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I have a potential employer with a strange solution for healthcare. They wish for you to select a HDHP from the marketplace with an HSA then they fund the HSA to pay for the healthcare premiums. I gather from the IRS 502 that paying premiums should not be a big deal as it is not exactly an employer sponsored plan. However, I am concerned about the potential for excess contributions to the HSA.

As single coverage, the contribution limit is $3400. The employer is looking to put $4000 into the HSA account for the payment of premiums. That would put me $600 over the contribution limit, but all that money will be spent out of that account to pay for the healthcare premiums.

I would potentially like to contribute up to $3400 to the HSA in order to pay for incidentals (co-pays, etc), but I am concerned about penalized due to the contribution potentially being $7400 total even though less than $3400 would remain in the account after the year.

My major question is whether or not the excess contribution looks at the actual contributions to the account over the year time or if it looks at the amount remaining in the account at the end of the year. I could not figure it out from the IRS forms and other user forums whether this was the case or not.

  • are you sure it is a HSA? I have seen reference to a premium reimbursement arrangement where they put money into the account so that you can pay the premiums. I have no idea about limits and rules.. – mhoran_psprep Feb 15 '17 at 18:37
  • @mhoran_psprep It is HSA. One of the requisites was I select a plan that has one for this purpose. – Branco Feb 15 '17 at 18:48
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    Could it be an HRA? – SlowTalk Feb 15 '17 at 23:34
  • Nope, it is apparently the weird they want to do it. I clarified with them to make sure since it doesn't seem right to me. It is a startup like company so I suppose that is their style. – Branco Feb 16 '17 at 19:12
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Calling this "strange" is an understatement. I'd call it illegal. You can't pay healthcare premiums with HSA funds while you are employed (unless you are on COBRA), and if you over contribute you pay a 6% tax on the overage unless you correct it. Furthermore, overage contributed by an employer must be treated as taxable wages, so they'd be better off just calling it a bonus and writing you a normal check. At least that way you wouldn't have to pay the 6% penalty on top of taxable wages.

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    I did see murky documentation saying that you can pay premiums as long as you're not in an employer sponsored plan. Although there are numerous sites that seem to contradict each other on it. The employer finally responded to me saying they would reach the limit then bonus the rest. That effectively kills the purpose of an HSA though because of the excise tax. – Branco Feb 15 '17 at 18:26
  • @Branco - Do you have a link to a site that claims you can use the HSA for premiums? As for your employer contributing 3400 and then bonus-ing the overage- that should work. Just make sure you don't also contribute any extra to your HSA beyond that. And don't take distributions to pay for your premiums... :D – TTT Feb 15 '17 at 19:57
  • Off top of my head...It is in the IRS 502 publication. It does specific medical premiums in both sections, allowed and not allowed. It does say not allowed for employer sponsored plans but allowed for premiums as long as it isn't in the not allowed part. – Branco Feb 16 '17 at 19:11
  • @Branco - I'm not finding it in pub 501. Pub 969 specifies what you can use your HSA for, and on page 8 it lists the rules for premiums: irs.gov/pub/irs-pdf/p969.pdf – TTT Feb 16 '17 at 19:33
  • they go into more detail in pub 502 irs.gov/pub/irs-pdf/p502.pdf .. It counts premiums as qualified medical expenses. Pg 9 talks about not including employer-sponsored plans. So between the two, it is ambigious and seems it could argue either way. – Branco Feb 16 '17 at 20:00

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