The new limits are as follows:

Below are some common questions about HSA limits, contributions, and scenarios:

What if an employee made contributions to an HSA above the allowed limit for that year?

An employee who has made excess contributions must remove them from the account, as well as any investment gains on the excess contributions before their federal income tax filing deadline. If the employer does not include the distribution on the employee’s W-2, it should be included as other income when filing their federal tax return.

What is the penalty for going over the contribution limit?

There is an excise tax of 6% on the excess contribution amount and any investment gains on those contributions for each taxable year. To avoid the excise tax, the excess contributions must be distributed from the HSA before the account holder’s federal tax return filing deadline (typically April 15th of the following year).

What if an employer made contributions for an employee who was ineligible for an HSA?

If the mistake is noticed in the same tax year that the contributions were made, and the contributions are recovered by the employer before the end of the tax year, it is as if they were never made in the first place. The employer can reach out to the financial institution and request that they return the contributions plus earnings from the employee’s account. If the contributions are not returned to the employer before the end of the tax year in which they were made, the employer must include the contribution amounts in the employee’s gross income and wages on their W-2. 

If the mistake is not noticed until the next year, the employer must issue an updated W-2 that includes the contribution amounts as gross wages. If the employee had already filed taxes based on the incorrect W-2, they’d have to file an amended tax return.

My spouse has a health FSA, can I contribute to an HSA?

The rule of thumb is that you cannot contribute pre-tax money to an HSA if you or your spouse are enrolled in an FSA that covers medical expenses in that tax year.

If it is a health FSA, you cannot contribute to an HSA while your spouse is enrolled in the FSA. If the FSA is “limited-purpose" (cannot be used for medical but can for dental and vision) or a dependent care FSA, you can contribute to the HSA while your spouse is enrolled in the limited-purpose or dependent care FSA.

If your eligibility for an FSA ends in the middle of the year, you can begin contributing to an HSA if you’re enrolled in an eligible high-deductible health plan. The contribution limit for the HSA will be pro-rated depending on the number of months remaining in the calendar year.

If I became eligible for an HSA for only part of a tax year, how much can I contribute?

There are two approaches if you become eligible sometime during the year. You can contribute a pro-rated amount depending on how many months you were eligible. As an example, a single person who was eligible from February 1st, 2021 to December 31st, 2021 could contribute 11/12 of the annual limit of $3,600, or $3,300. If you’re over 55 years old, you’re eligible for an additional $1,000 catch-up contribution which would also be pro-rated by 11/12, or $916.67.

The other approach is to use the Last Month rule, which allows someone to make the full calendar year contribution limit as long as they are HSA-eligible by December 1st. There is a testing period in which the employee must remain eligible for an HSA throughout the end of the following calendar year. If they do not, any contributions over the pro-rated amount are considered taxable income and subject to an additional 10% penalty, unless they become ineligible because of disability or death.

Can an employer contribute more to the HSA for executives than other employees?

HSA contributions must be deemed comparable if they are made outside of a Cafeteria Plan, or must be seen as non-discriminatory if made within a Section 125 Cafeteria plan. In either scenario, it’s generally difficult to give a higher HSA contribution to executives (who are usually considered a key or highly-compensated employee) and have that be seen as comparable or non-discriminatory.

Can I use my HSA funds to pay for a dependent on my plan’s qualified medical expenses?

In order to use HSA funds to pay for a dependent’s medical expenses, that dependent must qualify as your tax dependent. As an example, a 23-year old child can be enrolled in your high-deductible health plan regardless of their tax dependent status. However, to use HSA funds toward their medical expenses, they must qualify as a tax dependent.

However, there are three scenarios in which you can use HSA funds for someone who is not claimed on your tax return as a dependent. Please note that they must have been able to be claimed as a dependent but were not for one of the following reasons:

1. The person filed a joint return
2. The person had gross income of $4,200 or more; OR
3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s tax return

Can I use HSA money to pay for a gym membership?

Gym memberships are not considered a qualified medical expense by the IRS and therefore cannot be paid tax-free from an HSA. The HSAstore is a great resource to verify whether a product or service is a qualified expense and can be paid from your HSA tax-free.

Are there any changes to HSA qualified medical expenses as a result of COVID-19?

Yes. The CARES Act that was signed into law at the end of March 2020 allows for HSA dollars to be used for over-the-counter medications without a prescription, as well as certain menstrual care products. This change applies to purchases beginning January 1st, 2020, and as of now is a permanent change.

As always, please consult with your tax advisor if you have any specific tax questions. The content we’ve provided here cannot be construed as tax advice, because as employee benefit brokers, we are not tax professionals.

Please reach out to your Fall River Client Manager if you have other HDHP or HSA questions.