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Q-1. What is an HSA?
A-1. An HSA is a tax-exempt trust or custodial account established exclusively for the
purpose of paying qualified medical expenses of the account beneficiary who, for the
months for which contributions are made to an HSA, is covered under a high-deductible
health plan.
Q-2. Who is eligible to establish an HSA?
A-2. An “eligible individual” can establish an HSA. An “eligible individual” means,
with respect to any month, any individual who: (1) is covered under a high-deductible
health plan (HDHP) on the first day of such month; (2) is not also covered by any other
health plan that is not an HDHP (with certain exceptions for plans providing certain
limited types of coverage); (3) is not entitled to benefits under Medicare (generally, has
not yet reached age 65); and (4) may not be claimed as a dependent on another person’s
tax return.
Q-3. What is a "high-deductible health plan" (HDHP)?
A-3. Generally, an HDHP is a health plan that satisfies certain requirements with respect
to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an
HDHP has an annual deductible of at least $1,000 and annual out-of-pocket expenses
required to be paid (deductibles, co-payments and other amounts, but not premiums) not
exceeding $5,000. For family coverage, an HDHP has an annual deductible of at least
$2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. In
the case of family coverage, a plan is an HDHP only if, under the terms of the plan and
without regard to which family member or members incur expenses, no amounts are
payable from the HDHP until the family has incurred annual covered medical expenses in
excess of the minimum annual deductible. Amounts are indexed for inflation. A plan
does not fail to qualify as an HDHP merely because it does not have a deductible (or has
a small deductible) for preventive care (e.g., first dollar coverage for preventive care).
However, except for preventive care, a plan may not provide benefits for any year until
the deductible for that year is met. See A-4 and A-6 for special rules regarding network
plans and plans providing certain types of coverage.
Example (1): A Plan provides coverage for A and his family. The Plan provides for the
payment of covered medical expenses of any member of A’s family if the member has
incurred covered medical expenses during the year in excess of $1,000 even if the family
has not incurred covered medical expenses in excess of $2,000. If A incurred covered
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medical expenses of $1,500 in a year, the Plan would pay $500. Thus, benefits are
potentially available under the Plan even if the family's covered medical expenses do not
exceed $2,000. Because the Plan provides family coverage with an annual deductible of
less than $2,000, the Plan is not an HDHP.
Example (2): Same facts as in example (1), except that the Plan has a $5,000 family
deductible and provides payment for covered medical expenses if any member of A’s
family has incurred covered medical expenses during the year in excess of $2,000. The
Plan satisfies the requirements for an HDHP with respect to the deductibles. See A-12
for HSA contribution limits.
Q-4. What are the special rules for determining whether a health plan that is a network
plan meets the requirements of an HDHP?
A-4. A network plan is a plan that generally provides more favorable benefits for services
provided by its network of providers than for services provided outside of the network.
In the case of a plan using a network of providers, the plan does not fail to be an HDHP
(if it would otherwise meet the requirements of an HDHP) solely because the out-ofpocket
expense limits for services provided outside of the network exceeds the maximum
annual out-of-pocket expense limits allowed for an HDHP. In addition, the plan's annual
deductible for out-of- network services is not taken into account in determining the annual
contribution limit. Rather, the annual contribution limit is determined by reference to the
deductible for services within the network.
Q-5. What kind of other health coverage makes an individual ineligible for an HSA?
A-5. Generally, an individual is ineligible for an HSA if the individual, while covered
under an HDHP, is also covered under a health plan (whether as an individual, spouse, or
dependent) that is not an HDHP. See also A-6.
Q-6. What other kinds of health coverage may an individual maintain without losing
eligibility for an HSA?
A-6. An individual does not fail to be eligible for an HSA merely because, in addition to
an HDHP, the individual has coverage for any benefit provided by “permitted insurance.”
Permitted insurance is insurance under which substantially all of the coverage provided
relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities
relating to ownership or use of property (e.g., automobile insurance), insurance for a
specified disease or illness, and insurance that pays a fixed amount per day (or other
period) of hospitalization.
In addition to permitted insurance, an individual does not fail to be eligible for an HSA
merely because, in addition to an HDHP, the individual has coverage (whether provided
through insurance or otherwise) for accidents, disability, dental care, vision care, or longterm
care. If a plan that is intended to be an HDHP is one in which substantially all of
the coverage of the plan is through permitted insurance or other coverage as described in
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this answer, it is not an HDHP.
