Whether you currently offer your employees a qualified high deductible health plan (HDHP) with a health savings account (HSA) or may be considering offering one at your next renewal, here are some commonly asked questions and answers about how to administer these plans:
Q. Can HSAs be offered with any type of health plan?
A. Health Savings Accounts (HSAs) can only be offered if paired with a qualified high deductible health plan (HDHP). In order to be considered qualified, the plan must have at least a single deductible of $1,300 and a family deductible of $2,600 with a maximum out-of-pocket of $6,550 for single coverage and $13,100 for family coverage. Qualified plans may not have any cost sharing, including copays, for any services received prior to the deductible being satisfied, except for preventive services, which are covered at 100% in network.
*Please note that in 2018 the minimum deductible is increasing to $1,350 single / $2,700 family and the maximum out-of-pocket is increasing to $6,650 single / $13,300 family.
Q. Can anyone that participates in a qualified HDHP open an HSA?
A. In addition to being enrolled in a qualified HDHP, in order to be eligible to open and contribute to an HSA:
- An individual may not also be enrolled in a non-qualified health plan. This includes Medicare Parts A and B, Medicaid, traditional copay plans through a spouse and VA plans;
- An individual may not be claimed as a dependent on someone else’s tax return; or
- Neither an individual nor their spouse may be enrolled in a standard Flexible Spending Account (FSA)
Q. Are there limits on what can be contributed into an HSA?
A. The IRS provides HSA contribution limits each year. The current contribution limits are $3,400 single and $6,750 family. The IRS has increased the amounts to $3,450 single and $6,900 family for 2018.
In addition, employees age 55 and older are able to contribute an additional $1,000 per year, known as a catch-up contribution. This amount will remain at $1,000 for 2018.
Q. Does the company own the HSA bank account?
A. HSAs are individually owned savings accounts. Employers may choose to contribute to an employee’s HSA and/or allow employee contributions through payroll deductions, but employers have no ownership rights over the funding that is deposited into an employee’s HSA or the management of the employee’s HSA. HSAs are portable so if an employee changes jobs or becomes unemployed they take their HSA with them, including all funds deposited into the HSA.
Q. Do HSA contributions have to go through payroll?
A. Employers can opt to make pre-tax contributions to their employees’ HSAs through a Section 125 cafeteria plan, as well as allow employees to make additional pre-tax account contributions through payroll deduction, but this is not required.
Q. Do employers need to contribute to an employee’s HSA if it is running through payroll?
A. Employers can opt to make pre-tax contributions to their employees’ HSAs through a Section 125 cafeteria plan, but this is not required, even if employers are allowing employees to make their own pre-tax account contributions through payroll deduction.
Q. What happens to employer contributions if an employee leaves?
A. HSAs are individually owned savings accounts and any money in the employee’s HSA is 100% vested as soon as it is deposited. Because HSAs are portable, employees keep their HSAs if they change jobs or become unemployed, including all employer and employee funds deposited into the HSA.
Q. Can an employee hired in the middle of the year contribute the maximum amount for that year?
A. Under the IRS “last-month rule”, if an individual is eligible on the first day of the last month of their tax year (December 1 for most taxpayers), they are considered an eligible individual for the entire year and are treated as having the same HDHP coverage for the entire year that they had on the first day of the last month. This allows an employee to contribute up to the annual maximum for a year even if they enroll later that same year, provided they retain their HDHP coverage through the end of the following year.
Per IRS rules, if an employee makes contributions to their HSA based on the last-month rule, the employee must remain an eligible individual during the testing period, which is typically the twelve months of the following calendar year. Failing to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, means the employee will have to include in income the total HSA contributions made that would not have been made except for the last-month rule. This amount is also subject to a 10% additional tax.
Q. Can an employee change their HSA contribution amount during the year?
A. Employees can change HSA contribution amounts at any time during the plan year. If employers are allowing contributions via payroll deduction on a pre-tax basis, employers can set reasonable limits on how often those contribution amounts can change.
Q. Are there any HSA restrictions for owners?
A. Self-employed, partners and S corporation shareholders are not generally considered employees and cannot receive pre-tax employer contributions to their HSAs. Employees of a C corporation are typically free to make pre-tax contributions to their HSAs and receive non-taxable employer HSA contributions. (note that the cafeteria plan must satisfy applicable nondiscrimination testing)
Q. Are HSAs subject to ERISA?
A. In general, according to the Department of Labor (DOL), HSAs do not generally constitute “employee welfare benefit plans” under ERISA as long as the establishment of the HSA is completely voluntary on the part of the employee and the employer does not prevent the employee from moving their funds to another HSA, impose conditions on how the funds can be used, influence the investment decisions made, represent that the HSA is an employee welfare benefit plan established or maintained by it, or receive any payment or compensation in connection with the HSA.
Q. Are employer contributions to employee HSAs included as income
A. Employer contributions to an employee’s HSA are excluded from the employee’s income.
Q. Are there income requirements for having an HSA?
A. There is no earned income requirement or income limits for employees to have an HSA.
Q. Do employers need to continue providing employer HSA funding to COBRA enrollees?
A. Whether or not an employer is paying the COBRA premium for the qualified HDHP for an employee with an HSA, they do not have to continue making deposits into the HSA.
Q. Can employees use HSA funds to pay their health plan premiums
A. Employees may not pay their company health plan premiums with HSA funds. The only time an individual is allowed to pay the health insurance premium with HSA funds is when the individual is collecting Federal or State unemployment benefits or is on COBRA, Long-Term Care (limited) or Medicare.