Many employers are now offering Health Savings Accounts (HSAs). As required by law, these accounts are coupled with high-deductible health plans (HDHPs). One reason this employee benefits combination has become so popular is that, unlike Flexible Spending Accounts, HSAs allow participants to carry over unused account balances to the next year and beyond.
A common concern raised by employees who have elected HDHP+HSA coverage, and established an HSA, is how they should report their contributions and distributions on their tax returns. Although you obviously shouldn’t provide tax advice, you can encourage plan participation and nurture goodwill by supplying some basic facts. You can also inform employees about how they can use their plans during the Coronavirus crisis.
Required filings Employees with HSAs must file a Form 8889, “Health Savings Accounts (HSAs),” as an attachment to Form 1040 for any year in which they make or receive HSA contributions (including employer contributions), or for any year in which they take an HSA distribution (Form 8889 is also used with Forms 1040-SR and 1040-NR). Spouses who have reportable activity in their own HSAs must file separate Form 8889s — even if they file jointly.
When completing Form 8889, individuals will be required to provide information about:
- Their HDHP coverage,
- Their HSA contribution limit,
- The amount of HSA contributions (and any Archer medical savings account contributions) that were made by them or on their behalf, and
- The amount of any taxable or nontaxable distributions taken from their HSAs.
As an employer, you’re responsible for reporting your HSA contributions to employees’ HSAs in Box 12 of Form W-2 (using Code W). In addition to receiving a Form W-2, your employees with HSAs should have gotten a Form 5498-SA from their HSA trustee or custodian that reports the total contributions made to their HSAs during the year and the fair market value of their HSAs at year-end. Any participants who have taken distributions should have also received a Form 1099-SA on which their HSA trustee or custodian has reported the total amount of distributions made during the year.
Breaking: Coronavirus coverage
In an important announcement, the IRS has stated that HDHPs can cover the costs of Coronavirus testing and treatment before deductibles are met without risking the plan’s status as an HDHP. In addition, plan participants who have HSAs may continue contributing to their existing accounts. The costs of vaccinations will remain under the category of preventive care and, therefore, can be covered by an HDHP.
As mentioned, employers should provide only general information about HSAs, not tax advice. Refer employees with specific questions to their tax advisors. And please feel free to contact us for further information about launching, maintaining or educating employees about an HDHP or HSA. © 2020