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HSA IRS and Department of Labor Guidance
The following table lists the official guidance issued by the Treasury Department, the IRS, and the Department of Labor in regards to Health Savings Accounts. The table contains links to a synopsis of each one as well as links to the complete documents.
The IRS has recently released an updated version of Publication 969 for use in preparing tax returns for the 2007 fiscal year. Publication 969 pertains to tax favored health accounts, including information regarding Health Savings Accounts, Health Reimbursement Arrangements, Flexible Spending Accounts, Archer Medical Savings Accounts, and Medicare Advantage Medical Savings Accounts.
The updated document reflects the new 2007 limits for HSAs and incorporate changes made by the Tax Relief and Health Care Act of 2006 which took effect in 2007. Among these changes were the elimination of the annual HDHP deductible cap on HSA contributions and the addition of the "last month rule" which treats individuals who become HSA eligible on Dec 1st as being HSA eligible for the entirety of the tax year. There is also updated information on qualified HSA distributions from FSAs and HRAs, distributions from IRAs, and instructions on how to properly report any 10% tax penalties on 1040 forms.
To read IRS Publication 969, click here.
IRS Releases Form 5498-SA and Form 1099-SA for Custodians for the 2006 Tax Year
Trustees and custodians
of HSAs and Archer MSAs must use Form 5498-SA to report contributions
to (and the fair market value of) these accounts, and they are required
to report distributions on Form 1099-SA. Both forms must be filed with
the IRS, and a copy must be provided to the account holder. Aside from the obvious changes in dates, the 2006 forms
are basically unchanged from their 2005 counterparts. The Instructions
have been revised to include information about how mistaken
distributions that are repaid by the account holder are handled for
reporting purposes. Trustees and custodians that allow mistaken
distributions to be repaid should be aware of the requirement to correct any filed Form 1099-SA following the repayment.
Read the Instructions for filling out these Forms.
IRS releases Publication 969 for use in preparing 2005 tax returns.
Publication 969, which formerly only covered Medical Savings Accounts (MSAs), has been expanded to include information on Health Savings Accounts and other tax-favored health plans.
Various employer-sponsored programs are designed to give employees tax advantages to offset health care costs. These plans are also generally available to self-employed individuals. This publication explains the following programs.
- Health savings accounts (HSAs)
- Medical savings accounts (Archer MSAs and Medicare Advantage MSAs)
- Health flexible spending arrangements (FSAs)
- Health reimbursement arrangements (HRAs)
Read the entire IRS Publication 969.
Transitional relief for non-calendar-year plans with non-conforming, state-mandated benefits.
Originally, Notice 2004-43 (released 6/21/04) provided transitional relief for individuals in states where High Deductible Health Plans (HDHPs) were not available because state laws barred or limited a deductible for certain benefits. This original transitional relief was effective until January 1, 2006, to give states time to amend their laws to comply with HSA regulations.
Notice 2005-83 provides relief for certain health plans with non-calendar-year renewal dates. Generally, a health plan may not reduce existing benefits before the plan’s renewal date. Thus, even though a state may amend its laws before January 1, 2006, non-calendar-year plans may still fail to qualify as HDHPs after January 1, 2006, because existing benefits cannot be changed until the next renewal date. For example, a state amends its laws to authorize HDHPs, effective November 1, 2005. A health plan with a renewal date of July 1, 2005, is required to retain the state-mandated low-deductible coverage for the plan year July 1, 2005, through June 30, 2006, because the benefits can only be modified on the renewal date. As a result, although the state has amended its statute, the health plan will fail to be an HDHP for months after January 1, 2006 (i.e., for the months of January through June, 2006).
Read the entire Notice 2005-83.
FSA Grace Period and HSA Eligibility.
Notice 2005-86 clarifies the interaction of the Flexible Spending Arrangement (FSA) 2-1/2 month grace period (established earlier this year by Notice 2005-42) and eligibility to contribute to Health Savings Accounts (HSAs). The guidance clarifies that coverage by the FSA grace period disqualifies an individual to contribute to an HSA during the grace period. However, the notice also provides guidance on how an FSA can be amended to enable a covered individual to contribute to an HSA during the grace period.
