Regardless of whether this reflects sound economic strategy (depending on employer contributions), personal preference, or is the result of spousal carve-outs instituted by employers as a cost-mitigation strategy, having two working spouses each go on their own individual high-deductible health plans (HDHP) increases the chance of overfunding health savings accounts (HSAs). This is not unlike the situation some married couples find themselves in when they accidentally overfund their Dependent Care FSA by each accidentally maxing out their contributions through their individual employers.
Unlike last year when the IRS adjusted HSA contribution limits multiple times during the year, the 2019 HSA contribution limits are set and fairly straightforward. They are as follows:
These represent a $50 increase for individuals and a $100 increase for families compared to last year’s numbers. The catch-up limit has remained unchanged. (All of these figures include both employer and employee contributions.)
When just one person is contributing to an HSA, these limits are easy to apply. A bank representative can explain the account to them and help them make contributions that don't exceed the applicable limit.
In situations that involve two spouses, however, staying within the contribution limit becomes a little more involved.
There are multiple scenarios that must be considered when looking at possibilities involving two spouses. First, one spouse might not have HDHP coverage while the other one does. In these situations, the one spouse without coverage doesn’t factor into HSA contribution limits because they don’t qualify for such an account. The other spouse’s contribution limits will be the self-only limit, the family limit (if there are children), or one of those plus the catch-up limit.
Second, both spouses might have their own self-only HDHP and corresponding HSAs. In these situations, each spouse is subject to the self-only coverage limit. They can still contribute up to $7,000 in 2019 ($3,500 + $3,500), but it must be divided between the two accounts. Two separate HSAs don’t qualify for the family coverage limit.
Third, both spouses may have HDHPs, but one plan might provide family coverage for a spouse and \ children. In these situations, the couple is subject to the family contribution limit of $7,000. The other spouse’s self-only HSA doesn’t increase their contribution limit at all. It only allows them to put up to $3,500 in that account if they so choose. Alternatively, the full $7,000 (or any fraction thereof) could be put into the account that covers the children and one spouse.
Fourth, both spouses might be covered in a family HDHP but each maintains their own HSAs. In these situations, the family contribution limit of $7,000 still applies but it can be divided between the HSAs in any ratio. Contributions can be put fully into one spouse’s HSA, split half-and-half between the two HSAs, or divided any other way.
Once the contribution limits for two spouses has been determined, what each spouse is contributing must be clearly communicated. This is especially important in the latter two scenarios, where each spouse is making separate contributions to HSAs -- and those HSAs could be held at different financial institutions. An account adviser can’t be expected to know what a spouse is doing at another financial institution, so it’s ultimately up to the spouses to understand how these limits work and share with each other what contributions they’re making.
This is where employers’ human resources representatives are often extremely helpful and provide a lot of value to employees. Even though HR representatives typically don’t actually set up HSAs for employees, HR reps can provide information on these accounts and guidance on how to set them up. They can even tailor recommendations to employees’ particular situations, and many employees are likely to trust advice from their own HR department versus a financial institution’s representative that they’ve never met (and might only talk to over the phone).
HR reps should make sure employees understand that HSA contribution mistakes can be corrected. Sharing this often eases employees’ concerns and fears when they’re trying to digest all of the information regarding HSAs and take appropriate actions.
Overfunding an HSA can be remedied one of two ways;
The first and best way to correct this mistake is to remove the excess contributions and the net income attributable to the excess contribution before filing a federal income tax return (including extensions). This remedy will result in paying normal income tax on the excess funds removed from the HSA.
The second method to deal with this is to leave the excess contributions in the HSA and pay a 6% excise tax on this amount. The problem with this approach is that the 6% excise tax is applied annually, quickly wiping out any tax-advantaged benefits HSA accounts provide. If employees choose to go this route, they can opt to have the HSA contribution in excess of the annual limit applied to the following year's contribution. That said, they will have to pay an excise tax any year that amount leads to a contribution overage.
Whether your company is new to offering HDHPs or already provides these plans to many employees, our representatives are here to help you with all HDHP and HSA-related needs.
If you'd like to learn more about HDHPs and HSAs, contact us today.
Are you offering HSAs & HDHPs to your workforce? Are your employees familiar with the current contribution limits? Leave us a comment or contact us. We'd love to hear from you!