HSAs: Tax Time Considerations and Portability

As the flurry of benefits changes and deadlines continues, make sure that Health Savings Account (HSA) holders are aware of this year’s changes, contribution options and HSA portability.

Employees with HSAs will need to be aware of the following information to make the most of the deadline extension:

HSA holders who have not yet filed their 2019 income taxes may still contribute to last year’s HSA until July 15. Contributions must have POSTED to the account by July 15.
The benefit to contributing to the 2019 HSA is to reduce their overall taxable income and continue to build their savings.
Additional contributions made outside of payroll deductions are considered “post-tax,” so the funds are outside of the annual election amount determined by the employee. However, any contributions to the HSA will still reduce the total taxable income for the employee.
Ad hoc or post-tax contributions can usually be made using the online HSA platform or by calling the HSA provider. In order to receive credit for these contributions, the amount must be reported on Form 8889, as it will not be recorded on W2 for the employee already received.
Any contributions made to the HSA for 2019 should still fall within the total contribution limits for 2019, which were $3,500 for individuals and $7,000 for family coverage. Individuals 55 and older may make additional annual catch-up contributions of up to $1,000 to help grow their accounts. These limits include the total of all contributions from the employer, the employee or any other contributors.
HSA reimbursements or distributions for qualified medical expenses will not incur any tax penalties; however, if money was used for ineligible expenses, the account holder may have to pay additional income tax and a 20% penalty on those distributions. Account holders should be encouraged to keep receipts and documentation for all disbursements to demonstrate that funds were used for eligible expenses.

HSAs and Portability

As an individually owned account, the HSA belongs to the employee regardless of termination, leave of absence or furlough situation. There are a few considerations to remind HSA holders of during any of these life events.

Unpaid Leave of Absence (LOA) or Furlough:

Contributions: If the employee is still covered by a high deductible health plan (HDHP), both the employee and employer can still make contributions to the HSA. Employers may suspend contributions based on their LOA policy. Employees can still make post-tax, ad hoc contributions or they can suspend contributions.
Maintenance and account closing: Some HSAs will automatically close if a contribution has not been made for a specified period (which varies by plan design). Additionally, if the employee wants to maintain an active HSA, they may need to pay the monthly administrative fee, which is typically a few dollars per month.
Return to work: If an employee hopes to or intends to return to their prior position, they should be alerted to maintain their HSA’s active status during the leave of absence as long as they are eligible, either by contributing or paying the administration fee.
HSA use: Account holders have access to the funds already contributed and can use them without penalty for all eligible medical expenses. HSA funds do not have an expiration date.

HSAs and COBRA

Upon termination from the employer-based plan, employees can elect COBRA coverage—including maintaining their associated HSA—as long as they are still enrolled in a high-deductible plan (HDHP).

Contributions: Because the employee is no longer on active payroll, post-tax contributions can be made directly by the employee to the HSA. Most employers do not continue HSA contributions post-termination, as the HSA is not a medical plan.
Maintenance and Account Closing: Much like the LOA scenario above, some HSAs will automatically close if a contribution has not been made for a period of time. Additionally, if the employee wants to maintain an active HSA, they may need to pay the monthly administrative fee.
Return to work: HSA funds can be rolled over to a new HSA at any time, much like 401(k) fund transfer. Alternately, an employee can maintain their prior HSA by paying the monthly administrative fee. A new HSA may be opened as long as the employee is covered under an HDHP.
HSA use: HSA funds can be used to pay for any eligible expense, regardless of the account holder’s eligibility to contribute. HSA funds do not have an expiration date. Account holders do not have to be enrolled in an HDHP to spend HSA funds. Additionally, the HSA may prove useful to cover medical premiums in the following scenarios.

The account holder can pay health insurance premiums from the HSA if the accountholder is:

Receiving federal or state unemployment benefits
Has health insurance under COBRA to continue employer-based benefits coverage
Paying for IRS-qualified long-term care coverage (See IRS Publication 502)
Paying for Medicare premiums once the account holder is age 65 or older.

Note: HSAs may NOT be used to purchase medical plan coverage on the state-based/ACA exchanges unless the account holder is receiving federal or state unemployment benefits.

HSAs can be a great resource for medical expense funding, as well as a safeguard during unexpected life events. Help your employees understand how to get the full use of their HSAs by reminding them of the tax deadline extension and communicating their portability value. Communicating the value of an HSA can increase adoption and save on taxes for both the employee and the employer.

Read more: guidance on using consumer directed accounts (HSAs, FSAs, and HRAs) during the pandemic.

Interested in learning more about post-employment HRAs? Check out our e-book to learn more.