Q-7. Can a self-insured medical reimbursement plan sponsored by an employer be an
HDHP?
A-7. Yes.
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Q-11. Who may contribute to an HSA?
A-11. Any eligible individual may contribute to an HSA. For an HSA established by an
employee, the employee, the employee's employer or both may contribute to the HSA of
the employee in a given year. For an HSA established by a self-employed (or
unemployed) individual, the individual may contribute to the HSA. Family members
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may also make contributions to an HSA on behalf of another family member as long as
that other family member is an eligible individual.
Q-12. How much may be contributed to an HSA in calendar year 2004?
A-12. The maximum annual contribution to an HSA is the sum of the limits determined
separately for each month, based on status, eligibility and health plan coverage as of the
first day of the month. For calendar year 2004, the maximum monthly contribution for
eligible individuals with self-only coverage under an HDHP is 1/12 of the lesser of 100%
of the annual deductible under the HDHP (minimum of $1,000) but not more than
$2,600. For eligible individuals with family coverage under an HDHP, the maximum
monthly contribution is 1/12 of the lesser of 100% of the annual deductible under the
HDHP (minimum of $2,000) but not more than $5,150. In addition to the maximum
contribution amount, catch-up contributions, as described in A-14, may be made by or on
behalf of individuals age 55 or older and younger than 65.
All HSA contribut ions made by or on behalf of an eligible individual to an HSA are
aggregated for purposes of applying the limit. The annual limit is decreased by the
aggregate contributions to an Archer MSA. The same annual contribution limit applies
whether the contributions are made by an employee, an employer, a self-employed
person, or a family member. Unlike Archer MSAs, contributions may be made by or on
behalf of eligible individuals even if the individuals have no compensation or if the
contributions exceed their compensation. If an individual has more than one HSA, the
aggregate annual contributions to all the HSAs are subject to the limit.
Q-13. How is the contribution limit computed for an individual who begins self-only
coverage under an HDHP on June 1, 2004 and continues to be covered under the HDHP
for the rest of the year?
A-13. The contribution limit is computed each month. If the annual deductible is
$5,000 for the HDHP, then the lesser of the annual deductible and $2,600 is $2,600.
The monthly contribution limit is $216.67 ($2,600 /12). The annual contribution limit is
$1,516.69 (7 x $216.67).
Q-14. What are the “catch-up contributions” for individuals age 55 or older?
A-14. For individuals (and their spouses covered under the HDHP) between ages 55 and
65, the HSA contribution limit is increased by $500 in calendar year 2004. This catch-up
amount will increase in $100 increments annually, until it reaches $1,000 in calendar year
2009. As with the annual contribution limit, the catch- up contribution is also computed
on a monthly basis. After an individual has attained age 65 (the Medicare eligibility age),
contributions, including catch-up contributions, cannot be made to an individual’s HSA.
Example: An individual attains age 65 and becomes eligible for Medicare benefits in
July, 2004 and had been participating in self-only coverage under an HDHP with an
annual deductible of $1,000. The individual is no longer eligible to make HSA
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contributions (including catch-up contributions) after June, 2004. The monthly
contribution limit is $125 ($1,000 /12+ $500/12 for the catch- up contribution). The
individual may make contributions for January through June totaling $750 (6 x $125), but
may not make any contributions for July through December, 2004.
Q-15. If one or both spouses have family coverage, how is the contribution limit
computed?
A-15. In the case of individuals who are married to each other, if either spouse has family
coverage, both are treated as having family coverage. If each spouse has family coverage
under a separate health plan, both spouses are treated as covered under the plan with the
lowest deductible. The contribution limit for the spouses is the lowest deductible
amount, divided equally between the spouses unless they agree on a different division.
The family coverage limit is reduced further by any contribution to an Archer MSA.
However, both spouses may make the catch- up contributions for individuals age 55 or
over without exceeding the family coverage limit.
Example (1): H and W are married. H is 58 and W is 53. H and W both have family
coverage under separate HDHPs. H has a $3,000 deductible under his HDHP and W has
a $2,000 deductible under her HDHP. H and W are treated as covered under the plan
with the $2,000 deductible. H can contribute $1,500 to an HSA (1/2 the deductible of
$2,000 + $500 catch up contribution) and W can contribute $1,000 to an HSA (unless
they agree to a different division).
