ComplianceTax & AccountingApril 13, 2017

Health Savings Accounts (HSAs) vs. High Deductible Health Plans (HDHPs)

Overview

A Health Savings Account (HSA) is similar to an individual retirement account (IRA) on several levels. It is a tax advantaged account meant to hold assets that can later be used to reimburse or pay for qualified medical expenses of an HSA owner, his/her spouse, and his/her dependents. Similar to an IRA, it is an individual account. There is no such a thing as a joint, self-only, or family HSA.

Regular contribution eligibility

To make an HSA regular contribution, the rules require that an individual be covered by an HSA eligible high deductible health plan (HDHP). Whether or not that individual is the HDHP policy holder is irrelevant. Additionally, with the exception of limited purpose types of insurance, an individual cannot have non HDHP coverage, may not be eligible to be claimed as a dependent on someone else’s federal tax return, and cannot be enrolled in Medicare due to age or disability.

Self-only vs. Family health plan coverage

Health care coverage is generally available for one person (i.e., self-only coverage) or a family. Several factors beyond the scope of this article play a role in determining whether a health plan is an HSA eligible HDHP. If a health plan is an HSA eligible HDHP, the type of coverage (i.e., self-only vs. family) determines the amount an individual may contribute to his/her HSA.

HSA regular contribution limit

The regular contribution limit for tax year 2017 for an individual covered by a self-only HDHP is $3,400. The aggregate regular contribution limit for tax year 2017 for a married couple covered under a family HDHP is $6,750.

An individual’s contribution limit increases by $1,000 if he/she is age 55 or older any time during the year. This additional $1,000 amount is referred to as a catch-up contribution. A catch-up contribution is reported as a regular contribution and must be deposited to the HSA of the individual eligible for the catch-up contribution. Therefore, an individual age 55 or older who has family HDHP coverage may potentially deposit $7,750 to his/her HSA as a regular contribution for 2017 [i.e., $6,750 (regular limit) + $1,000 (catch-up amount) = $7,750].

Monitoring contribution amounts

Article I of the Internal Revenue Service (IRS) HSA model trust agreement (i.e., Form 5305-B) and custodial agreement (i.e., Form 5305-C) states “No contributions will be accepted by the trustee [custodian] for any account owner that exceeds the maximum amount for family coverage plus the catch-up contribution” (i.e., $7,750 for 2017). However, many HSA trustees and custodians prefer to monitor the contribution limits at four levels including the type of HDHP coverage (i.e., self only or family), and age (i.e., younger than age 55 all year or age 55 or older by year end).

Self-Only vs. Family HSA – no such thing

To help monitor the contribution limit, the type of HDHP under which an individual is covered is documented on a Wolters Kluwer HSA agreement. This does not create a self-only or family HSA; it simply identifies whether the individual is covered by a self-only or family HDHP. In many cases data systems will actually classify HSAs as self-only or family, which can be very misleading. It is important to keep in mind that an HSA is neither self-only nor family; it is simply an individual account that holds funds that may be used to pay for qualified medical expenses of an HSA owner, his/her spouse, and his/her dependents on a tax-free distribution basis. Again, the self-only or family classification refers only to the HSA owner’s type of health insurance plan which determines an HSA owner’s annual regular contribution limit.

When an individual is covered by a family HDHP, the benefits defined within the insurance policy will generally apply to the policy holder, his/her spouse, and his/her dependents. Assuming both the family HDHP policy holder and his/her spouse are eligible individuals, each may establish an HSA and the contribution limit attributable to family HDHP coverage (i.e., $6,750 for 2017) may be divided between them. Keep in mind that the catch up contribution amount is only available to an individual that has attained age 55 by year end and it may be beneficial for the entire contribution amount (i.e., standard plus catch up) to be deposited to that individual’s HSA. When the other spouse attains age 55, he/she can establish an HSA if for no other reason than to take advantage of the $1,000 catch up amount for which he/she is now eligible.

Example

Janet, age 53 and Paul, age 54, are married. Janet’s employer offers an HDHP under which Janet has elected family coverage beginning in January 2017. Because Janet and Paul are both covered under an HDHP, each of them is eligible to establish their own HSA. Because Janet’s employer allows her to make salary deferrals into her HSA, and her employer also contributes to her HSA, Janet and Paul decide that it makes sense for Janet to establish an HSA. Paul does not establish an HSA. The entire family contribution limit is deposited to Janet’s HSA.

Assuming family HDHP coverage continues and Paul remains an eligible individual in 2018, Paul will be age 55 and becomes eligible for the $1,000 catch-up contribution. The catch-up contribution must go into Paul’s HSA — it cannot be contributed to Janet’s HSA. Paul establishes an HSA, indicating on the documentation used to establish his HSA that he has family HDHP coverage. Paul then makes a $1,000 catch-up contribution to his HSA. Janet and Paul may decide to continue making the standard contribution amount (i.e., $6,750) to Janet’s HSA.

Beginning in 2019, Paul’s employer offers an HDHP and Janet turns age 55. Paul enrolls in a self-only HDHP as of January 1, 2019 with his employer, and Janet changes from family HDHP coverage to self-only HDHP coverage with her employer as of January 1, 2019. Janet and Paul notify their HSA custodian that their HDHP plan type is no longer a family HDHP. The contribution limit for 2019 is now based on self-only HDHP coverage [i.e., $3,400 each or as increased by the cost of living adjustment (COLA)] plus the catch-up (i.e., $1,000) allowing Janet and Paul to each contribute $4,400 (or as increased by COLA) to their own HSA. Note that the $1,000 catch-up limit is not subject to an annual COLA.

Conclusion

An HSA owner is responsible for determining whether or not the health insurance plan by which he/she is covered is an HDHP and should inform his/her HSA custodian/trustee of the type of coverage, self-only or family. This information allows a custodian/trustee to monitor the contribution amounts and helps HSA owners avoid making any excess contributions. Ultimately, it is the responsibility of an HSA owner to track his/her HSA contributions, including employer contributions (if any) to ensure the contribution limit is not exceeded.

Diana Theis
Senior Specialized Consultant, Tax Advantaged Accounts
With more than 30 years of experience, Diana has worked closely with hundreds of financial organizations to help them create, implement, and maintain their tax-advantaged accounts program.