Timing of Direct Deposits via Payroll Deduction into an HSA for a Newly Eligible Employee

Question: We have a group that will offer a High Deductible Health Plan (HDHP) effective December 1st of this year. The Employees get paid semi-monthly on the 5th for the pay period that ends on the last day of the previous month.  Starting with the December 5th paycheck, can an eligible employee start contributing to a Health Savings Account (HSA) via a payroll deduction that would be directly deposited to the HSA even though the money was earned in November, before the person became HSA eligible?

Answer: Any person can contribute funds to an HSA on behalf of an HSA eligible individual. This includes the individual via payroll deductions and direct deposit into the HSA account if the employer is set up to do that. It does not matter when the money is earned, but rather than when it is deposited.

Basically the person must be HSA eligible to open and deposit money into the account on the date the money is deposited, regardless if it via direct deposit from a payroll deduction.

In your example the employee will be HSA eligible on 12/01, and the money would be deposited in the HSA on 12/05 which is allowable.  This is based on the assumption the employee already has an existing HSA, or will open an HSA on or after December 1st, so the employee can provide the employer with the direct deposit information prior to payroll processing for the paycheck that will be issued on December 5th.

The following information comes from IRS Publication 969 – Health Savings Accounts and Other Tax Favored Health Plans and is available online at http://www.irs.gov/pub/irs-pdf/p969.pdf.

An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual’s return whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an HSA that are used to pay qualified medical expenses are not taxed. 

Qualifying for an HSA – To be an eligible individual and qualify for an HSA, you must meet the following requirements:

  • You must be covered under a high deductible health plan (HDHP) on the first day of the month.
  • You have no other health coverage.
  • You are not enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else’s tax return.