Tax Tip Podcast or Blog Post and Health Savings Accounts Defined

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Health Savings Accounts Defined

A Health Savings Account (HSA) is a U.S. trust set up with a qualified trustee for the exclusive purpose of paying the account beneficiary’s qualified medical expenses (Code Section 223(d)(1)). A custodial account is treated as a trust if the account’s assets are held by a bank or another IRS-approved person and if the custodial account would, except for the fact that it is not a trust, constitute an HSA (Code Secs. 223(d)(4)(E), 408(h)). In the case of a custodial account treated as a trust, the custodian of the account is treated as the trustee.

Any insurance company or any bank (or similar financial institution) can be an HSA trustee or custodian (Code Sec. 223(d)(1)(B)). In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian (Notice 2004-2; Notice 2004-50, Q&A-72). Other persons may request IRS approval to be a trustee or custodian (Reg. Sec. 1.408-2(e); Announcement 2003-54). The IRS has issued two model forms for establishing an HSA: Form 5305-B, Health Savings Trust Account; and Form 5305-C, Health Savings Custodial Account.

An HSA may be established through a qualified trustee or custodian who is different from the high-deductible health plan (HDHP) provider. If a trustee or custodian does not sponsor the HDHP, the trustee or custodian may require proof or certification that the account beneficiary is an eligible individual, including proof or certification that the individual is covered by a health plan that meets all the requirements of an HDHP (Notice 2004-2, Q&A-10).

Tax Compliance Tip:

The trustee or custodian must file Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, with the IRS for each individual for whom it maintains an HSA.

Except for certain permitted rollover contributions, all contributions to the HSA must be in cash (Code Sec. 223(d)(1)(A)(i)). Further, except in the case of permitted rollover contributions or trustee-to-trustee transfers, the trustee or custodian cannot accept annual contributions to any HSA that exceed the sum of:

(1) the maximum annual contribution limit for family coverage ($7,200 for 2021, $7,100 for 2020, $7,000 for 2019, $6,900 for 2018; $6,750 for 2017; and $6,750 for 2016); plus

(2) the catch-up contribution amount ($1,000) (Code Sec. 223(d)(1)(A)(ii); Revenue Procedure 2020-32; Revenue Procedure 2019-25; Revenue Procedure 2018-30; Revenue Procedure 2018-27; Revenue Procedure 2016-28; Revenue Procedure 2015-30).

Tax Practice Tip:

In Revenue Procedure 2018-27, the IRS modified the 2018 annual limitation on deductions for contributions to HSAs for individuals with family coverage under a high deductible health plan (HDHP) to bring it back to the limitation amount in effect prior to a change in the limitation announced in 2018-18 Revenue Procedure 2018-18 had reduced the limitation from $6,900 to $6,850. Revenue Procedure 2018-27 details the procedures that should be followed where an individual received a distribution from an HSA of an excess contribution (with earnings) based on the $6,850 limitation.

An individual can make a contribution to his or her HSA by having a portion of his or her income tax refund if any, paid directly to the HSA (Instructions, Form 8888, Allocation of Refund (Including Savings Bond Purchases).

HSA funds may be invested in investments approved for IRAs (for example, bank accounts, annuities, certificates of deposit, stocks, mutual funds, or bonds). HSAs may not invest in life insurance contracts, or in collectibles (for example, any work of art, antique, metal, gem, stamp, coin, alcoholic beverage, or other tangible personal property specified in IRS guidance) (Code Sec. 223(d)(1)(C); Notice 2004-50, Q&A-65). HSAs may, however, invest in certain types of bullion or coins, as described in Code Section 408(m)(3) (Notice 2004-50, Q&A-65). The HSA trust or custodial agreement may restrict investments to certain types of permissible investments (e.g., particular investment funds).

The trust’s assets cannot be commingled with other property, except in a common trust fund or common investment fund (Code Sec. 223(d)(1)(D); Notice 2004-50, Q&A-66). Further, an individual’s interest in the balance in his or her account must be nonforfeitable (Code Section 223(d)(1)(E)).

In the case of married taxpayers, each spouse who is an eligible individual and who wants an HSA must set up a separate HSA – spouses cannot have a joint HSA (Notice 2004-50, Q&A-63).

Whether an HSA is exempt from a bankruptcy estate depends on the laws of the individual state.

The debtor in In Re Mooney, 2014 PTC 9 (Bankr. M.D. Ga. 2014) tried to exempt her health savings account from her Chapter 7 bankruptcy estate. However, a Georgia bankruptcy court held that, because the health savings account was not a substitute for wages, it was not the type of illness benefit, or right to receive payment on account of illness, contemplated by Georgia law as being eligible for exemption from a bankruptcy estate.

Brenda Fitch Real Estate Professional
Brenda Fitch Real Estate Professional

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Health Savings Accounts Defined
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(Updated 04162021)

Published by Don Fitch, CPA

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