An individual eligible to contribute to an HSA must be covered by a high deductible health plan (HDHP) and generally no other non-HDHP coverage, including health FSA coverage. Consequently, an individual who has his or her health FSA coverage extended by the grace period is ineligible to contribute to an HSA, even where the health FSA has reached its annual benefit limit. However, the guidance provides that, if the employer amends the FSA to be HSA-compatible during the grace period for all participants, individuals would not be disqualified from contributing to an HSA during the grace period. In addition to this general rule, the notice provides a special transition rule for coverage years ending before June 5, 2006. For those years, an otherwise eligible individual may contribute to an HSA during coverage by a health FSA grace period if the individual's health FSA has no unused contributions or if the employer amends the cafeteria plan to provide that the grace period is not available to individuals electing HDHP coverage during the grace period.
Finally, the notice clarifies the following points about the grace period.
- The grace period must be made available to all participants who are covered on the last day of the plan year, including participants whose coverage is extended to the last day through COBRA continuation coverage.
- The grace period must remain in effect for the entire period even though the participant terminates employment prior to the end of the grace period.
- Employers may limit the application of the grace period to only certain benefits (e.g., a plan offering a health FSA and a dependent care FSA could limit the grace period to the health FSA).
- The maximum grace period is until the 15th day of the third calendar month after the end of the plan year, but a shorter period may be adopted as a grace period.
Read the entire Notice 2005-86.
IRS announces 2006 cost-of-living adjustment.
The Internal Revenue Service released the 2006 inflation adjusted indexed numbers for Health Savings Accounts (HSAs) and out-of-pocket spending limits for High Deductible Health Plans (HDHPs) that must be used in conjunction with HSAs. These amounts have been indexed for cost-of-living adjustments for 2006 and are included in Revenue Procedure 2005-70, which announces changes in several indexed amounts for purposes of the federal income tax. The new Health Savings Account limits for contributions, deductibles, and out-of-pocket limits are as follows: the maximum annual HSA contribution for an eligible individual with self-only coverage is $2,700 (note: for any individual, the maximum contribution is the lesser of the indexed amount or the deductible of the HDHP); for family coverage, the maximum annual HSA contribution is $5,450; catch up contributions for individuals who are 55 or older is increased by statute from $600 to $700 for 2006. The maximum amount for out-of-pocket spending on HSA-compatible HDHPs increased to $5,250 for HDHP self-coverage and the maximum annual out-of-pocket amount for HDHP family coverage increased to $10,500. The minimum deductible for HSA-Compatible HDHPs increased to $1,050 for self-only coverage and $2,100 for family coverage.
Read the entire Notice 2005-70.
IRS UPDATES LIST OF APPROVED NONBANK TRUSTEES AND CUSTODIANS FOR HSAs,
ARCHER MSAs, AND OTHER TAX-EXEMPT TRUSTS
To be a trustee or custodian of an HSA or an Archer MSA, an entity that is not a bank or insurance company must file a written application with the IRS demonstrating in detail that it meets each of the requirements specified in IRS regulations. (Banks and insurance companies are automatically eligible to serve as trustees or custodians for HSAs and Archer MSAs; individuals are not eligible at all.) If an application is approved, the applicant is provided with a notice of approval, which remains effective until withdrawn by the applicant or revoked by the IRS. Approved nonbank trustees are required to provide a copy of the notice of approval to prospective account holders before their HSAs or Archer MSAs are established. In Announcement 2005-59, the IRS has listed 250 nonbank trustees and custodians approved as of December 31, 2004 (eight more than in 2003). The list includes the name and address
of each entity and the date that each application was approved. The announcement also gives instructions for correcting a mistake in the list.
Read the entire Announcement 2005-59.
Employer Comparable Contributions to HSAs
IRS REG-138647-04 contains proposed regulations providing guidance on employer comparable contributions to Health Savings Accounts (HSAs) under section 4980G. In general, these proposed regulations would affect employers that contribute to employees’ HSAs.
The proposed regulations generally follow the previously issued guidance on comparability rules and clarify and expand on the guidance regarding the comparability rules published in Notice 2004-2 and in Notice 2004-50, Q & A-46 through Q & A-54.
