PUB. 11 2021-2022 Issue 2

July • August 2021 19 Certain Policies May Help Consider taking the following steps to help your HSA clients avoid HSA negative balances: • Use custom-designed HSA checks and debit cards to distinguish them from checks and debit cards used for checking accounts. When the same debit card stock is used for HSAs as for checking accounts, HSAs owners tend to use the wrong card to pay for a nonmedical expense. • Refuse to honor any checks and do not authorize any debit card transactions that would overdraw the HSA. • Do not impose transaction or overdraft fees if the imposition of the fee would cause the account to go negative. Many financial organizations refuse to honor checks and debit card transactions that exceed the balance of the account but then assess an overdraft fee, which causes the account to go negative. In other cases, monthly maintenance fees may cause the account to go negative. Many HSA owners use their HSAs to pay medical bills immediately, and the account balance remains low until the next HSA contribution is made. Consider collecting any fees directly from the HSA owner or another account at your organization if there is an agreement in place that would allow it. Prevention Is Key Also, consider taking steps to prevent an extension of credit to an HSA (and the prohibited transaction it creates). While the IRS has not published guidance on how to do that, the Department of the Treasury has commented that financial organizations can prevent an extension of credit by automatically withdrawing assets from another account (such as a savings account) if a transaction would cause the HSA to go negative. But the HSA owner must have a written agreement with the financial organization to automatically withdraw assets from another account. EXAMPLE: Sarah, an HSA owner, has entered into a written agreement that allows her financial organization to withdraw assets from her savings account to cover any transactions that would exceed her HSA balance. Sarah uses her debit card to pay a $500 medical bill. The transaction is authorized, but because Sarah only has $250 in her HSA, her financial organization withdraws $250 from her HSA and $250 from her savings account, thereby covering the debit card transaction fully while avoiding a negative balance in her HSA. Another option is for the HSA owner to authorize the financial organization to move assets from another account (such as a savings account) into the HSA to cover the amount needed to prevent the HSA from going negative. EXAMPLE: David, an HSA owner, has entered into a written agreement that allows his financial organization to transfer assets from his savings account to his HSA to cover any transactions that would exceed his HSA balance. David uses his debit card to pay a $1,000 medical bill. The transaction is authorized, but because David only has $250 in his HSA, his financial organization transfers $750 from David’s savings account to his HSA, covering the debit card transaction in full while avoiding a negative balance in his HSA. Similarly, overdraft protection features many financial organizations offer customers automatically transfer assets from a savings account or credit card account to the customer’s checking account to avoid overdrafts. But, unlike when assets are transferred to a checking account to cover an overdraft, using this method to transfer assets to an HSA creates a reportable HSA contribution. As such, the HSA owner needs to be aware that an excess contribution will occur if assets are moved into the HSA after the HSA has received the maximum contribution amount for the year. A third option is to use a non-HSA checking account exclusively for medical expenses tied to an HSA. With this option, all payments to cover medical expenses (“distributions”) are taken from the non-HSA checking account, with assets transferred from the HSA to cover payments from the non-HSA checking account. EXAMPLE: Peter, an HSA owner, has a non-HSA checking account used exclusively for medical expenses. Peter uses his debit card (linked to his non-HSA checking account) to pay a $100 medical bill. The transaction is authorized, and when it posts to his non-HSA checking account, Peter’s financial organization transfers $100 from Peter’s HSA to his non-HSA checking account to cover the transaction. Thus, if there’s an insufficient balance in the HSA to cover the expense, the checking account – not the HS – has a negative balance. This is similar to the “sweep” feature that many brokerage firms use to settle debit card and securities transactions, where assets are “swept” from a money market account daily to settle transactions that have been posted to the cash account. These options may allow your financial organization to help its HSA owners avoid negative HSA balances and the resulting prohibited transaction tax consequences.