For some business owners, and their close relatives, the HSA deposit rules are more stringent than those for everyone else. The rules are very specific depending on what type of business you own.
If you are a member of a Limited Liability Company (LLC), partner in a partnership or a 2% or greater owner of a Subchapter S corporation, you cannot receive a tax-free HSA contribution from the business.
Under IRS rules, owners of these entities and some immediate family members cannot receive tax-free contributions from the business, though these owners can give tax-free contributions to their employees and deduct those employee contributions as a business expense.
If you are an owner of one of these entities, you must contribute personal funds and deduct your contribution on your personal income tax return. This restriction applies regardless of how you are paid by the firm (even if you receive your income on a Form W-2). See IRS Notice 2005-8 for additional guidance.
If you are a member of an LLC, partner in a partnership or 2% or greater owners of a Subchapter S corporation, you cannot make pre-tax payroll contributions to your HSA.
These owners are not eligible to participate in a Cafeteria Plan, the program that allows employees to elect to defer a portion of their salary as a nontaxable benefit. Since pre-tax payroll contributions can be made only through a Cafeteria Plan, these owners cannot make their HSA contributions on a pre-tax basis. Instead, they make personal contributions and deduct those contributions on their personal income tax forms.
This restriction impacts owners financially in two ways. First, because they receive their tax break when they file their personal income tax returns rather than when they contribute, they lose the use (including the potential investment value) of their tax deduction between the time of their contribution and their income tax filing. Second, they cannot recover federal payroll taxes paid on those contributions through their personal income tax filing.
The full financial impact depends on whether their taxable income falls above (2.9% total levy) or below (15.3% total levy) the $118,500 taxable income ceiling for Social Security taxes in 2015.
If you own a Subchapter C corporation, you generally can receive a tax-free contribution from the business and make Cafeteria Plan pre-tax payroll contributions.
Subchapter C owners usually are considered employees of the business entity.
In these cases, they are treated the same as other employees with regard to HSA contributions.
Todd Berkley is an HSA industry veteran who runs AskMrHSA.com, and is the author of the HSA Owner’s Manual.