Tag Archives: Contributions

When Can I Make My HSA Contribution?

A common question for HSA participants is, “I have HSA insurance this year, so when and how much can I contribute that to my HSA?”. The answer is actually more flexible than you think: you have myriad options of how much and when you contribute to your Health Savings Account. As you will see, the main rule is you need a Health Savings Account established with a bank / custodian to make the contribution. After that, you have flexibility to get your money into the account.

In general, you can make your full HSA contribution at anytime up until tax day of the following year.

Rule 1: You can contribute any amount up to your Contribution Limit

First, know that you can contribute any amount to your HSA as long as it does not exceed your contribution limit. You have complete flexibility in determining how much to contribute. This can be the maximum allowable, $50 per month, or whatever works for you. Remember: if you start coverage mid year, and are insured as of December 1st, you can use the Last Month Rule to contribute as if you were eligible for the entire year.

Rule 2: You can contribute at any time during the year

You need to open a Health Savings Account in order to make a contribution. Of course, you need to prove HSA eligible insurance to open that account, but after that, you can make contributions at any time. The timing can be weekly, monthly, full amount at once, any amount at any time, or even any amount in the subsequent year (see next section).

Rule 3: You can contribute in the following year

A great part of HSA’s is that you can make a contribution in the subsequent year as a prior year contribution. You have until the tax filing day for the year to make a contribution for the prior year. For example, for the 2019 tax year, you have until April 15th (or so) of 2020 to make an HSA contribution for 2019. Just be sure to flag the contribution for the prior year; otherwise, it will apply towards the current year.

Here are some various scenarios to demonstrate how flexible the timing of your Health Savings Account contribution can be:

Scenario 1: You have HSA coverage all year

If you have HSA eligible coverage for the entire year, then you know your contribution limit. From there, you can contribute that amount at any time in any amount during the year. Let’s say you have self-only coverage in 2019 (note that this would work the same for Family coverage, just different amounts). For 2019, your contribution limit is $3,500. Here are some options as to when you can make your contributions:

Contribute full amount of $3,500 on January 1st, 2019
Contribute 1/12th ($291.67) of full contribution limit each month
Contribute $500 each quarter for a total of $2,000
Contribute full amount of $3,500 on April 14th, 2020 as a prior year contribution

Scenario 2: Start HSA coverage mid year

If you begin coverage mid year, your contribution limit will be less than the maximum allowable. This is because HSA eligibility is determined at the start of each month. As a result, your contribution limit may be a fraction (or pro rata amount) of the maximum limit. For example, if your HSA insurance begins November 1st, your contribution equals 2/12 x your maximum contribution. The options for when you can contribute to the HSA are:

Contribute pro-rata amount (for months covered) any time after coverage begins
Contribute partial amount any time after coverage begins
Contribute maximum amount using Last Month Rule any time after coverage begins (see below)
Contribute full amount before tax day in subsequent year as a prior year contribution

Scenario 3: End HSA coverage during the year

Even if your HSA coverage ends, this does not prevent you from contributing to the HSA for that year. A common misconception is “I can’t contribute any longer because I don’t have HSA insurance”. This is because your contribution limit is a “yearly” amount that can be contributed at any time. Even if your coverage ends, you have still “earned” a contribution limit for the coverage you did have during the year.

You can still contribute to your HSA even after your HSA eligible insurance has ended during the year.

However, given that you will not have HSA eligible insurance for some months, your contribution limit will be less than the maximum contribution limit. Be sure not to over contribute or you will have excess contributions and face taxes and penalties.

If your HSA coverage ended, you have many options to contribute to your HSA:

Full amount before coverage ends
Full amount after coverage ends
Partial amount before coverage ends, partial amount after coverage ends
Full or partial amount in subsequent year as a prior year contribution

Scenario 4: contribute more using the Last Month Rule

The Last Month Rule allows you to contribute the maximum contribution limit during a year that you start coverage, as long as you have coverage on December 1st of that year. That means you can contribute more than you could have otherwise based on the months you had HSA coverage. However, remember that using the Last Month Rule binds you to the Testing Period, which requires that you maintain HSA eligible coverage through the subsequent year. If you do not, your “extra” contribution you made via the Last Month Rule will be taxed and penalized.

