Catch-up Contribution Provision Lifts the Deposit Ceiling for Older HSA Owners

This column is an excerpt (Question 48) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and a citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: What is a catch-up contribution?

Answer: Health Savings Accounts are like retirement plans (such as tax-deferred and Roth Individual Retirement Arrangements, and 401(k) and similar workplace-based plans) in that participants can make additional deposits once they turn a certain age. The goal is to allow people to accelerate their contributions as they near retirement age, after which they’re unlikely to qualify to fund their accounts.

Beginning in the year that you turn age 55, you can deposit up to an additional $1,000 annually to your Health Savings Account. This amount is in addition to the statutory maximum annual contribution based on your contract type (self-only or family). The figure isn’t indexed for inflation and remains at $1,000 annually unless a future Congress approves and a future president signs legislation that changes or indexes the figure.

It doesn’t matter when during the year you celebrate your birthday. If you’re HSA-eligible during the year that you turn age 55 – whether your birthday is in early January, late December, or somewhere in-between – you can make the full $1,000 contribution without prorating the amount. If you’re not HSA-eligible during all 12 months of any year during which you turn age 55 or older, your catch-up contribution, like your statutory deposit limit, may be subject to prorating. See Question 62 and Question 64.

The opportunity to make catch-up contributions is extended to all HSA-eligible individuals, regardless of whether they are the medical-plan subscriber. A family with a couple who are both HSA-eligible can reduce its taxable income not by an additional $1,000, but rather $2,000 annually. If a spouse is age 55 or older and HSA-eligible, she can make a $1,000 contribution into her own HSA.

As noted, under current law, a catch-up contribution must be deposited into a Health Savings Account owned by the person eligible to make the contribution. That means that when a spouse turns age 55, she must open her own Health Savings Account if she hasn’t already, rather than deposit the additional $1,000 into the subscriber-spouse’s account.

 Tips

 Where does the non-subscriber spouse find a Health Savings Account provider? Here are a few suggestions:

• See whether the Health Savings Account provider for the subscriber spouse’s employer offers an account to people “off the street” (rather than employees of an employer-partner). Some, but not all, do. Also, ask the employer whether the account can be created as part of the company’s relationship with the provider. That way, the non-subscriber spouse may pay no (employer pays) or a reduced (employer’s negotiated amount) administrative fee.
• Check with a local bank with which your family does business already. It may offer a Health Savings Account. There are strict rules around enticing account owners by offering discounts on fees to add a Health Savings Account, but at a minimum it may be more convenient for you to manage your account alongside other financial accounts at a single institution and possibly with a single account login. But beware that many local financial institutions’ Health Savings Accounts offer no investment options (or limit the menu to certificates of deposit).
• Use a search engine, inserting a term like Health Savings Account or free HSA. You’ll find a lot of options that way. Through your inquiry, you’ll probably bake a “cookie” that will display online ads in your social-media feeds and future searches – a good reminder if you don’t act promptly.

IRS Notice 2004-2:

 Q-14. What are the “catch-up contributions” for individuals age 55 or older?

A-14. For individuals (and their spouses covered under the HDHP) who have attained 55 and are also not enrolled in Medicare, the HSA contribution limit is increased by $500 in calendar year 2004. This catch-up amount will increase in $100 increments annually, until it reaches $1,000 in calendar year 2009. As with the annual contribution limit, the catch-up contribution is also computed on a monthly basis. After an individual has attained age 65 (the Medicare eligibility age), contributions, including catch-up contributions, cannot be made to an individual’s HSA.

 [Author’s note: The last sentence is incorrect and was corrected in subsequent IRS guidance. Individuals can continue to contribute at age 65 or older if they have no disqualifying coverage (like enrollment in any Part of Medicare).]

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.

HSA Question of the Week is published every week, alternating every other Wednesday with HSA Wednesday Wisdom and every other Monday with HSA Monday Mythbuster.