An employer is not required to contribute to the HSAs of its employees. However, in general, if an employer makes contributions to any employee’s HSA, the employer must make comparable contributions to the HSAs of all comparable participating employees. Comparable participating employees are eligible individuals (as defined in section 223(c)(1)) who have the same category of high deductible health plan (HDHP) coverage. The categories of coverage are self-only HDHP coverage and family HDHP coverage.
Read the entire IRS REG-138647-04.
Spousal non-HDHP family coverage
Rev. Rul. 2005-25 indicates that an individual whose spouse has non-qualified family coverage can still contribute to an HSA, as long he/she is not COVERED under the spouse's plan.
According to the ruling, “an individual who otherwise qualifies as an eligible individual does not fail to be an eligible individual merely because the individual’s spouse has non-HDHP family coverage, if the spouse’s non-HDHP does not cover the individual. Accordingly, that individual may contribute to an HSA.”
The ruling also states that the maximum amount under section 223(b) that an eligible individual may contribute to an HSA is based on whether the individual has self-only or family HDHP coverage.
There is a rule in Code Section 223(b)(5) that indicates that if a husband or spouse has family coverage, then they are both considered as having that family coverage. This has caused some confusion with regard to the situation addressed in this ruling. However, that rule regulates contributions and not eligibility.
Read the entire Rev. Rule 2005-25.
IRS releases Notice 2005-8
regarding tax treatment of partner/self-employed HSA contributions.
This four-page notice, in Q/A format, provides guidance on a partnership’s
contributions to a partner’s HSA and an S corporation’s
contribution to a 2-percent shareholder-employee’s HSA. This
notice explains the income tax and self-employment tax consequences
when a partnership makes contributions to partners’ HSAs
either as Section 731 distributions or as Section 707(c) guaranteed
payments.
Generally, HSA contributions are treated as payments to the partner or shareholder and are not treated as excludable employer contributions. The contributions will be treated as the individual partner’s or shareholder's contribution and allowed as above-the-line deductions on their individual income tax returns, similar to the treatment for any eligible individual who makes a contribution to an HSA directly with after-tax funds.
Notice 2005-8 will be published in Internal Revenue Bulletin 2005-4.
IRS releases Form 8889 for post-tax HSA contributions.
Form 8889 is referenced in Question #28 of Form 1040 and is used for post-tax Employee Contributions and other contributions other than Employer Contributions.
Advisory Opinion 2004-09A addresses employer-sponsored HSAs with respect to prohibited transactions.
In this particular opinion, the Department of Labor found that the contribution at issue by the insurer or bank was not a prohibited transaction. The DOL also noted that the HSA account holder would not be engaging in prohibited self-dealing because the contribution would go directly to the HSA. The Advisory Opinion notes that if an HSA becomes subject to ERISA, additional obligations will apply. This is a reminder to employers that HSAs ARE subject to the prohibited transaction provisions and MAY be subject to ERISA. The DOL released a strong statement early last year to support the establishment of HSAs by employers, clarifying ERISA obligations with respect to HSAs.
Read the entire Advisory Opinion 2004-09A
IRS announces 2005 cost-of-living adjustments
The Treasury Department and IRS today issued new guidance on the maximum contribution levels for Health Savings Accounts (HSAs) and out-of-pocket spending limits for High Deductible Health Plans (HDHPs) that must be used in conjunction with HSAs. These amounts have been indexed for cost-of-living adjustments for 2005 and are included in Revenue Procedure 2004-71, which announces changes in several indexed amounts for purposes of the federal income tax. The minimum deductible required for HDHPs did not change.
The new annual contribution levels for HSAs are as follows for 2005: the maximum annual HSA contribution for an eligible individual with self-only coverage is $2,650 (note: for any individual, the maximum contribution is the lesser of the indexed amount or the deductible of the HDHP); for family coverage the maximum annual HSA contribution is $5,250; catch up contributions for individuals who are 55 or older is increased by statute from $500 to $600 for 2005; and both the HSA contribution and catch up contribution apply pro rata based on the number of the months of the year a taxpayer is an eligible individual, and, with respect to the catch up contribution, the number of months of the year that the taxpayer is age 55 and over.
