- Learn the basics of Health Savings Accounts (HSAs).
- Discover key 2020 HSA amounts as well as any changes coming in 2021.
- Get the details about contributing to an HSA on an employee’s behalf.
- Find out more about eligible expenses as well as taxes associated with other withdrawals.
Small business owners know all too well the increasing cost of employee health care benefits. Employer-sponsored Health Savings Accounts (HSAs) may help you provide some of these health care benefits and save you money. Or perhaps you already have an HSA. It’s a good time to review how these accounts work since the IRS recently announced the relevant inflation-adjusted amounts for 2021, and Fiducial has the information you need.
The basics of HSAs
For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:
- Contributions that participants make to an HSA are deductible, within limits.
- Contributions that employers make aren’t taxed to participants.
- Earnings on the funds within an HSA aren’t taxed, so the money can accumulate year after year tax free.
- HSA distributions to cover qualified medical expenses aren’t taxed.
- Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.
Key 2020 and 2021 amounts for HSAs
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2020, a “high deductible health plan” has an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For 2021, these amounts will stay the same.
The 2020 limit on deductible contributions is $3,550 for self-only coverage. For family coverage, the 2020 limit on deductible contributions is $7,100. In 2021, these amounts will increase to $3,600 and $7,200, respectively. In addition, for 2020, annual out-of-pocket expenses requiring payment (other than for premiums) for covered benefits may not exceed $6,900 for self-only coverage or $13,800 for family coverage. For 2021, these amounts will increase to $7,000 and $14,000.
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2020 and 2021 of up to $1,000.
Contributing on an employee’s behalf
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can build up for years. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
Paying for eligible expenses
You may use HSA distributions to pay for qualified medical expenses. This generally means those expenses that would qualify for the medical expense itemized deduction. They include expenses such as doctors’ visits, prescriptions, chiropractic care, and premiums for long-term care insurance.
If you withdraw funds from the HSA for any other reason, the withdrawal counts as taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless you make the withdrawal after reaching age 65, or in the event of death or disability.
As you can see, HSAs offer a flexible option for providing health care coverage, but they have somewhat complex rules. Have questions or want to discuss offering this benefit to your employees? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations.
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.