Example (2): H and W are married. H is 35 and W is 33. H and W each have a selfonly
HDHP. H has a $1,000 deductible under his HDHP and W has a $1,500 deductible
under her HDHP. H can contribute $1,000 to an HSA and W can contribute $1,500 to an
HSA.
Q-16. In what form must contributions be made to an HSA?
A-16. Contributions to an HSA must be made in cash. For example, contributions may
not be made in the form of stock or other property. Payments for the HDHP and
contributions to the HSA can be made through a cafeteria plan. See A-33.
Q-17. What is the tax treatment of an eligible individual's HSA contributions?
A-17. Contributions made by an eligible individual to an HSA (which are subject to the
limits described in A-12) are deductible by the eligible individual in determining adjusted
gross income (i.e., “above-the- line”). The contributions are deductible whether or not the
eligible individual itemizes deductions. However, the individual cannot also deduct the
contributions as medical expense deductions under section 213.
Q-18. What is the tax treatment of contributions made by a family member on behalf of
an eligible individual?
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A-18. Contributions made by a family member on behalf of an eligible individual to an
HSA (which are subject to the limits described in A-12) are deductible by the eligible
individual in computing adjusted gross income. The contributions are deductible whether
or not the eligible individual itemizes deductions. An individual who may be claimed as
a dependent on another person’s tax return is not an eligible individual and may not
deduct contributions to an HSA.
Q-19. What is the tax treatment of employer contributions to an employee’s HSA?
A-19. In the case of an employee who is an eligible individual, employer contributions
(provided they are within the limits described in A-12) to the employee’s HSA are treated
as employer-provided coverage for medical expenses under an accident or health plan
and are excludable from the employee’s gross income. The employer contributions are
not subject to withholding from wages for income tax or subject to the Federal Insurance
Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad
Retirement Tax Act. Contributions to an employee’s HSA through a cafeteria plan are
treated as employer contributions. The employee cannot deduct employer contributions
on his or her federal income tax return as HSA contributions or as medical expense
deductions under section 213.
Q-20. What is the tax treatment of an HSA?
A-20. An HSA is generally exempt from tax (like an IRA or Archer MSA), unless it has
ceased to be an HSA. Earnings on amounts in an HSA are not includable in gross income
while held in the HSA (i.e., inside buildup is not taxable). See A-25 regarding the
taxation of distributions to the account beneficiary.
Q-21. When may HSA contributions be made? Is there a deadline for contributions to an
HSA for a taxable year?
A-21. Contributions for the taxable year can be made in one or more payments, at the
convenience of the individual or the employer, at any time prior to the time prescribed by
law (without extensions) for filing the eligible individual's federal income tax return for
that year, but not before the beginning of that year. For calendar year taxpayers, the
deadline for contributions to an HSA is generally April 15 following the year for which
the contributions are made. Although the annual contribution is determined monthly, the
maximum contribution may be made on the first day of the year. See A-22 regarding
correcting excess contributions.
Example: B has self-only coverage under an HDHP with a deductible of $1,500 and also
has an HSA. B’s employer contributes $200 to B’s HSA at the end of every quarter in
2004 and at the end of the first quarter in 2005 (March 31, 2005). B can exclude from
income in 2004 all of the employer contributions (i.e., $1,000) because B’s exclusion for
all contributions does not exceed the maximum annual HSA contributions. See A-12.
Q-22. What happens when HSA contributions exceed the maximum amount that may be
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deducted or excluded from gross income in a taxable year?
A-22. Contributions by individuals to an HSA, or if made on behalf of an individual to an
HSA, are not deductible to the extent they exceed the limits described in A-12.
Contributions by an employer to an HSA for an employee are included in the gross
income of the employee to the extent that they exceed the limits described in A-12 or if
they are made on behalf of an employee who is not an eligible individual. In addition, an
excise tax of 6% for each taxable year is imposed on the account beneficiary for excess
individual and employer contributions.
However, if the excess contributions for a taxable year and the net income attributable to
such excess contributions are paid to the account beneficiary before the last day
prescribed by law (including extensions) for filing the account beneficiary's federal
income tax return for the taxable year, then the net income attributable to the excess
contributions is included in the account beneficiary's gross income for the taxable year in
which the distribution is received but the excise tax is not imposed on the excess
contribution and the distribution of the excess contributions is not taxed.
