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Health Savings Accounts (HSAs)

A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.

No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

Your employer may already have some information on HSA trustees in your area.

If you have an Archer MSA, you can generally roll it over into an HSA tax free. See Rollovers, later.
What are the benefits of an HSA?   You may enjoy several benefits from having an HSA.

  • You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.

  • Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

  • The contributions remain in your account from year to year until you use them.

  • The interest or other earnings on the assets in the account are tax free.

  • Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.

  • An HSA is “portable” so it stays with you if you change employers or leave the work force.

Qualifying for an HSA

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), described later, on the first day of the month.

  • You have no other health coverage except what is permitted under Other health coverage , later.

  • You are not enrolled in Medicare.

  • You cannot be claimed as a dependent on someone else's 2008 tax return.

 

Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).

If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you.

If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. This is true even if the other person does not actually claim your exemption. Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You cannot have a joint HSA.
High deductible health plan (HDHP).   An HDHP has:

  • A higher annual deductible than typical health plans, and

  • A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums.

  An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Preventive care includes, but is not limited to, the following.

  1. Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.

  2. Routine prenatal and well-child care.

  3. Child and adult immunizations.

  4. Tobacco cessation programs.

  5. Obesity weight-loss programs.

  6. Screening services. This includes screening services for the following:

    1. Cancer.

    2. Heart and vascular diseases.

    3. Infectious diseases.

    4. Mental health conditions.

    5. Substance abuse.

    6. Metabolic, nutritional, and endocrine conditions.

    7. Musculoskeletal disorders.

    8. Obstetric and gynecological conditions.

    9. Pediatric conditions.

    10. Vision and hearing disorders.

    For more information on screening services, see Notice 2004-23, 2004-15 I.R.B. 725 available at www.irs.gov/irb/2004-15_IRB/ar10.html.

  The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2008.   
Type of Coverage Minimum
Annual
Deductible		 Maximum
Annual Deductible and Other Out-of-Pocket Expenses *
Self-only $1,100 $5,600
Family $2,200 $11,200
* This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.
The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2009.   
Type of Coverage Minimum
Annual
Deductible		 Maximum
Annual Deductible and Other Out-of-Pocket Expenses *
Self-only $1,150 $5,800
Family $2,300 $11,600
* This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.
  Self-only HDHP coverage is an HDHP covering only an eligible individual. Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual).

Example.

An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual's employer. This is family HDHP coverage.

Family plans that do not meet the high deductible rules.   There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is below the minimum annual deductible for family coverage, the plan does not qualify as an HDHP.

Example.

You have family health insurance coverage in 2008. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. The plan does not qualify as an HDHP because the deductible for an individual family member is below the minimum annual deductible ($2,200) for family coverage.

Other health coverage.   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan.    You can have additional insurance that provides benefits only for the following items.

  • Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property.

  • A specific disease or illness.

  • A fixed amount per day (or other period) of hospitalization.

  You can also have coverage (whether provided through insurance or otherwise) for the following items.

  • Accidents.

  • Disability.

  • Dental care.

  • Vision care.

  • Long-term care.

Plans in which substantially all of the coverage is through the above listed items are not HDHPs. For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA.
Prescription drug plans.   You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. If you can receive benefits before that deductible is met, you are not an eligible individual.
Other employee health plans.   An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. Health FSAs and HRAs are discussed later.   However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements.

  • Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed earlier under Other health coverage, except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.

  • Suspended HRA. Before the beginning of an HRA coverage period, you can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. When the suspension period ends, you are no longer eligible to make contributions to an HSA.

  • Post-deductible health FSA or HRA. These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.

  • Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement you are no longer eligible to make contributions to an HSA.

Health FSA – grace period.   Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero, or a qualified HSA distribution (discussed later) of any balance remaining is made to an HSA. See Flexible Spending Arrangements (FSAs), later.

Contributions to an HSA

Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual.

Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.

Limit on Contributions

The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. For 2008, if you have self-only HDHP coverage, you can contribute up to $2,900. If you have family HDHP coverage, you can contribute up to $5,800.

For 2009, if you have self-only HDHP coverage, you can contribute up to $3,000. If you have family HDHP coverage you can contribute up to $5,950.

