof has family coverage under an HSA-qualified health plan with a $5,000 deductible. Through her employer, Izzy has self-only coverage under an HSA-qualified health plan with a $2,000 deductible. Because one spouse has family coverage under an HSA-qualified health plan that could potentially cover the other spouse, the IRS treats them as if they both have family coverage. They can contribute up to $7,300, the family limit for 2022, between the two of them, even though logic might suggest that Kristof could make the maximum family contribution and Izzy could also contribute, up to the maximum self-only limit. They file separate tax returns. Because she has no children of her own to claim as dependents like Kristof does, they determine that they could save the most on taxes if Izzy makes a larger contribution to her HSA. They decide that Izzy will contribute 75% of the yearly maximum ($5,475), and Kristof will contribute 25% ($1,825) to his.
Business entities
Typically, self-employed individuals and those affiliated with certain entities might not be able to make pre-tax contributions to their HSAs. They may only qualify for business tax deductions in some cases.
The specifics can vary widely depending on the type of entity and individual circumstances. It’s best to seek advice from a tax advisor to understand the rules that apply to your particular situation.
Individuals or sole proprietors
Tax regulations treat sole proprietors similarly to individuals making personal HSA contributions.
They can deduct their own HSA contributions and health insurance payments from their personal income taxes.
However, unlike employers contributing to their employees’ HSAs, sole proprietors don’t receive a business-related tax deduction.
Consequently, they can’t list contributions to their HSAs as business expenses on Schedule C because these contributions aren’t related to the proprietor’s trade or business.
Also, the contribution amount doesn’t affect the calculation of net earnings from self-employment on Schedule SE.
Nonetheless, contributions made by the business to its employees’ HSAs qualify as deductions for Schedule C.
Partnerships and multiple-member LLCs
When a partnership makes contributions to a partner’s HSA for services provided, it’s treated as a distribution of money to the partner, not as an employer contribution to an employee’s HSA.
These contributions are considered guaranteed payments, which increase the partner’s gross income.
However, the partner can deduct the amount as an above-the-line deduction on their federal income tax return. Additionally, the partnership itself may deduct these contributions.
S corporations
Contributions by an S corporation to the HSA of a 2-percent shareholder-employee in exchange for services provided are treated as guaranteed payments by the IRS.
This means the S corporation can deduct these contributions, but they must also be included in the individual’s gross income. The shareholder-employee can deduct these contributions on their personal income tax returns.
Since the law treats 2-percent shareholder-employees similarly to self-employed individuals, the rules regarding guaranteed payments for partners apply here as well. (Refer to the previous section for more details.)
Single-member LLCs are treated in the same way as sole proprietorships for tax purposes.
Penalties
Contributions beyond the allowable limit
Excess contributions occur when you deposit more money into your HSA than the IRS allows for a given year. If this happens, you’re responsible for paying income tax on the excess amount, plus a 6% excise tax penalty. Even if your employer’s contribution caused the excess, you’re still liable for the taxes.
To avoid the penalty:
- Withdraw the excess contributions by your tax return’s due date for the year you made them (e.g., April 15, 2022, for 2021 contributions).
- Withdraw both the contributions and any earnings they generated. Report the earnings as “other income” on your tax return.
Keep in mind that while you can dodge the excise tax, you might still owe income tax on the excess amount.
Testing period failures
If you utilized the full-contribution rule to deposit the maximum amount for a whole year into your HSA but failed to meet the testing period, you might face a 10% penalty.
Additionally, you’ll owe income tax on the excess amount.
If you discover before the tax deadline that you won’t meet the testing period criteria, you can withdraw the excess contribution along with any earnings, following the steps outlined in the previous section.
Calculating penalties
If you become ineligible after the tax filing deadline of the previous year, refer to the instructions in the “Testing period” section earlier in this chapter to figure out the excess contribution amount. To ascertain your tax responsibility, download IRS Form 5329 from www.irs.gov and complete the worksheet provided.
Summary
You can contribute to your HSA using pre-tax wages or after-tax money that you later deduct from your federal income taxes. Regardless of how you contribute, these amounts are not taxed as income.
- Contributions can come from you, your employer, your family, or anyone else, but they all count toward the annual limit, which can change each year. Families typically have a higher limit than individuals.
- Going over the annual contribution limit, even if it’s due to an employer’s contribution, usually results in a 6% excise tax, in addition to paying income tax on the excess amount.
- To maximize savings, plan contributions carefully and keep track of progress towards meeting your deductible.
- The full-contribution rule lets you contribute the entire allowed amount to your HSA if you open it before December 1st of the tax year. But if you use this rule and become ineligible during the following year, you’ll owe income tax plus a 10% excise tax on the excess.
- Life events like marriage, divorce, having a baby, or changing jobs can affect your coverage needs. Make enrollment changes promptly after such events, usually within 30 days.
- Having a Health Reimbursement Arrangement (HRA) or Flexible Spending Account (FSA) typically makes you ineligible to contribute to your HSA. However, there are HSA-compatible versions of these accounts available.