Spouses Can't Make Catch-up HSA Contributions? Not True, if . . .

Health Savings Account owners can make a catch-up contribution once they turn a certain age if they remain eligible to fund their accounts. What about spouses?

It's one of the perks of aging. Once you turn a certain age, you can contribute more to a tax-advantaged account - a 401(k) or similar plan, an Individual Retirement Arrangement, or a Health Savings Account. But who can contribute? How much? And beginning at what age?

Catch-up Contributions

People eligible to fund a Health Savings Account can contribute an additional $1,000 annually to their account beginning in the year that they turn age 55. Yes, even if their birthday falls within days of the end of the year.

To address a misnomer head-on, these account owners don't have to pro-rate their contributions based on their birth date. In other words, a New Year's baby and a Christmas Eve baby can each contribute $1,000 in the year that they turn age 55. They must pro-rate their catch-up (and regular) contribution only if they lose eligibility during the year.

They can start depositing the catch-up contribution at the beginning of the year that they turn age 55, even if their birthday is much later that year. This provision helps smooth out pre-tax payroll deductions, so that someone with a Nov. 1 birthday isn't forced to divide the $1,000 by four remaining paychecks, thus reducing cash flow around the holidays.

Subscriber versus Member

A spouse doesn't have to be the subscriber (employee) on the medical plan to be eligible to open and fund a Health Savings Account, including making a catch-up contribution. Eligibility to open and fund an account is based on having the right coverage (enrolled on an HSA-qualified plan), not having disqualifying coverage (such as Medicare, or access to reimbursements through her own or a spouse's general Health FSA), and not qualifying as another taxpayer's tax dependent.

Thus, it's not unusual for more than one family member to be eligible to make and receive contributions to a Health Savings Account. My wife, my 23-year-old working son, and I are all enrolled on my company's HSA-qualified plan and eligible to open and fund a Health Savings Account. At various times, my son's three older siblings were all eligible to open and fund their own accounts when they no longer qualified as tax dependents, remained covered on my HSA-qualified plan, and had no disqualifying coverage. When they enrolled on their employers' non-HSA-qualified plans, they couldn't make additional contributions to their accounts.

A New Account

There is one caveat with a spouse and catch-up contributions. The additional money can be deposited only in a Health Savings Account owned by that spouse. There are no joint Health Savings Accounts, even if the underlying medical plan covers the family. Health Savings Accounts are trusts, and they, like Individual Retirement Arrangements, have a single owner.

Where does a spouse find her own Health Savings Account? The subscriber-spouse's account administrator and employer may allow a spouse to open an account through the employer. That's a nearly frictionless way to open a Health Savings Account. Often this option isn't available. But sometimes it is, depending on how the plan document is written and the employer's willingness.

Alternatively, the non-subscriber spouse can look at other options:

• Retirement-plan administrator. A growing number of retirement-plan administrators now offer Health Savings Accounts. My wife has an account with the investment company that administers of her rollover IRA. With one login, she can manage investments in both her IRA and her Health Savings Account. Companies like Fidelity and Vanguard offer these accounts to individuals, complete with a hefty menu of investment options in mutual funds, ETFs, and stocks.
• Find an independent account. Many administrators offer individuals (not tied to an employer) account. Enter Health Savings Account trustees into a search engine and you'll find page after page of articles ("20 Best Health Savings Accounts") and links to administrators.

Before you open an account, think about how you'll use it. If you plan to spend balances each year (like a Health FSA), your focus should be on low fees and convenience access to balances. If you want to invest your funds in a diversified portfolio, then investment menus are important. If you want to minimize the number of places that you hold financial assets, you may want to open an account with your local bank (if it offers one with features that meet your needs) or retirement administrator (if you're primarily a saver and want to diversify your total holdings).

Pre-tax Payroll Deductions

It would be great if the subscriber-spouse could contribute $1,000 to a spouse's Health Savings Account through pre-tax payroll deductions. But those deductions can fund only the employee's account.

It would be great if the non-subscriber spouse could fund her account with pre-tax payroll contributions through her employer. But most employers limit pre-tax payroll deductions to employees enrolled in that company's medical plan.

Timing

The deadline for contributing to a Health Savings Account for 2020 is the earlier of the date that you file your 2020 personal income tax return or April 15, 2021. If you're learning about catch-up contributions for the first time, you still have nearly four months to save and contribute. The deadline for pre-tax payroll contributions through an employer is your final payroll of the year. But you can deposit personal funds and deduct the contribution on your tax return, even if you don't itemize deductions. See Internal Revenue Service Form 8889 for more information.

Bottom Line

The Health Savings Account catch-up contribution comes later (age 55, versus age 50) and is smaller (fixed at $1,000, versus an inflation-indexed $6,500 in 2020 and 2021) than the catch-up contribution provision in traditional employer-based retirement plans. It is identical in value to the IRA catch-up contribution.

If you have (a) high medical expenses or (b) a tax problem or (c) want to boost your retirement savings with funds that can be entirely tax-free, a spousal catch-up contribution allows your family to increase its total contributions by $1,000.

It's an opportunity worth considering.

I'm director of strategy and compliance at Benefit Strategies, LLC, a provider of Health Savings Accounts and other tax-advantaged benefits. You can read my biweekly Health Savings Account GPS blog and subscribe by clicking here and my weekly HSA Monday Mythbuster and HSA Wednesday Wisdom columns, as well as my occasional Healthcare Update column, on LinkedIn. My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, Medicare, and retirement planning. It's available in book and e-book forms from Amazon.

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