In addition to recent guidance allowing Health Savings Accounts (HSAs) to reimburse for over-the-counter medications (see our Client Alert), the Internal Revenue Service (IRS) has issued IRS Notice 2020-23 as well as frequently asked questions (FAQs) which, in part, describe relief for HSA contributions:
Specifically, contributions to HSAs may be made up until July 15, 2020. Additionally, if excess contributions had been made in 2019 and were treated as being taxable, individuals can avoid the 6% excise tax if the excess amount (plus income on that amount) is withdrawn by July 15, 2020. This does not apply to contributions that were made via salary reduction or if deductions were taken on the excess amounts. Contributions must be taxable.
The specific questions and answers relating to HSAs are as follows:
Q. Does this relief provide me more time to contribute money to my HSA or Archer MSA for 2019?
A. Yes. Contributions may be made to your HSA or Archer MSA, for a particular year, at any time during the year or by the due date for filing your return for that year. Because the due date for filing Federal income tax returns is now July 15, 2020, under this relief, you may make contributions to your HSA or Archer MSA for 2019 at any time up to July 15, 2020. For more details on HSA or Archer MSA contributions, see Publication 969, Health Savings Accounts and other Tax-Favored Health Plans.
Q. I made an excess contribution to my HSA in 2019. Can I avoid the 6% excise tax if I withdraw the excess amount (and income on the excess amount) by July 15, 2020?
A. Yes, provided that you didn’t make the contributions to the HSA through a salary reduction or similar arrangement with your employer, and you didn’t (or don’t) take a deduction for the excess contribution when you file your tax return. Also, if you file your return by July 15, 2020, and don’t withdraw those excess contributions by that date, you can still avoid the excise tax if you withdraw the excess (and income on the excess amount) by October 15, 2020.
The latter FAQ states that the withdrawal relief does not apply to contributions that were made via salary reduction or if deductions were taken on the excess amounts. This is because the excise taxes are only avoided if excess contributions are timely withdrawn, and only if the contributions are treated as taxable. The FAQ is unclear as to whether there is a blanket exclusion for contributions through salary reduction, or just those which are not taxable.
Timely filing of returns, as well as amended returns, are still required to accomplish the above. Automatic extension are not allowed if returns are not timely filed.
As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.
This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.
We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.
Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or firstname.lastname@example.org.