The maximum amount for out-of-pocket spending on HSA-compatible HDHPs increases to $5,100 for HDHP self-coverage and the maximum annual out-of-pocket amount for HDHP family coverage is twice that, $10,200.
The minimum deductible for HSA-Compatible HDHPs is unchanged, remaining at $1,000 for self-only coverage and $2,000 for family coverage.
Rev. Proc. 2004-71 also increases other limits for 2005, including the limit for qualified transportation plans under Code Section 132, increasing from $100 to $105 the combined transit pass/vanpooling limit and increasing from $195 to $200 the qualified parking limit.
Read the entire Notice 2004-71.
Read the Treasury Department's Press Release.
IRS Issues Combined HSA/MSA Forms for Custodians/Trustees
The IRS has issued combined forms that Trustees and Custodians
will use to satisfy their IRS reporting obligations for both
HSAs and Archer MSAs. The new forms -1099-SA ("Distributions
From an HSA, Archer MSA, or Medicare+Choice MSA") and 5498-SA
("HSA, Archer MSA, or Medicare+Choice MSA") - are similar
to Forms 1099-MSA and 5498-MSA, which were previously used for
Archer MSA reporting. The old 2004 Forms 1099-MSA and 5498-MSA
(and their Instructions) have been taken off the IRS Forms and
Publications website and should not be used or filed.
Find the forms and instructions here.
New HSA Guidance Clarifies
Issues
IRS Notice 2004-50 provides further guidance on Health Savings Accounts.
The question-and-answer format is divided into the following sections:
Eligible Individuals, High Deductible Health Plans (HDHPs), Preventive
Care, Contributions, Distributions, Comparability, Rollovers, Cafeteria
Plans and HSAs, Account Administration, Trusties and Custodians,
and Other Issues.
Some of the items clarified were:
- An otherwise eligible individual will not generally be disqualified
from contributing to an HSA by receiving benefits under Employee
Assistance Plans, Disease Management Plans, and Wellness Programs.
- Mistaken HSA distributions can be repaid to the HSA without
penalty or tax.
- The FSA-type salary reduction rules do not generally apply to
HSA salary reduction contributions. These HSA contributions generally
follow the 401(k) plan rules, which allow prospective changes
in elections throughout the year.
- Payments by individuals resulting from traditional benefit limits
that are part of a reasonable plan design do not count against
the out-of-pocket maximums.
- Employer-matching contributions made through a cafeteria plan
are not subject to the comparability requirements.
- Account fees paid from HSAs are nontaxable distributions, while
account fees paid outside of the HSA directly to trustees are
not treated as contributions
Read the entire Notice 2004-50.
Read the Treasury Department's Press Release.
Transitional Relief for
State Mandates on High Deductible Health Plans
IRS
Notice 2004-43 provides transitional relief for individuals
in states where High Deductible Health Plans (HDHPs) are not available
because state laws bar or limit a deductible for certain benefits.
The transitional relief will be effective until January 1, 2006.
Note that the transitional relief applies to both below-the-deductible state mandates and preventive-care state mandates. Earlier this year, IRS issued IRS 2004-23, which provided safe harbors for preventive care benefits
Read the entire IRS Notice 2004-43.
- The IRS does not require the HSA trustee or a contributing employer
to adjudicate HSA distributions.
- Employer contributions to HSAs are exempt from FICA tax.
- A self-insured plan can serve as the High-Deductible Health
Plan (HDHP) coverage.
- Entities that have already been approved as IRA or MSA trustees
can be HSA trustees.
- Electronic debit/credit payment cards can be used to distribute
HSA funds.
- HSA contributions made through a cafeteria plan are NOT subject to the HSA "comparable contribution" rule for employer contributions.
Read the entire Notice
2004-2.
Safe Harbor for Preventive Care Benefits
HSAs can only be established by eligible individuals, who must have coverage by a high deductible health plan (HDHP). Generally, an HDHP cannot provide benefits before the deductible is satisfied, but there is an exception for benefits for preventive care. This Guidance provides a safe harbor list of benefits that can be provided by an HDHP, generally clarifying that traditional preventive care benefits - such as annual physicals, immunizations, and screening services - are preventive care for purposes of HSAs, as well as routine prenatal and well-child care, tobacco cessation programs, and obesity weight-loss programs. The Guidance also clarifies that preventive care generally does not include treatment of existing conditions. The safe harbor provides employers and plans with the flexibility in designing health benefits, allowing them to provide preventive care benefits that reduce health costs and encourage early identification of health conditions that may require medical attention.