If you decide to use the Last Month Rule, here are some examples of when you can make that contribution:

Contribute maximum amount during any month after HSA coverage begins. You can’t open a Health Savings Account until you have HSA eligible coverage, so you can’t contribute until you have coverage. Note that doing this before December assumes you will have HSA coverage in December (and the following year).
Contribute percentage of full contribution limit each month after coverage began
Make a one time contribution any month after coverage began
Contribute full amount of $3,500 on April 14th, 2020 as a prior year contribution using the Last Month Rule

Note: Regardless of when you make your HSA contribution, when you need to complete Form 8889 for your HSA, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

Reduce Social Security and Medicare Taxes with an HSA

We all know that one of the reasons people open Health Savings Accounts is the triple tax advantage, which, simply stated, means:

HSA contributions are tax free
HSA earnings grow tax free
HSA distributions for qualified medical expenses are tax free

However, there is a hidden fourth tax advantage to HSA’s that is not widely known, and can save you money. The fact is that HSA contributions can be payroll tax deductible as well. In the term “payroll tax” I lump the various taxes often described as FICA taxes which include Social Security, Medicare, and Unemployment Insurance. This is on top of the exclusion to income tax as shown in #1 above.

How to avoid Social Security and Medicare taxes an with HSA

There are various ways to contribute to an HSA which include:

Post-tax contributions
Pre-tax contributions
Employer Contributions
Qualified Funding Distribution (from IRA)

The main method people use to contribute to their HSA is #1 above, via post-tax HSA contributions. This involves depositing money into your HSA from your bank account using dollars you previously paid taxes on. Unfortunately, since those dollars likely came from an employer you would have already paid income, social security, and Medicare taxes. The income tax will be “returned” to you when you file Form 8889, but the Social Security and Medicare taxes are gone and cannot be credited back. In this way, you cannot avoid Social Security or Medicare taxes with a post-tax contribution.

The good news is you can avoid paying Social Security and Medicare taxes using pre-tax contributions. Pre-tax contributions are contributions withheld from your paycheck by your employer and deposited into your HSA for you. This often takes the form of a Cafeteria Plan, which is an automated contribution plan on behalf of the employee. This is an important distinction, because per IRS Form 15, only pre-tax contributions using a cafeteria plan can avoid Social Security and Medicare taxes:

However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan aren’t wages and aren’t subject to employment taxes or (Social Security, Medicare) withholding.

They distinguish that from a “payroll deduction plan” which, while undefined, is likely looser and does not meet the same requirements as a section 125 deduction. The result is you have to be using a section 125 cafeteria plan to make a pre-tax contribution that avoids these additional taxes. Your employer will have more information about this but is likely using this vehicle since it is most advantageous for both the employee and the employer. Contributions made in this way will be deducted from your paycheck before income, Social Security, and Medicare taxes are paid. In this way you save that money and it goes into your HSA instead of being paid to the government. As we will see, this can be a significant amount of money.

How much FICA taxes can you save with an HSA?

Here is a theoretical example of how much you can save on FICA taxes in addition to regular income tax using cafeteria plan HSA contributions. For 2017, you are taxed 6.2% of your income for Social Security up to a salary limit of $127,200. In addition, Medicare is taxed at 1.45% of wages with no ceiling.

Let’s say that for 2018, you have Family HSA insurance which has an (ever-changing) contribution limit of $6,900. Let’s say that you make contribution the family maximum using post-tax dollars. As mentioned, there is no way to avoid Social Security and Medicare Taxes on these amounts. Thus, you will pay:

	Post-Tax	Cafeteria Plan
Contribution	$6,900	$6,900
Social Security (6.2%)	$427.80	$0
Medicare (1.45%)	$100.50	$0
Total:	$528.30	$0

Contrast that with the cafeteria plan, contributions to which avoid these two taxes.

