HSA vs, HDHP
ComplianceTax & AccountingJuly 20, 2020

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

Overview

A Health Savings Account (HSA) is like 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. Like an IRA, it is an individual account. There is no such a thing as a 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 an 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 2020 for an individual covered by a self-only HDHP is $3,550. The aggregate regular contribution limit for tax year 2020 for a married couple covered under a family HDHP is $7,100.

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, if an individual is age 55 or older by the end of 2020 and is covered by a family HDHP he/she can potentially deposit $8,100 to his/her HSA as a regular contribution for 2020 [i.e., $7,100 (standard limit) + $1,000 (catch-up amount) = $8,100].

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., $8,100 for 2020). 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. However, in many cases data systems 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 under 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., $7,100 for 2020) may be divided between them. Keep in mind that the catch-up contribution amount is only available to an individual that attains 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 HSA owner’s 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 would then be eligible.

Example

In 2020 Janet, age 53 and her husband Paul, age 54, were covered under a family HDHP offered by Janet’s employer. Janet established an HSA in 2020 and in addition to her employer making contributions to her HSA, Janet also made salary deferrals to her HSA. Though Paul was covered under the family HDHP offered by Janet’s employer, and could have established and contributed to his own HSA for 2020, he and Janet decided that the maximum standard contribution amount under the family HDHP limit (i.e., $7,100 for 2020) should be contributed to Janet’s HSA.

Assuming family HDHP coverage continues in 2021 and Paul remains an eligible individual, he will be able to make a $1,000 catch-up contribution to his HSA as he will attain age 55 before the end of the year. 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 is covered under a family HDHP. Paul then makes a $1,000 catch-up contribution to his HSA. Janet and Paul may decide to continue to deposit the standard contribution amount (i.e., $7,200 for 2021) to Janet’s HSA.

Beginning in 2022, assume Paul’s employer offers an HDHP under which Paul obtains self-only HDHP coverage as of January 1, 2022. Additionally, assume Janet changes from family HDHP coverage to self-only HDHP coverage with her employer as of January 1, 2022. Janet and Paul will inform their HSA custodian that they are now individually covered by self-only HDHPs, and not a family HDHP. Janet and Paul’s standard contribution limit for 2022 will be individually determined under the self-only HDHP coverage limit. Additionally, Janet will also be eligible to make a catch-up contribution of $1,000 to her HSA as she will attain age 55 by the end of the year.

Conclusion

An HSA owner is responsible for determining whether 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.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.

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.