I. INTRODUCTION
The Medicare Prescription Drug, Improvement and Modernization Act of 2003, authorized individuals to pay for qualified medical expenses with pre-tax dollars through a Health Savings Account (HSA). Beginning on January 1, 2004, employees became eligible to deposit amounts into an HSA that may be used to pay for qualified medical expenses of the employee and his or her family.
Employer contributions to an HSA are excluded from the employee’s gross income, are not subject to withholding for income tax purposes, and are not subject to other employment taxes. In addition, unused HSA balances may be rolled over from year to year by the employee. For tax year 2024, individuals, their employers, or both can contribute tax-deductible funds each year up to the amount of the policies annual deductible, subject to a cap of $4,150 for individuals and $8,300 for families.
To participate in an HSA, an individual must be covered under a “high deductible health plan,” defined as a plan with a minimum annual deductible of $1,600 for self-only or $3,200 for family coverage. For tax year 2024, the annual out-of-pocket cap for the high deductible health plan must also not exceed $8,050 for self-only or $16,100 for family coverage.
II. HSA TRUSTEE OR CUSTODIAN
Any bank can be an HSA trustee or custodian. Trustees and custodians are not responsible for determining an individual’s eligibility for an HSA and are not required to determine if funds are used for qualified medical expenses. Individuals who establish an HSA must make that determination and should maintain records of their medical expenses sufficient to show the distributions have been made exclusively for qualified medical expenses and are thus excludable from gross income. The trustee/custodian is responsible for tracking the account beneficiary’s age, but may rely on the account beneficiary’s representation as to his or her date of birth.
III. ACCOUNT ADMINISTRATION
An HSA is considered established after the model HSA form is fully executed by the account owner and the trustee or custodian. The account must be for the exclusive benefit of the account owner. The HSA trustee or custodian may incorporate additional provisions in the agreement as long as they are not inconsistent with the tax provisions of the model agreement. Additional provisions may include minimum deposits, minimum distribution requirements, and distribution timing requirements.
Trustee or custodial fees can be paid from assets in the HSA without being subject to tax or penalty, or they can be paid by the beneficiary without being counted toward the HSA contribution limits. The trustee or custodian is not allowed to accept contributions that exceed the maximum amount for family coverage, plus catch up contributions. If there are excess contributions, it is the responsibility of the account owner to notify the trustee/custodian and request withdrawal of excess contribution amounts and any net income attributable to those amounts.
The Internal Revenue Service has issued HSA model documents Form 5305-B, Health Savings Trust Account and Form 5305-C, Health Savings Custodial Account which can be found at http://www.irs.gov/formspubs/index.html.
IV. REPORTING REQUIREMENTS
The HSA reporting requirements are straightforward: The HSA trustee/custodian must file Form 5498-SA, “Copy A,” with the IRS on or before June 1, for each person for whom it maintained an HSA. The trustee/custodian also must provide a statement, generally “Copy B” of the form, to the participant by June 1. Form 5498-SA is used to report total contributions made to the account during the year and the value of the account at the end of the year. The HSA trustee/custodian must report all HSA distributions annually to the account owner on Form 1099-SA. The individual taxpayer is responsible for tracking the use of the distributions and reporting the amount used for qualified medical expenses on his or her annual tax return.
V. CONCLUSION
There is a special section on the Treasury website, www.treas.gov, for HSAs containing the rules, the model HSA trustee and custodian forms, Form 1099-SA and Form 5498-SA. One click to the website provides access to HSA rules and forms as well as All About HSA’s, a document that provides an excellent summary of the rules.