Tax season and HSAs: How employers can help provide support

With this year’s deadline to file personal income taxes coming up on April 18, employers can play a role in guiding employees through the process of reporting health savings account (HSA) activities on their tax returns.

HSAs are triple-tax advantaged — qualified contributions are tax-free, the money in them grows tax-free and withdrawals used for qualified medical expenses are tax-free. However, the Internal Revenue Service requires individuals to report HSA contributions and withdrawals when they file their returns.

Here are some considerations that employers should make sure their benefits departments are communicating to employees.

Catch-up contributions

In 2022, total HSA contributions, regardless of if they are made by the employee or employer, are limited to $3,650 for those with self-only coverage and $7,300 for those with family coverage. Those limits will increase to $3,850 and $7,750 respectively for the 2023 tax year (HSA contributions are also exempt from income taxes in most states except California and New Jersey).

Plus, employees 55 or older may contribute up to an additional $1,000 per year as a catch-up contribution, whether they have individual or family coverage. This catch-up contribution is often overlooked by those eligible and is a great way to help employees prepare for health care costs in retirement.

Contributing up until tax deadline

Human resources and benefits teams should make sure eligible employees know that they can make HSA contributions retroactively for the previous tax year, so long as they do it before the April 18 tax deadline. This includes those who have not contributed at all or those who would like to contribute more for the 2022 tax year. And even if they neglected to open an account in 2022, so long as they were HSA eligible in 2022, they can open an account now, and still make their contribution for 2022. However, employees need to act now since any of these people must make their contributions by the filing deadline. One item to note: Even though they were eligible to make contributions, if a person is only now opening and establishing their HSA, they cannot use those funds to make qualified distributions for expenses incurred before the establishment date. The only exception to that would be if they previously had an HSA with a balance at some point in the last 18 months. But the good news is that they can, of course, use their funds to pay for or reimburse themselves for qualified medical expenses incurred in the future.

Excess contributions

Employees need to know that if they exceed the maximum contribution to their HSAs, they will have to pay a 6% penalty each year until they remove the excess contribution. If they find that they have overcontributed, they will need to correct that issue before the tax filing deadline. However, they can’t just remove the funds themselves. To correct this issue, they need to make an “Excess Contribution Removal” with their HSA administrator so that the tax reporting is correct.

Withdrawals

Your employees should be made aware that all withdrawals, also called distributions, made during the year will be reported on Form 1099-SA, which shows how much money was distributed from their HSA whether it was for qualifying expenses or not. The employee then reports if these distributions are qualified or not when they file their taxes with the IRS. And while they not required to submit receipts to the IRS or their HSA provider, employers should advise employees to save receipts and health insurance provider’s explanation of benefits statements for IRS-qualified medical expenses for potential tax audit purposes.

If employees are under the age of 65, using HSA funds for other than qualified expenses can result in a 20% tax on the amount spent, plus any income tax that was not paid on the funds. Once account holders turn 65, they can use HSA money for anything without the penalty, but they still must pay income taxes on withdrawals not used for medical expenses.

Finally, employees need to know that they cannot double deduct medical expenses. Only those expenses not paid with HSA funds can be itemized. HSA Bank offers guidance on its website about what kinds of expenses qualify, but employees should be encouraged to check with a tax advisor to be certain.

Related: HSAs: An important tool to combat economic uncertainty

IRS deadlines and disaster declarations

In certain circumstances, the IRS may provide tax-filing and payment relief to some Americans, such as those that might be affected by natural disasters. For example, these deadlines were extended last year for certain counties that were impacted in December 2021 by the tornadoes in Kentucky, Tennessee and Illinois, as well as the wildfires in Colorado. With the recent disaster declaration for areas affected by the storms in California, the IRS has declared an extension for certain affected counties. This extension impacts both individual and business tax-filing and tax-payment deadlines. Individual 2022 income tax returns due on April 18 and various 2022 business returns normally due on March 15 and April 18 are now due by May 15 for the affected counties. This extension also means that eligible taxpayers have until May 15 to make 2022 contributions to their IRAs and HSAs. For a list of the affected areas, or to find out more, go to the IRS newsroom.

Kevin Robertson, HSA Bank CRO