III. Contributions to HSA s.

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 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 orover 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 (unlessthey 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 theeligible 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?
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 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 contributions to HSA s permitted?
A-23. Rollover contributions from Archer MSAs and other HSA s 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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