Health Savings Account (HSA) Tax Rules: CPA REG Exam Guide
Master the tax rules for health savings accounts for the CPA REG exam. Covers eligibility, contribution limits, qualified medical expenses, and the triple tax advantage.
Health Savings Account Tax Rules for CPA Candidates
Health Savings Accounts (HSAs) are tax-advantaged accounts that allow individuals enrolled in high-deductible health plans (HDHPs) to save for medical expenses. HSAs offer a unique "triple tax advantage": contributions are tax-deductible, earnings grow tax-free, and distributions for qualified medical expenses are tax-free. For CPA REG candidates, HSAs are tested frequently because they intersect individual taxation, itemized deductions, and penalty provisions.
Eligibility Requirements
High-Deductible Health Plan (HDHP)
To be eligible to contribute to an HSA, an individual must be covered under a high-deductible health plan. For 2024, an HDHP must have a minimum annual deductible of $1,600 for self-only coverage or $3,200 for family coverage, and maximum annual out-of-pocket expenses of $8,050 for self-only or $16,100 for family coverage (including deductibles, copayments, and other amounts, but not premiums).
Other Eligibility Requirements
The individual must not be covered by any other health plan that is not an HDHP (with exceptions for specific types of permitted coverage such as dental, vision, and certain limited-scope plans). The individual must not be enrolled in Medicare. The individual must not be claimed as a dependent on another person's tax return. Coverage under a general-purpose health care flexible spending arrangement (FSA) disqualifies the individual, though a limited-purpose FSA (dental and vision only) is permitted.
Contribution Rules
Annual Contribution Limits
For 2024, the maximum HSA contribution is $4,150 for self-only HDHP coverage and $8,300 for family HDHP coverage. Individuals age 55 or older (but not enrolled in Medicare) can make an additional $1,000 catch-up contribution. Contributions can be made by the individual, the individual's employer, or a family member. All contributions from all sources count toward the annual limit.
Tax Treatment of Contributions
Contributions made by the individual are deductible as an above-the-line deduction (adjustment to gross income), available regardless of whether the taxpayer itemizes. Employer contributions (including amounts contributed through a cafeteria plan) are excluded from the employee's income and are not subject to FICA tax. Employer contributions also reduce the amount the individual can contribute.
Pro-Rata and Last-Month Rules
If an individual is eligible for only part of the year, the contribution limit is generally prorated based on the number of months of eligibility. However, under the "last-month rule," an individual who is eligible on the first day of December is treated as eligible for the entire year. If the individual uses the last-month rule and ceases to be eligible at any time during the following year (the "testing period"), the excess contribution is included in income and subject to a 10% penalty.
Distributions
Qualified Medical Expenses
Distributions from an HSA used to pay qualified medical expenses (as defined in Section 213(d)) of the account holder, spouse, or dependents are excluded from income. Qualified expenses include doctor visits, prescriptions, dental and vision care, and certain over-the-counter medications (since the CARES Act). Health insurance premiums are generally not qualified expenses, with exceptions for COBRA continuation coverage, long-term care insurance premiums (subject to age-based limits), and health insurance premiums while receiving unemployment compensation.
Non-Qualified Distributions
Distributions used for non-qualified expenses are included in gross income and subject to a 20% penalty. The 20% penalty is waived for distributions made after the account holder reaches age 65, becomes disabled, or dies. After age 65, non-qualified distributions are simply taxed as ordinary income (similar to traditional IRA distributions) without the penalty.
HSA vs. Other Tax-Advantaged Accounts
- HSA vs. FSA: HSAs have no "use it or lose it" requirement; unused funds roll over indefinitely. FSAs have a use-it-or-lose-it rule (with a limited carryover or grace period). HSAs are owned by the individual; FSAs are employer-sponsored.
- HSA vs. Traditional IRA: Both offer deductible contributions and tax-deferred growth. HSAs add tax-free distributions for medical expenses. After age 65, HSA non-qualified distributions are taxed like IRA distributions.
- Portability: HSAs are fully portable; they belong to the individual regardless of employment changes.
Reporting Requirements
HSA contributions and distributions are reported on Form 8889, which is attached to the individual's Form 1040. Employers report their contributions on the employee's Form W-2 in Box 12 with code W. The HSA trustee reports distributions on Form 1099-SA and the fair market value of the account on Form 5498-SA.
CPA Exam Tips
- The triple tax advantage: deductible contributions, tax-free growth, tax-free qualified distributions.
- Must be enrolled in an HDHP and not covered by other non-HDHP plans or Medicare.
- Contribution limits include both individual and employer contributions.
- Non-qualified distributions: income tax plus 20% penalty (waived after age 65, disability, or death).
- HSA funds roll over indefinitely; there is no use-it-or-lose-it rule.
- The last-month rule allows a full-year contribution but requires a 13-month testing period.
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