If you were, or were considered (under the last-month rule, discussed later), an eligible individual for the entire year and did not change your type of coverage, you can contribute the full amount based on your type of coverage. However, if you were not an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of:

  1. The limitation shown on the last line of the Line 3 Limitation Chart and Worksheet in the Instructions for Form 8889, Health Savings Accounts (HSAs), or

  2. The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year.

 

If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2008 is $5,800 even if you changed coverage during the year.
Last-month rule.   Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of that last month.
Testing period.   If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. For example, December 1, 2008, through December 31, 2009.   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the total contributions made to your HSA that would not have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are shown on Form 8889, Part III.

Example 1.

Chris, age 53, becomes an eligible individual on December 1, 2008. He has family HDHP coverage on that date. Under the last-month rule, he contributes $5,800 to his HSA.

Chris fails to be an eligible individual in June 2009. Because Chris did not remain an eligible individual during the testing period (December 1, 2008, through December 31, 2009), he must include in his 2009 income the contributions made in 2008 that would not have been made except for the last-month rule. Chris uses the worksheet for line 3 in the Form 8889 instructions to determine this amount.

January -0-
February -0-
March -0-
April -0-
May -0-
June -0-
July -0-
August -0-
September -0-
October -0-
November -0-
December $5,800.00
Total for all months $5,800.00
Limitation. Divide the total by 12 $483.33

Chris would include $5,316.67 ($5,800.00 – $483.33) in his gross income on his 2009 tax return. Also, a 10% additional tax applies to this amount.

Example 2.

Erika, age 39, has self-only HDHP coverage on January 1, 2008. Erika changes to family HDHP coverage on November 1, 2008. Because Erika has family HDHP coverage on December 1, 2008, she contributes $5,800 for 2008.

Erika fails to be an eligible individual in March 2009. Because she did not remain an eligible individual during the testing period (December 1, 2008, through December 31, 2009), she must include in income the contribution made that would not have been made except for the last-month rule. Erika uses the worksheet for line 3 in the Form 8889 instructions to determine this amount.

 

January $2,900.00
February $2,900.00
March $2,900.00
April $2,900.00
May $2,900.00
June $2,900.00
July $2,900.00
August $2,900.00
September $2,900.00
October $2,900.00
November $5,800.00
December $5,800.00
Total for all months $40,600.00
Limitation. Divide the total by 12 $3,383.33

Erika would include $2,416.67 ($5,800 – $3,383.33) in her gross income on her 2009 tax return. Also, a 10% additional tax applies to this amount.

Additional contribution.   For 2008, if you are an eligible individual who is age 55 or older, your contribution limit is increased by $900. For example, if you have self-only coverage, you can contribute up to $3,800 (the contribution limit for self-only coverage ($2,900) plus the additional contribution of $900). However, see Enrolled in Medicare, later.
For 2009 and later years, the additional contribution amount is $1,000. If you have more than one HSA in 2008, your total contributions to all the HSAs cannot be more than the limits discussed earlier.
Reduction of contribution limit.   You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year. A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP.
Rules for married people.   If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. If each spouse has family coverage under a separate plan, the contribution limit for 2008 is $5,800. You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouse's Archer MSAs. After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division.
The rules for married people apply only if both spouses are eligible individuals.

If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $7,600. Each spouse must make the additional contribution to his or her own HSA.

Example.

For 2008, Mr. Auburn and his wife are both eligible individuals. They each have family coverage under separate HDHPs. Mr. Auburn is 58 years old and Mrs. Auburn is 53. Mr. and Mrs. Auburn can split the family contribution limit ($5,800) equally or they can agree on a different division. If they split it equally, Mr. Auburn can contribute $3,800 to an HSA (one-half the maximum contribution for family coverage ($2,900) + $900 additional contribution) and Mrs. Auburn can contribute $2,900 to an HSA.

Employer contributions.   You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. This includes amounts contributed to your account by your employer through a cafeteria plan.
Enrolled in Medicare.   Beginning with the first month you are enrolled in Medicare, your contribution limit is zero.

Example.

You turned age 65 in July 2008 and enrolled in Medicare. You had an HDHP with self-only coverage and are eligible for an additional contribution of $900. Your contribution limit is $1,900 ($3,800 × 6 ÷ 12).

Qualified HSA funding distribution.   A qualified HSA funding distribution may be made from your traditional IRA or ROTH IRA to your HSA. This distribution cannot be made from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made.   The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. The qualified HSA funding distribution is shown on Form 8889, Part I, line 10 for the year in which the distribution is made.   You can make only one qualified HSA funding distribution during your lifetime. However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled.

Example.

