Rushing to Fund Your Account by Year-End? Relax. You Have Plenty of Time!

You have additional time to fund your Health Savings Account for 2021. So, enjoy the lead-in to New Year's Eve.

If you're conducting your year-end financial review and realize that you haven't funded your Health Savings Account to the 2021 contribution limit ($3,600 for self-only coverage and $7,200 for a family plan, plus an additional $1,000 if you're age 55 or older at any point in 2021), relax. You don't face an impending deadline to submit that final deposit.

You may have run out of time to fund your Health Savings Account through the most tax-efficient means - pre-tax payroll deductions. But you have until spring to make a personal tax-deductible contribution that applies to the 2021 tax year.

Plan Year

Health Savings Accounts don't have a plan year in the sense that a medical plan or Flexible Spending Arrangement (FSA) does. Both the medical plan and FSA are employer-sponsored coverage that is in force for a 12-month period that begins on a date chosen by your company. In contrast, a Health Savings Account isn't time-bound - you never renew your account, nor are you required under federal tax law to make a new contribution election when you contribute through a Cafeteria Plan. Your company may require you to make a pre-tax payroll deduction commitment during open enrollment, but that's an employer choice rather than a provision in the tax law. And you can change your election prospectively at least monthly if you want to contribute more or less per pay period to your Health Savings Account.

There is one important year that matters with respect to your Health Savings Account: the contribution-tracking year. Under federal tax law, that's the calendar year. It doesn't matter whether your medical coverage renews July 1 or you are part of the Great Resignation and will start coverage with your new employer May 1. The tracking period for your contributions is Jan. 1 through Dec. 31.

Payroll Deductions

If you fund your Health Savings Account through pre-tax payroll deductions, you do face an immediate deadline (or you may have missed the final opportunity). You make those contributions through your company's Cafeteria Plan. You must make contributions for the calendar year during the calendar year.

It's probably too late to make a last-minute adjustment to your payroll deductions if you haven't received your final paycheck of the year. Most companies need time to process a deduction change. Others make changes effective with the first check run of the following month. Either way, the door has probably closed on this opportunity.

That's unfortunate. Neither the employer's nor employee's 7.65% federal payroll tax is applied to pre-tax payroll deductions through a Cafeteria Plan. If you want to contribute an additional $1,000 for 2021, this advantage will net an additional $76.50 in tax savings when the deposit is run through the Cafeteria Plan.

Personal Contributions

The alternative is to contribute personal (after-tax) funds. You complete this transaction on your own. Check with your Health Savings Account administrator to understand the process. Here are the key elements:

1. You complete paperwork - usually a single-page document - indicating the amount of the contribution and the year to which the contribution should be applied.
2. You include a check or the account and routing numbers of the personal financial account from which you want the administrator to withdraw the funds.

The key part of this process is to identify the year to which the contribution applies. Your administrator will automatically process any deposit received in 2022 as a 2022 contribution unless you indicate that it applies to 2021.

The Real Deadline

You can fund your Health Savings Account up until the later of:

1. the date that you file your federal income tax return for 2021 OR
2. the deadline for filing your 2021 tax return.

In other words, applying current knowledge, you must make your final 2021 contribution by April 15, 2022. That date may be extended, as it was for 2020 tax returns nationally due to the pandemic (to July 15, 2021). And residents of three states - Texas, Oklahoma, and Louisiana - enjoyed an even later deadline due to severe late winter storms (remember those stories about the storm last winter that crippled the Texas electric grid?).

Don't count on an extension. You shouldn't need it, since you have an additional three months and 15 days to make a contribution and deduct it on your 2021 personal income tax return. But if the deadline is extended and you want to wait until the last minute (either because you're a procrastinator or you owe a balance and want to keep the funds in your bank account as long as possible), know that you have additional time to complete your 2021 contributions.

The Bottom Line

Get the biggest bang for your buck by funding your Health Savings Account through your employer's Cafeteria Plan during the calendar year. That way, you enjoy immediate savings on federal and state income taxes (versus paying these taxes on the funds when you earn them and then receiving a rebate when you file your tax return months later) and avoid payroll taxes as well.

But if you review your account early in the new year, realize that you haven't reached your contribution limit for 2021, and have the desire and resources to make an additional deposit (perhaps from a year-end commission or bonus paid during the first quarter), just know that you have additional time to fund your account.

Heck, if you delay filing your tax return, you can collect your winnings from the NCAA March Madness tournament and make a last-minute deposit up to the limit. Yup, contributions can be from any source - they're not limited to earned income.

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