What You’ll Need Before Opening an HSA
Employers are now preparing for benefits enrollment season, and chances are likely that you’ll soon experience an uptick in potential clients who want to set up new health savings accounts (HSAs) for next year. More employers than ever are offering their employees a high deductible health plan (HDHP) with an HSA option to help keep costs down.
Before these new HSA clients start showing up at your office door, it’s important to understand HSA rules and the steps involved in opening an HSA.
Proper Documentation is Key
Plan Agreement
To establish an HSA, the IRS requires that an HSA document (i.e., application or plan agreement) be signed by the HSA administrator and the HSA owner. The plan agreement lists both the HSA administrator’s and the HSA owner’s responsibilities. The types of HSA documents that may be used are
an IRS HSA model document: Form 5305-B, Health Savings Trust Account, or Form 5305-C, Health Savings Custodial Account; a standardized document from a forms provider; or a custom-designed document.
There is no IRS prototype program for HSAs, so forms providers generally design plan agreements for their HSA document kits based on the IRS model forms. Regardless of which type of document is chosen, HSA administrators need to be familiar with the contents of the HSA plan agreement that they use.
The HSA administrator may give copies of its HSA document or document kit to the employer or can work directly with the employees. To prove that the plan agreement was received, an HSA owner should sign and date a copy of the plan agreement or the HSA application as an acknowledgment of receipt. Copies of the signed document must be given to the HSA owner. The HSA administrator should retain copies as well.
An entity that has applied for and received nonbank trustee or custodian powers for HSAs will have an approval letter from the IRS that also must be given to HSA owners when they establish HSAs.
Disclosure Statement
Disclosure statements, which are documents that contain nontechnical explanations of the rules, have long been required for some tax-deferred arrangements, including IRAs. But laws and official IRS guidance have not yet required disclosure statements for HSAs. But to provide good customer service and to educate HSA owners about the HSA rules, it’s a good idea for financial organizations to provide HSA owners a disclosure statement with the plan agreement. Forms providers, like Ascensus, may offer HSA disclosure statements as part of their HSA document kits. A copy of IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, also could serve as a disclosure statement.
Beneficiary Designation
Although designating beneficiaries is not an IRS requirement, it is very helpful for both financial organizations and HSA owners. An HSA owner may indicate the individuals (or entities) that will have rights to the HSA assets when the HSA owner dies. If proper procedures are followed, HSA administrators should have no difficulty determining who should receive the HSA assets after death. To assure the validity of the beneficiary designation, the HSA owner should sign and date the document used to name beneficiaries (e.g., the HSA application or a separate beneficiary form). Some financial organizations even require a witness to verify the HSA owner’s identity.
Deadline
An HSA must be established by the HSA owner’s tax return due date for the year, not including extensions (generally April 15 following the year for which the HSA is established). This same deadline applies to contributions, regardless of who makes the contribution. However, employees signing up for an HSA-compatible HDHP should establish their HSAs during their enrollment period, or at least by the time their HDHP coverage begins so that they may begin contributing through payroll deduction.
Funding
There are no restrictions on who may fund an HSA. Both the HSA owner and the HSA owner’s employer may contribute on behalf of the employee. In addition, any other individual may contribute to an eligible individual’s HSA, and generally would do so by working directly with the HSA owner or the HSA administrator, not through the HSA owner’s employer.
Eligibility to make HSA contributions is determined monthly. For individuals who are eligible for the entire year, the maximum permitted annual contribution (not including catch-up contributions) is subject to the statutory limit for the type of HDHP coverage that the employee has (self-only or family). These amounts may be adjusted for cost-of-living increases.
The annual HSA contribution limits for single health coverage are $3,850 for 2023 and $4,150 for 2024. The contribution limits for family coverage are $7,750 for 2023 and $8,300 for 2024.
Eligible individuals who are age 55 or older by the end of the year may make additional HSA catch-up contributions of up to $1,000. Both the regular and catch-up contributions may be made through payroll deduction.
All HSA contributions are aggregated for purposes of applying the annual contribution limit. If employees make additional HSA contributions outside of their payroll deduction, they must be cautious about combining all the contributions for purposes of the annual limit.