In 2008, you are an eligible individual, age 57, with self-only HDHP coverage. You can make a qualified HSA funding distribution of $3,800 ($2,900 plus $900 additional contribution).

Funding distribution – testing period.   You must remain an eligible individual during the testing period. For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. For example, if a qualified HSA funding distribution is contributed to your HSA on August 15, 2008, your testing period begins in August 2008, and ends on August 31, 2009.   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA funding distribution. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and the additional tax are shown on Form 8889, Part III.   Each qualified HSA funding distribution allowed has its own testing period. For example, you are an eligible individual, age 45, with self-only HDHP coverage. On June 18, 2008, you make a qualified HSA funding distribution of $2,800. On August 1, 2008, you enroll in family HDHP coverage and on August 14, 2008, you make a qualified HSA funding distribution of $3,000. Your testing period for the first distribution begins in June 2008 and ends on June 30, 2009. Your testing period for the second distribution begins in August 2008 and ends on August 31, 2009.   The testing period rule that applies under the last-month rule (discussed earlier) does not apply to amounts contributed to an HSA through a qualified HSA funding distribution. If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and will not be subject to the additional tax for failing to meet the last-month rule testing period.

Rollovers

A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit.

Archer MSAs and other HSAs.   You can roll over amounts from Archer MSAs and other HSAs into an HSA. You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. Rollover contributions do not need to be in cash. Rollovers are not subject to the annual contribution limits.   You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period.

Note.

If you instruct the trustee of your HSA to transfer funds directly to the trustee of another HSA, the transfer is not considered a rollover. There is no limit on the number of these transfers. Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889, line 14a.

Qualified HSA distribution.   This is a distribution from a health FSA or an HRA that is transferred to your HSA. To be a qualified HSA distribution certain conditions must be met. See Qualified HSA distribution under Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs) , later.
Testing period.   You must remain an eligible individual during the testing period. For a qualified HSA distribution, the testing period begins with the month in which the qualified HSA distribution is contributed and ends on the last day of the 12th month following that month. For example, if a qualified HSA distribution is contributed to your HSA on December 31, 2008, your testing period runs from December 2008, through December 31, 2009.   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA distribution. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and the additional tax are shown on Form 8889, Part III.

When To Contribute

You can make contributions to your HSA for 2008 until April 15, 2009. If you fail to be an eligible individual during 2008, you can still make contributions, up until April 15, 2009, for the months you were an eligible individual.

Your employer can make contributions to your HSA between January 1, 2009, and April 15, 2009, that are allocated to 2008. Your employer must notify you and the trustee of your HSA that the contribution is for 2008. The contribution will be reported on your 2009 Form W-2.

Reporting Contributions on Your Return

Contributions made by your employer are not included in your income. Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. You can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.

Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.

Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.

Form 8889.   Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. You should include all contributions made for 2008, including those made by April 15, 2009, that are designated for 2008. Contributions made by your employer and qualified HSA funding distributions are also shown on the form.   You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. Follow the instructions for Form 8889. Report your HSA deduction on Form 1040 or Form 1040NR, line 25.
Excess contributions.   You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions are not deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return.   Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.

  • You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.

  • You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income is not an excess contribution. If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later.
Deducting an excess contribution in a later year.   You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the following two amounts.

  • Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year.

  • The total excess contributions in your HSA at the beginning of the year.

  Amounts contributed for the year include contributions by you, your employer, and any other person. It also includes any qualified HSA funding distribution made to your HSA. Any excess contribution remaining at the end of a tax year is subject to the additional tax. See Form 5329.

Distributions From an HSA

You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA.

You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax. You do not have to make distributions from your HSA each year.

If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.

Generally, a distribution is money you get from your health savings account. Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.

Qualified medical expenses.   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for HSA purposes.   For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. State law determines when an HSA is established. An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established.   If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses.   Qualified medical expenses are those incurred by the following persons.

  1. You and your spouse.

  2. All dependents you claim on your tax return.

  3. Any person you could have claimed as a dependent on your return except that:

    1. The person filed a joint return,

    2. The person had gross income of $3,500 or more, or

    3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2008 return.

For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption.
You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA.
Insurance premiums.   You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

  1. Long-term care insurance.

  2. Health care continuation coverage (such as coverage under COBRA).

  3. Health care coverage while receiving unemployment compensation under federal or state law.

  4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

  The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).   Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses.
Health coverage tax credit.   You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. See Publication 502 for more information on this credit.
Deemed distributions from HSAs.   The following situations result in deemed taxable distributions from your HSA.