Read the entire Notice 2004-23.
Transitional relief for HSAs established prior to April 15, 2005
Initial Guidance stipulated that HSAs may only reimburse medical expenses incurred after the HSA is established. However, many individuals eligible to establish HSAs have been unable to locate trustees or custodians to open HSAs. This Guidance provides that for 2004, an HSA established by an eligible individual on or before April 15, 2005, may reimburse expenses incurred on or after the later of January 1, 2004, or the first day of the first month that the individual became an eligible individual.
Read the entire Notice 2004-25.
Prior Guidance noted that an eligible individual must be covered by an HDHP and no other health plan that is not an HDHP. Revenue Ruling 2004-38 clarifies that individuals covered by a health plan that provides prescription drug benefits before the minimum annual deductible of an HDHP has been satisfied may not make contributions to an HSA. However, companion guidance (see below) provides transition relief.
Read the entire Revenue Ruling 2004-38.
Transitional Relief for Prescription Drugs
This Guidance provides transition relief to those individuals covered by both an HDHP and by a separate health plan or rider that provides prescription drug benefits before the deductible of the HDHP is satisfied. Under the relief, such individuals continue to be eligible to contribute to HSAs until 2006.
Read the entire Revenue Procedure 2004-22.
HSAs Can Exist Above ERISA Rules
Health Savings Accounts are not governed by the Employee Retirement Income Security Act (ERISA), according to The Employee Benefits Security Administration (EBSA). EBSA, the administrative arm of the Department of Labor (DOL), issued guidance on April 7, 2004, confirming that employers can implement (and even contribute to) Health Savings Accounts (HSAs) without being subject to ERISA regulations.
According to Field Assistance Bulletin 2004-1, for an HSA program to avoid ERISA regulations, it must meet the following four basic requirements:
- The program must be completely voluntary.
- An employer cannot endorse the program, but can administrate
payroll functions and publicize the program.
- An employer may only receive reasonable compensation for payroll
expenses.
- An employer can make no contributions (exceptions below).
There are certain circumstances in which an employer can contribute and still not be subject to ERISA. The following conditions must be satisfied:
- Establishment of the HSA must be completely voluntary.
- The employer cannot make or influence HSA fund investment decisions.
- The employer cannot receive any compensation in connection with
the HSA.
- No conditions can be placed on the utilization of HSA funds
beyond that permitted by the Code.
- The employer must allow the employee to move funds to another
HSA beyond that permitted by the Code.
- The employer cannot represent that the HSAs are established or maintained by the employer.
It is important to note, however, that the high-deductible health plans necessary for HSA implementation are subject to ERISA.
Read the entire Field Assistance Bulletin 2004-1.
The interaction of HSAs, FSAs, and HRAs
Revenue Ruling 2004-45 provides a number of ways that eligible individuals may continue to contribute to an HSA and still have access to benefits from FSAs and HRAs.
- Limited purpose FSAs and HRAs that restrict reimbursements to
certain permitted benefits such as vision, dental, or preventive
care benefits.
- Suspended HRAs where the employee has elected to forgo health
reimbursements for the coverage period.
- Post-deductible FSAs or HRAs that only provide reimbursements
after the minimum annual deductible has been satisfied.
- Retirement HRAs that only provide reimbursements after an employee retires.
Read the entire Revenue
Ruling 2004-45.
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
Public Law 108-173, known as the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, is the Congressional Act that established Health Savings Accounts and Code Section 223.
List of Nonbank Trustees and Custodians
The following is a list of entities that have been approved by the Commissioner of the Internal Revenue Service, pursuant to § 1.408-2(e) of the Income Tax Regulations, to serve as a nonbank trustee or custodian. This list updates and supersedes the list published with Announcement 2002-12, 2002-1 C.B. 553.
Read the entire Internal Revenue Bulletin: 2003-40.
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