A Guide to Health Savings Accounts (HSA) Compliance for 2020
According to the Centers for Disease Control and Prevention (CDC), enrollment in high-deductible plans (HDHPs) with a health savings account (HSA) have increased from 4.2% to 18.9% between 2007 and 2017 among adults ages 18-64. Health savings accounts (HSAs) are a popular type of tax-advantaged medical savings account available to individuals enrolled in high deductible health plans (HDHPs). Individuals can use their HSAs to pay for expenses covered under the HDHP until their deductible has been met, or they can use their HSAs to pay for qualified medical expenses that are not covered under the HDHP, such as dental or vision expenses.
HSAs provide a triple tax advantage for consumers — 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.
As we approach open enrollment 2020, Rose & Kiernan, Inc. would like to go over key features of health savings accounts (HSA) compliance for 2020. Please also refer to our July blog on the expanded list of fully-covered preventative care benefits for HDHPs.
Updated 2020 HSA Contribution Limits and HDHP Cost-Sharing Limits
For plan years beginning on or after January 1, 2020.
2020 HSA 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 carry-over 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
2020 HSA Contributions
The employee, the employer, or both may contribute (family members or any other person may also contribute). Contributions can also be made through employee salary reductions under a cafeteria plan. 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.
2020 HSA Distributions
Distributions used exclusively to pay for qualified medical expenses of the employee and 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 percent tax. Generally, qualified medical expenses are those expenses paid for “medical care” as defined in Internal Revenue Code Section 213(d). Employees who cover dependents to age 26 under an HDHP may not use HSA fuds for reimbursement on a tax-free basis for an adult child’s medical expenses, unless the adult child qualifies as a tax dependent of the employee; the same rule applies for Domestic Partners – they are ineligible to use an employee’s HSA funds.
Of course, with HSAs, any balance of funds remaining at the end of the year are carried over to the next year, and since the employee is the owner of the account, HSAs are portable. Account owners may only contribute when enrolled in a HDHP, but may receive distributions from an HSA at any time for qualified medical expenses.
Other recommended resources for HSA compliance include the following:
- IRS Publication 969, Health Savings Accounts and Other Tax-favored Health Plans
- IRS Rev. Proc. 2019-25, which includes the inflation-adjusted HSA limits for 2020
This overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
To help determine if an HSA is the right option for you or for further clarification on HSA Compliance for 2020, contact the Employee Benefits Management Group (EBMG) at Rose & Kiernan, Inc. here or by calling (800) 242-4433.