Q-23. Are rollover contribut ions to HSAs permitted?
A-23. Rollover contributions from Archer MSAs and other HSAs into an HSA are
permitted. Rollover contributions need not be in cash. Rollovers are not subject to the
annual contribution limits. Rollovers from an IRA, from a health reimbursement
arrangement (HRA), or from a health flexible spending arrangement (FSA) to an HSA
are not permitted.
.
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Q-24. When is an individual permitted to receive distributions from an HSA?
A-24. An individual is permitted to receive distributions from an HSA at any time.
Q-25. How are distributions from an HSA taxed?
A-25. Distributions from an HSA used exclusively to pay for qualified medical expenses
of the account beneficiary, his or her spouse, or dependents are excludable from gross
income. In general, amounts in an HSA can be used for qualified medical expenses and
will be excludable from gross income even if the individual is not currently eligible for
contributions to the HSA.
However, any amount of the distribution not used exclusively to pay for qualified
medical expenses of the account beneficiary, spouse or dependents is includable in gross
income of the account beneficiary and is subject to an additional 10% tax on the amount
includable, except in the case of distributions made after the account beneficiary's death,
disability, or attaining age 65.
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Q-26. What are the “qualified medical expenses” that are eligible for tax-free
distributions?
A-26. The term “qualified medical expenses” are expenses paid by the account
beneficiary, his or her spouse or dependents for medical care as defined in section 213(d)
(including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B.
559), but only to the extent the expenses are not covered by insurance or otherwise. The
qualified medical expenses must be incurred only after the HSA has been established.
For purposes of determining the itemized deduction for medical expenses, medical
expenses paid or reimbursed by distributions from an HSA are not treated as expenses
paid for medical care under section 213.
Q-27. Are health insurance premiums qualified medical expenses?
A-27. Generally, health insurance premiums are not qualified medical expenses except
for the following: qualified long-term care insurance, COBRA health care continuation
coverage, and health care coverage while an individual is receiving unemployment
compensation. In addition, for individuals over age 65, premiums for Medicare Part A or
B, Medicare HMO, and the employee share of premiums for employer-sponsored health
insurance, including premiums for employer-sponsored retiree health insurance can be
paid from an HSA. Premiums for Medigap policies are not qualified medical expenses.
Q-28. How are distributions from an HS A taxed after the account beneficiary is no
longer an eligible individual?
A-28. If the account beneficiary is no longer an eligible individual (e.g., the individual is
over age 65 and entitled to Medicare benefits, or no longer has an HDHP), distributions
used exclusively to pay for qualified medical expenses continue to be excludable from
the account beneficiary’s gross income.
Q-29. Must HSA trustees or custodians determine whether HSA distributions are used
exclusively for qualified medical expenses?
A-29. No. HSA trustees or custodians are not required to determine whether HSA
distributions are used for qualified medical expenses. Individuals who establish HSAs
make that determination and should maintain records of their medical expenses sufficient
to show that the distributions have been made exclusively for qualified medical expenses
and are therefore excludable from gross income.
Q.-30. Must employers who make contributions to an employee’s HSA determine
whether HSA distributions are used exclusively for qualified medical expenses?
A-30. No. The same rule that applies to trustees or custodians applies to employers. See
A-29.
Q-31. What are the income tax consequences after the HSA account beneficiary’s death?
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A-31. Upon death, any balance remaining in the account beneficiary’s HSA becomes the
property of the individual named in the HSA instrument as the beneficiary of the account.
If the account beneficiary’s surviving spouse is the named beneficiary of the HSA, the
HSA becomes the HSA of the surviving spouse. The surviving spouse is subject to
income tax only to the extent distributions from the HSA are not used for qualified
medical expenses.
If, by reason of the death of the account beneficiary, the HSA passes to a person other
than the account beneficiary’s surviving spouse, the HSA ceases to be an HSA as of the
date of the account beneficiary’s death, and the person is required to include in gross
income the fair market value of the HSA assets as of the date of death. For such a person
(except the decedent’s estate), the includable amount is reduced by any payments from
the HSA made for the decedent’s qualified medical expenses, if paid within one year
after death.
