A health savings account (HSA) is a tax-exempt trust or custodial account set up with a qualified HSA trustee (such as a bank or insurance company) that is used to pay or reimburse certain medical expenses.
HSAs were first available as of January 1, 2004, and have grown greatly in popularity. An eligible individual (with or without employer involvement) can establish an HSA. Eligible participating individuals can make contributions, up to statutory limits, and get a tax deduction. Investment earnings on HSA accounts are tax free, and HSA funds used to pay qualified medical expenses are completely tax free. Employers contributing to their eligible employees’ HSAs, or that offer HSAs through a cafeteria plan also receive federal tax deductions for the contributions.
As a result of these benefits, HSAs are highly regulated; by Internal Revenue Code Section 223, as well as numerous IRS notices and guidance documents. IRS Publication 969 provides a basic overview of HSA regulations for employers and employees.
In response to the spread of the 2019 Novel Coronavirus (COVID-19), on March 11, 2020, the IRS released Notice 2020-15 regarding HSA-qualified high deductible health plan (HDHP) coverage of testing and treatment related to COVID-19. Under the notice, health plans that otherwise qualify as HSA-eligible HDHPs will not lose that status solely because they cover the cost of testing for or treatment of COVID-19 before the plan’s minimum deductible has been met. The notice provides that vaccinations continue to be considered preventive care and can be paid for by the HDHP without first meeting a deductible. IRS Notice 2020-29 clarifies that this HDHP coverage rule applies to reimbursements of expenses incurred on or after January 1, 2020. The Notice further clarifies that the panel of diagnostic testing for influenza A and B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing under the Families First Coronavirus Response Act (FFCRA) as amended by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), are part of testing and treatment for COVID-19 for purposes of IRS Notice 2020-15.
To be an eligible individual and qualify for an HSA, you must meet the following requirements:
- You must be covered under a high deductible health plan (HDHP) on the first day of the month.
- You have no other disqualifying health coverage except what is permitted.
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on someone else’s tax return for the year.
Download the full Compliance Advisor to learn more about:
- Disqualifying coverage
- The interplay between health FSAs and HSAs
- HSAs with a grace period
- Health FSAs with carryovers
- HSAs and Medicare
- Dependent status
- Determining eligibility and changes in eligibility
- HSA contributions and distributions