In addition to this, your HSA contribution might save you on various state taxes as well. Many states remove HSA contributions from state tax calculation. One notable exception is are tax hungry states like California who does not allow HSA contributions to be deducted from state income tax. Either way, state taxes for things like Disability and Unemployment insurance can range from 1-2%, so that is another $75 to $150 right there.

How employers save on taxes with an HSA Cafeteria Plan

It is also in an employer’s interest to establish a cafeteria plan for employee’s HSA contributions. This is because employers must also make a contribution to Social Security and Medicare coffers on behalf of the employee. While the employee contributes 6.2% and 1.45% percent of salary (up to limits for SS) to the government, the employer must make the same contribution for employee’s salary. That means that for each dollar you are paid, 12.4% is going to Social Security (6.2% + 6.2%) and 2.9% is going to Medicare (1.45% + 1.45%). This results in a tax of 15.3% going to the government for each dollar you ear.

The cafeteria plan deduction offered to employees also extends to the employer. So employer Social Security and Medicare contributions are not required for employee contributions made through a cafeteria plan to an HSA. So the same example applies, for each employee contributing $6,900 to an HSA via cafeteria plan, the employer can save $528.30 in taxes. Per IRS Form 15:

Your contributions to an employee’s health savings account (HSA) aren’t subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they’ll be excludeable from the income of the employee.

Note: if you need help with your HSA taxes this year, please consider using my service EasyForm8889.com to help complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

HSA Contributions from Others on Form 8889

This question was submitted by HSA Edge reader James. Feel free to send in your question today to evan@hsaedge.com.

I read your article on “Contributing to HSA’s with a Cafeteria Plan” and have a question. I am a federal employee with the Aetna High Deductible Health Plan. The government automatically deducts my premiums from each paycheck pretax through premium conversion. Aetna contributes $1,500 to my HSA each year. Where do I report Aetna’s $1,500 contribution on Form 8889?

One of the benefits of Health Savings Accounts is that literally anyone willing can make a contribution to your HSA on your behalf. This means that if you have a parent, grandparent, rich uncle, friendly employer, or random organization that wants to give you money for your medical care, you can accept it in your HSA.

HSA Contributions from Others are Tax Deductible

As if receiving free money wasn’t enough, the IRS gives you another special bonus for HSA contributions from others on your behalf. Incredibly, these contributions from others are deductible on your return. Yes, you read that right: if you receive HSA contributions from another person, you receive a tax deduction for this money. Per Form 969:

HSA-contributions-from-others-on-your-behalf-tax-free

In the above, “eligible individual” is the term for the HSA account holder. The result of this amazing tax treatment is that it trues up these other funds going into your HSA, and in effect gives them the same tax preferred status as your regular HSA contributions. In other words, if you receive a an HSA contribution from another on your behalf, you get the contribution as well as the deduction equal to the contribution amount times your marginal tax rate. Score!

Reporting Other HSA Contributions on Form 8889

Come tax time, reporting these contributions on Form 8889 can be a complication. Two lines on that form are used to report regular contributions to the HSA. Line 2 is used to report pre-tax contributions that you made during the year. Amounts on this line will reduce your taxable income. Line 9, on the other hand, is called Employer Contributions and amounts here do not reduce your taxable income. The “contributions from others” do not fall neatly into these categories, and are sort of in an “in between” zone.

Luckily, the Form 8889 instructions provide guidance on this situation. Comparing the two tax form lines, you can see that this situation is explicitly handled:

HSA-Form-8889-Line-2-tax-deductible-contributions
HSA-Form-8889-Line-9-employer-contribution-info

Per your question, it is not entirely clear if Aetna is contributing as your employer or as another entity. Since they are an insurance company, my guess is as another entity i.e. as another on your behalf. In this case, it is the best possible scenario, as you get the free money and get to deduct the contribution.

Note: if you need help recording your contribution on your HSA taxes this year, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.