Health Savings Account (HSA) Eligibility Rules
Many employers offer high-deductible health plans (HDHPs) to control premium costs, and then pair this coverage with a health savings account (HSA) to help employees with their care expenses. An HSA is a tax-favored trust or account that can be contributed to by, or on behalf of, an eligible individual for the purpose of paying qualified medical expenses.
HSAs provide a triple tax advantage – contributions, investment earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, FICA tax and most state income taxes. Due to an HSA’s potential tax savings, federal tax law imposes strict eligibility requirements for HSA contributions.
Only an eligible individual can establish an HSA and make HSA contributions (or have them made on his or her behalf). An individual’s HSA eligibility is determined monthly, and, as a general rule, contributions can only be made for the months in which the individual satisfies all of the HSA eligibility criteria.
Who is an Eligible Individual?
To be HSA-eligible for a month, an individual must:
- Be covered by an HDHP on the first day of the month;
- Not be covered by other impermissible health coverage (with certain exceptions);
- Not be enrolled in Medicare; and
- Not be eligible to be claimed as a dependent on another person’s tax return.
The full-contribution rule that applies to individuals who are HSA-eligible on December 1 is an exception to this general rule. Under this exception (known as the Last Month Rule), an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions if he or she becomes covered under an HDHP in a month other than January and is HSA-eligible on December 1 of that year. An individual who relies on this special rule must generally remain HSA-eligible during a 13-month testing period, with exceptions for death and disability. [Note: Participants seeking to take advantage of this Last Month Rule, should review the examples on page 5 of IRS Publication 969 so that they are aware of the taxes and penalties they may face if they fail to keep their HDHP coverage for as long as is required].
To be eligible for HSA contributions for a month, an individual must be covered under an HDHP as of the first day of the month and have no other impermissible coverage.
No Disqualifying Coverage
To be eligible for HSA contributions, an individual generally cannot have health coverage other than HDHP coverage. This means that an HSA-eligible individual cannot be covered under a health plan that provides coverage below the HDHP minimum annual deductible.
An individual who has non-HDHP coverage with a deductible below the minimum HDHP deductible that is not preventive care, permitted coverage or permitted insurance will not be an eligible individual for HSA purposes.
Individuals who are covered by general-purpose health FSAs or HRAs are not eligible for HSA contributions. A general-purpose health FSA or HRA is one that pays or reimburses all qualifying medical expenses of an employee and his/her dependents. This includes an individual whose spouse is enrolled in a general-purpose health FSA or HRA through his/her employer. In addition, an individual’s HSA eligibility may be affected when a health FSA incorporates a grace period or a carry-over feature.
Although general-purpose health FSA or HRA coverage will prevent an individual from being eligible from HSA contributions, certain health FSA or HRA designs preserve HSA eligibility. These include:
- Limited-purpose health FSA or HRA – This type of health FSA or HRA pays or reimburses qualifying medical expenses that are permitted coverage, permitted insurance or preventive care (for example, dental or vision coverage).
- Post-deductible health FSA or HRA – This type of health FSA or HRA pays or reimburses medical expenses incurred after the individual has met the minimum annual deductible within the HDHP.
- Suspended HRA – A suspended HRA, pursuant to an election made before the beginning of the HRA coverage period, does not pay or reimburse at any time, any medical expenses incurred during the suspension period, except preventive care, permitted insurance or permitted coverage.
- Retirement HRA – A retirement HRA pays or reimburses medical expenses incurred after the individual retires.
An individual who is entitled to Medicare benefits is not eligible for HSA contributions. To be entitled to Medicare benefits, an individual generally must be both eligible and enrolled. Eligibility for Medicare benefits alone does not make an individual ineligible for HSA contributions.
IRS Notices 2004-50 and 2008-59 confirm that a Medicare-eligible individual who is not actually enrolled in Medicare Part A, Part B, Part D or any other Medicare benefit may contribute to an HSA until the month that he or she is enrolled in Medicare.
An individual who can be claimed as a tax dependent of another individual is not eligible for HSA contributions. In general, a taxpayer may claim an individual as his or her tax dependent if the individual is:
- The taxpayer’s child and under age 19 at the end of the tax year;
- The taxpayer’s child, a student and under age 24 at the end of the tax year; or
- A member of the taxpayer’s household for whom the taxpayer provided over half of the support for the year and whose gross income does not exceed the personal exemption amount.
|Health Savings Account (HSA) Contribution Limits for Spouses
There is a special contribution limit for married individuals, which provides that if either spouse has family HDHP coverage, then both spouses are treated as having only that family coverage. This means that if both spouses are HSA-eligible and either has family HDHP coverage, the spouses’ combined contribution limit is the annual maximum limit for individuals with family HDHP coverage.
Annual Limits for 2017
Individuals who are age 55 or older by the end of the tax year are permitted to make an additional $1,000 HSA contribution to his/her separate HSA, called a “catch-up contribution.”
- IRS Publication 969
- CA’s HSA-limit chart (1 page)
- CA’s Best Approach brochure & chart (4 pages)
- 2017 HSA limits updated – blog post
For more information contact email@example.com. The information contained in this post, and any attachments, is not intended and should not be misconstrued as legal advice. You should contact your employment, benefits or ERISA attorney for legal direction.