  • You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2008. Your account ceases to be an HSA as of January 1, 2008, and you must include the fair market value of all assets in the account as of January 1, 2008, on Form 8889, line 14a.

  • You used any portion of any of your HSAs as security for a loan at any time in 2008. You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR, line 21.

  Examples of prohibited transactions include the direct or indirect:

  • Sale, exchange, or leasing of property between you and the HSA,

  • Lending of money between you and the HSA,

  • Furnishing goods, services, or facilities between you and the HSA, and

  • Transfer to or use by you, or for your benefit, any assets of the HSA.

  Any deemed distribution will not be treated as used to pay qualified medical expenses. These distributions are included in your income and are subject to the additional 10% tax, discussed later.
Recordkeeping. You must keep records sufficient to show that:

  • The distributions were exclusively to pay or reimburse qualified medical expenses,

  • The qualified medical expenses had not been previously paid or reimbursed from another source, and

  • The medical expenses had not been taken as an itemized deduction in any year.

Do not send these records with your tax return. Keep them with your tax records.

Reporting Distributions on Your Return

How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier).

  • If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. Follow the instructions for the form and file it with your Form 1040 or Form 1040NR.

  • If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. If you have a taxable HSA distribution, include it in the total on Form 1040 or Form 1040NR, line 21, and enter “HSA” and the amount on the dotted line next to line 21. You may have to pay an additional 10% tax on your taxable distribution.

 

HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA.
Additional tax.   There is an additional 10% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. Report the additional tax on Form 1040, line 61, or Form 1040NR, line 57, and enter “HSA” and the amount on the dotted line next to that line.
Exceptions.   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

Balance in an HSA

An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier). Earnings on amounts in an HSA are not included in your income while held in the HSA.

Death of HSA Holder

You should choose a beneficiary when you set up your HSA. What happens to that HSA when you die depends on whom you designate as the beneficiary.

Spouse is the designated beneficiary.   If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death.
Spouse is not the designated beneficiary.   If your spouse is not the designated beneficiary of your HSA:

  • The account stops being an HSA, and

  • The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.

If your estate is the beneficiary, the value is included on your final income tax return.
The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.

Filing Form 8889

You must file Form 8889 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. You must file the form even if only your employer or your spouse's employer made contributions to the HSA.

If, during the tax year, you are the beneficiary of 2 or more HSAs or you are a beneficiary of an HSA and you have your own HSA, you must complete a separate Form 8889 for each HSA. Enter “statement” at the top of each Form 8889 and complete the form as instructed. Next, complete a controlling Form 8889 combining the amounts shown on each of the statement Forms 8889. Attach the statements to your tax return after the controlling Form 8889.

Employer Participation

This section contains the rules that employers must follow if they decide to make HSAs available to their employees. Unlike the previous discussions, “you” refers to the employer and not to the employee.

Health plan.   If you want your employees to be able to have an HSA, they must have an HDHP. You can provide no additional coverage other than those exceptions listed previously under Other health coverage.
Contributions.   You can make contributions to your employees' HSAs. You deduct the contributions on the “Employee benefit programs” line of your business income tax return for the year in which you make the contributions. If the contribution is allocated to the prior year, you still deduct it in the year in which you made the contribution. If you are filing Form 1040, Schedule C, this is Part II, line 14.   For more information on employer contributions, see Notice 2008-59, 2008-29 I.R.B. 123, questions 23 through 27, available at www.irs.gov/irb/2008-29_IRB/ar11.html.
Comparable contributions.   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. Your contributions are comparable if they are either:

  • The same amount, or

  • The same percentage of the annual deductible limit under the HDHP covering the employees.

Comparable participating employees.   Comparable participating employees:

  • Are covered by your HDHP and are eligible to establish an HSA,

  • Have the same category of coverage (either self-only or family coverage), and

  • Have the same category of employment (part-time, full-time, or former employees).

The comparability rules do not apply to contributions made through a cafeteria plan.

Note.

For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees.

Excise tax.   If you made contributions to your employees' HSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed.
Employment taxes.   Amounts you contribute to your employees' HSAs are generally not subject to employment taxes. You must report the contributions in box 12 of the Form W-2 you file for each employee. This includes the amounts the employee elected to contribute through a cafeteria plan. Enter code “W” in box 12.