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Q-32. What discrimination rules apply to HSAs?
A-32. If an employer makes HSA contributions, the employer must make available
comparable contributions on behalf of all "comparable participating employees" (i.e.,
eligible employees with comparable coverage) during the same period. Contributions are
considered comparable if they are either the same amount or same percentage of the
deductible under the HDHP.
The comparability rule is applied separately to part-time employees (i.e., employees who
are customarily employed for fe wer than 30 hours per week). The comparability rule
does not apply to amounts rolled over from an employee’s HSA or Archer MSA, or to
contributions made through a cafeteria plan. If employer contributions do not satisfy the
comparability rule during a period, the employer is subject to an excise tax equal to 35%
of the aggregate amount contributed by the employer to HSAs for that period.
Example: Employer X offers its collectively bargained employees three health plans,
including an HDHP with self-only coverage and a $2,000 deductible. For each employee
electing the HDHP self-only coverage, X contributes $1,000 per year on behalf of the
employee to an HSA. X makes no HSA contributions for employees who do not elect the
HDHP. X’s plans and HSA contributions satisfy the comparability rule.
Q-33. Can an HSA be offered under a cafeteria plan?
A-33. Yes. Both an HSA and an HDHP may be offered as options under a cafeteria
plan. Thus, an employee may elect to have amounts contributed as employer
contributions to an HSA and an HDHP on a salary-reduction basis.
Q-34. What reporting is required for an HSA?
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A-34. Employer contributions to an HSA must be reported on the employee’s Form W-2.
In addition, information reporting for HSAs will be similar to information reporting for
Archer MSAs. The IRS will release forms and instructions, similar to those required for
Archer MSAs, on how to report HSA contributions, deductions, and distributions.
Q-35. Are HSAs subject to COBRA continuation coverage under section 4980B?
A-35. No. Like Archer MSAs, HSAs are not subject to COBRA continuation coverage.
Q-36. How do the rules under section 419 affect contributions by an employer to an
HSA?
A-36. Contributions by an employer to an HSA are not subject to the rules under section
419. An HSA is a trust that is exempt from tax under section 223. Thus, an HSA is not a
“fund” under section 419(e)(3) and, therefore, is not a “welfare benefit fund” under
section 419(e)(1).
Q-37. May eligible individuals use debit, credit or stored-value cards to receive
distributions from an HSA for qualified medical expenses?
A-37. Yes.
Q-38. Are HSAs subject to other statutory rules and provisions?
A-38. Yes. HSAs are subject to other statutory rules and provisions not addressed in this
notice. No inference should be drawn regarding issues not expressly addressed in this
notice that may be suggested by a particular question or answer, or by the inclusion or
exclusion of certain questions.
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Comments are requested on the questions and answers set forth in this notice. In
addition, comments are requested on any other issue not addressed in this notice but
which should be addressed in future IRS guidance. In particular, comments are requested
as to the following:
1. The appropriate standard for preventive care in section 223(c)(2)(C).
2. The relationship between section 223 and the rules governing health FSAs in
cafeteria plans under section 125 and the proposed and final regulations under
section 125 (in particular, Prop. Treas. Reg. § 1.125-2 Q&A 7).
3. Whether transition relief should be provided in cases of inappropriate
coordination of an HDHP with other coverage.
4. The relationship between HSAs and health FSAs or HRAs.
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5. The application of the nondiscrimination rules in section 125 to HSAs offered
under a cafeteria plan.
6. The corrective procedures in instances where employer contributions exceed the
statutory contribution limits.
7. The relationship between limits on out-of-pocket expenses in section 223(c)(2)(A)
and reasonable lifetime maximums on benefits in health insurance plans.
Send comments to: CC:DOM:CORP:R (Notice 2004-2), Room 5226, Internal Revenue
Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Comments may be
hand-delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORT:R (Notice
2004-2), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, D.C. Alternatively, taxpayers may submit comments electronically at:
Notice.2004.2.Comments@irscounsel.treas.gov (a Service Comments e- mail address).
DRAFTING INFORMATION
The principal authors of this notice are Elizabeth Purcell and Shoshanna Tanner of the
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). For further information regarding this notice contact Ms. Purcell or Ms. Tanner
on (202) 622-6080 (not a toll- free call).
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