Discuss the best way to fund an HSA for a 2% shareholder of an S corporation.

Optimal Funding Strategies for an HSA for a 2% Shareholder in an S Corporation

Understanding HSA Contributions for 2% Shareholders

A 2% shareholder in an S Corporation is treated as a partner for tax purposes. This means that any contributions to a Health Savings Account (HSA) made by the S Corporation on behalf of the 2% shareholder are included in the shareholder's gross income. However, the 2% shareholder can then deduct the contribution amount on their individual tax return, provided they meet the eligibility requirements for HSA contributions.

Eligibility for HSA Contributions

To be eligible to contribute to an HSA, the individual must be covered under a high deductible health plan (HDHP) and have no other health coverage that is not an HDHP. Additionally, they cannot be enrolled in Medicare or be claimed as a dependent on someone else's tax return.

Contribution Limits

The contribution limits for HSAs are adjusted annually for inflation. According to [26 U.S. Code § 223], the Secretary of the Treasury is required to publish the adjusted contribution amounts by June 1 of the preceding calendar year. Any increase that is not a multiple of $50 is rounded to the nearest multiple of $50.

Reporting Requirements

The trustee of the HSA is required to report contributions and distributions to both the IRS and the account beneficiary. Similarly, the provider of the HDHP must report to the IRS and the account beneficiary as deemed appropriate by the Secretary.

Optimal Funding Strategies

1. Maximize Contributions: The 2% shareholder should aim to contribute the maximum amount allowed to the HSA each year to take full advantage of the tax benefits. This includes both the pre-tax contributions and any catch-up contributions if the shareholder is age 55 or older.

2. Timing of Contributions: Contributions can be made at any time during the year, up to the tax filing deadline (usually April 15 of the following year). It may be beneficial to contribute earlier in the year to maximize the tax-free earnings potential of the HSA.

3. Employer Contributions: If the S Corporation makes contributions to the HSA, the 2% shareholder should ensure these are included in their gross income and then properly deducted on their personal tax return.

4. Record Keeping: Maintain accurate records of all contributions and distributions to ensure compliance with reporting requirements and to substantiate deductions on the individual tax return.

5. Stay Informed: Keep abreast of annual contribution limit changes and any other relevant tax law changes by reviewing updates in the [Internal Revenue Bulletin] and other IRS publications.

By following these strategies, a 2% shareholder in an S Corporation can optimize their HSA funding and maximize the associated tax benefits.

‍

Sources:

26 U.S. Code § 223 - Health savings accounts 26 U.S. Code Chapter 1 - NORMAL TAXES AND SURTAXES 26 U.S. Code Subchapter B - Computation of Taxable Income 26 U.S. Code Part VII - ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS 2023-12-11

Internal Revenue Bulletin: 2008-25 2008-06-22

Internal Revenue Bulletin: 2008-20 2008-05-18

Internal Revenue Bulletin: 2008-01-13 https://www.irs.gov/irb/2008-02_IRB