IRS provides guidance on contributions to HSAs.

• Author: Schell, Wayne M.
• Position: Health savings accounts

The Tax Relief and Health Care Act of 2006, P.L. 109-432, made changes to the treatment of contributions to health savings accounts (HSAs) under Sec. 223. The IRS recently issued two notices explaining those changes. Notice 2008-52 provides general guidance on contributions to HSAs, and Notice 2008-51 provides guidance on the treatment of a one-time qualified funding distribution from an individual retirement account (IRA) or a Roth IRA to a health savings account.

Tax Treatment of HSAs

An HSA is a tax-advantaged medical savings account available to eligible individuals. Sec. 223(c)(1) defines eligible individuals as those who are covered by a high-deductible health plan (HDHP) and, with certain exceptions, not also covered by a health plan that is not high deductible. In addition, they may not be enrolled in Medicare (Sec. 223(b)(7)), and they may not be claimed as a dependent (Sec. 223(b)(6)).

Contributions to HSAs are generally deductible in computing adjusted gross income, and distributions from HSAs are excludible from gross income as long as they are exclusively used to pay qualified medical expenses of the individual or, depending on the type of coverage, the individual's spouse or dependents. Distributions not used for qualified medical expenses are included in gross income and are subject to an additional 10% tax (Sec. 223(f)). The 10% tax, however, does not apply to distributions to individuals after they reach age 65, become disabled, or die.

Contribution Limits

Notice 2008-52 identifies limits to the amount of allowable contributions an individual can make to an HSA annually. The maximum allowable HSA contribution is limited to the greater of (1) the annual contribution limit or (2) the sum of the monthly contribution limits. The annual contribution limit is based on the type of coverage (self only or family) and available catch-up contribution amounts. This limit is available only if the individual is eligible on the first day of the last month of the tax year (December 1 for calendar-year taxpayers).

The annual contribution limits are indexed. In 2008, the limits are $2,900 for a self-only HDHP and $5,800 for family coverage. In addition, for individuals who are age 55 or above on the last day of the year, a catch-up contribution is allowed. In 2008, the amount is $900. The maximum monthly contribution limits equal 1/12 of the annual contribution limit for both regular contributions and catch-up contributions. Thus, the 2008 monthly contribution limits are $483.33 ($5,800 / 12) for months where there is family coverage, $241.67 for self-only coverage months, and $75 for catch-up contributions.

Not only is eligibility for the annual contribution limit determined on the first day of the last month of the tax year, but the annual contribution limit amount is also determined on that day. The amount of the contribution limit is based on the individual's coverage (self only, family, or none at all) at that time. The individual's eligibility and coverage at other times during the year are not considered.

Example 1: Individual P carries family coverage for all of December. Her allowable contribution to an HSA is $5,800, even though she had no coverage during the rest of the year. Her annual limit of $5,800 is greater than the sum of her monthly limits, $483 ($5,800 x 1 / 12).

Testing Period

There is a testing period for individuals who can use the annual contribution limit (Sec. 223(b)(8)(B)). This is a period during which the individual must maintain eligibility for an HSA or be subject to additional tax. Eligibility during the testing period does not require that the individual maintain the same level of HDHP coverage (self...