This Alert concerns employers who currently offer – or are contemplating offering – a High Deductible Health Plan (HDHP). When such plan is in place, employees may qualify for a tax-advantaged Health Savings Account (HSA) that allows them to save for future medical expenses not covered by the HDHP. Contributions to an HSA are deductible (and can be made on a pre-tax basis and even be matched by the employer). Disbursements from the account for qualified medical expenses are not taxed. HDHP premiums are normally less than a typical PPO plan, and the HSA permits the person to accumulate funds for future claims costs. These arrangements are well-suited for younger employees or others who typically do not incur large health claims during a year, but may not be as attractive to those with health issues and/or who might be on an expensive monthly medication regimen.
Based on the volume of inquiries we receive from employers, it is evident that HR directors field numerous questions from employees regarding HSA eligibility. What advice should HR render? Best practices dictate – very little. An HSA is an individual account and not an employer-sponsored health plan. As such, any representation by an employer to an employee as to his/her eligibility for its tax benefits may produce troubling results down the line.
The first requirement for HSA eligibility is that the individual be covered by a qualified high deductible health plan. A qualified HDHP is one with a minimum deductible of $1,350 for single-only coverage and $2,700 for other-than-single; and a maximum out-of-pocket of $6,550 single; $13,100 family. (The maximum contribution to an HSA is $3,450 for a single person and $6,900 for a family account.) These are 2018 numbers.
The second HSA eligibility requirement is that the person not be covered by any other plan that is not a qualified HDHP. These rules are clearly laid out in the tax code; specifically, IRC §223(c)(1)(A)….
(c) Definitions and special rules. For purposes of this section—
(1) Eligible individual.
(A) In general. The term “eligible individual” means, with respect to any month, any individual if—
(i) such individual is covered under a high deductible health plan as of the 1st day of such month, and
(ii) such individual is not, while covered under a high deductible health plan, covered under any health plan—
(I) which is not a high deductible health plan, and
(II) which provides coverage for any benefit which is covered under the high deductible health plan.
While this seems simple enough, much consternation occurs over the issue of what is considered “other coverage” that will block one’s eligibility for a health savings account. IRS Publication 969 is considered the “Bible” of health savings accounts. HR directors may even want to download and print a copy of this document for future reference. Pub 969 discusses several types of coverage that are not deemed “other coverage” and thus are safe. Further, there have been several IRS Notices over recent years that address even other programs; issued as questions arise from IRS field agents. Based on Pub 969 and the other IRS guidance, this is, we think, a pretty comprehensive listing of plans/programs that should be A-OK and not cause eligibility issues…..
- Workers comp
- Auto/liability medical insurance
- Specific disease coverage
- Tobacco cessation
- Hospital indemnity
- Accident insurance & AD&D
- VA only if service-connected
- Immunizations
- Disability income
- Drug testing w/no treatment
- Vision coverage
- Vaccinations
- Preventive care
- Long-term care insurance
- Employee assistance programs
- Periodic physicals
- On-site clinics
- Business travel accident
- Discount card
- Dental coverage
- Limited purpose FSA/HRA
A frequent question concerns Tele Medicine programs which cover telephonic and/or video real-time consultations with physicians. These arrangements are increasing in popularity, exponentially, but IRS is yet to address their status as potential “other benefits.” Working with the Small Business Council of America last year, our representatives twice met with the top Treasury employee benefit officials in Washington pleading for an up-or-down decision on Tele Medicine. Those officials became convinced that Tele Medicine was good for the country. One even expressed, “The tax law should promote sound social policy.” We thus thought we were quite close to securing a favorable ruling, then the election happened and those folks lost their jobs. And, IRS has a gracious plenty on its plate, regulation-wise, right now with a new tax law to deal with.
Best practice, if you sponsor a high deductible health plan, is to use a format that requires that the participant pay the actual fair market cost of the consultation until the HDHP deductible has been reached. We at J. Smith Lanier & Company offer an HDHP option and Tele Medicine. We put in writing to each HDHP enrollee that enrollment in Tele Medicine may preclude eligibility for a health savings account and that they should consult their tax advisor before doing so. Further, some insurance plans now build Tele Medicine into their contracts. Make sure such arrangements do not pay benefits below the HDHP deductible.
Our counsel is to avoid giving specific advice to employees. Here is what can happen. An employee comes in and asks if he/she can set up an HSA. The HR person asks in return if he/she has any other health coverage. When the employee responds with a no, the HR director says, “Well, you are good to go.” Unbeknownst to HR, and out of mind with the employee, his/her spouse is enrolled in a PPO plan at his/her work and participates in a general purpose FSA that pays medical expenses for the entire family. Your employee gets selected for an IRS audit, and his/her HSA qualification if disallowed, and back taxes are due…and guess which grumpy employee will be standing in front of your desk the next day! Or, what if you were unaware that an employee filed for his social security benefits which results in automatic enrollment in Medicare Part A? Or, what if you had no way of knowing that the employee is enrolled in the VA health system and gets his high blood pressure medication from the VA? An HR department simply cannot know enough to render final advice. HSA qualification should always be an individual matter and deferred to the employee’s tax preparer.
[1] Provided it does not provide any “medical care.”
[2] If only preventive, “insignificant” benefits, and/or job injury treatment is provided.
[3] Only if EE must pay 100% of discounted prices before the HDHP deductible kicks in
[4] Preventive and excepted benefits (dental, vison, etc.) only
Not everyone is an expert on health care reform. But the folks at J. Smith Lanier, one of our endorsed services providers, are. For this reason they created a publication called the Health Care Reform Alert. J. Smith Lanier has been providing these to its clients since 2010 when the bill was passed and now offers it to the members of ABA. It is J. Smith Lanier’s intention in the alerts to take the many pages generated by the Centers for Medicare and Medicaid Services, U.S. Department of Labor or Treasury and filter them down into terms that all can understand. For more information on how J. Smith Lanier can help your bank, contact Tom Younger at (256) 890-9027.