The Internal Revenue Service has issued a set of frequently asked questions, with answers, on health savings accounts (HSAs). The 42 FAQs included in Notice 2008-59 cover a wide range of topics, including who is eligible for an HSA, and issues related to high deductible health plans (HDHPs), HSA contributions and HSA distributions. This article summarizes some of the clarifications found in Notice 2008-59.
If an employer pays for or reimburses all or a part of an individual’s health expenses below the HDHP deductible (other than expenses for preventive care or other disregarded coverage), that individual will not be eligible to contribute to an HSA.
An individual who is eligible for, but not enrolled in, Medicare Part D, is eligible for an HSA, but once that individual has enrolled in Medicare Part D, he or she ceases to be HSA-eligible.
An individual can be covered under a health plan in addition to the HDHP, so long as that plan’s deductible is at least the statutory minimum deductible. The example given is of an individual with an HDHP with a lifetime benefit maximum of $1 million, who also is covered under a second health plan with a $1 million deductible and a $2 million lifetime benefit maximum.
Individuals who receive free or reduced-price health care from an employer’s onsite clinic can be HSA-eligible, so long as the clinic does not provide “significant benefits in the nature of medical care.” In an example, an onsite clinic that provided physicals and immunizations, allergy injections, nonprescription pain relievers and treatment for work accidents was not considered to provide significant benefits. In contrast, a hospital that provided free medical care to uninsured employees, and that waived deductibles and copayments for insured employees, was considered to provide significant benefits, and its employees would not be HSA-eligible.
HIGH DEDUCTIBLE HEALTH PLANS
To determine when an individual who switches from family HDHP to self-only HDHP coverage satisfies the self-only deductible, the plan may use any reasonable method to allocate the covered expenses incurred during the period of family coverage. Examples given of reasonable methods include considering only those expenses incurred by the individual and not those incurred by other family members, or allocating expenses on a per-capita basis according to the number of persons who had been covered under the family HDHP. Also, if the family deductible had been satisfied, the plan may treat the self-only deductible as satisfied.
If a plan imposes a separate or higher deductible for specific benefits — such as for substance abuse — amounts paid toward satisfying that deductible are not treated as out-of-pocket expenses for purposes of satisfying the HDHP minimum annual deductible, so long as significant other benefits remain available under the plan in addition to the benefits that are subject to the separate deductible.
If two spouses are eligible for HSA coverage and one spouse has self-only HDHP coverage and the other spouse has family HDHP coverage, the maximum annual HSA contribution for the married couple is the statutory maximum for family coverage. The same applies if each spouse has family HDHP coverage that does not cover the other spouse. The spouses need to divide the contribution limit by agreement.
An individual who ceases to be eligible to make HSA contributions during the year may still make contributions with respect to the months of the year when he or she was eligible, up to the time for filing his or her tax return.
Employer HSA contributions, including salary reduction contributions, may be allocated to the prior year if made between January 1 and the date for filing returns.
If an employer mistakenly makes HSA contributions to the account of an employee who was never an eligible individual, the HSA is considered to have never existed and the employer may correct the error. If amounts are not recovered by the end of the taxable year, they must be included as gross income on the employee’s W-2 for the year in which the contributions were made.
An HSA may be administered through a debit card that is restricted to health care items, so long as HSA funds are also readily available through other means.
An HSA account beneficiary can authorize someone else to withdraw funds from the HSA.
Medicare Part D premiums are qualified medical expenses for account beneficiaries who have attained age 65. If the account beneficiary has not attained age 65, Medicare premiums for an age 65 or older spouse are not qualified medical expenses.
These are just a sampling of the FAQs from the array of guidance provided under Notice 2008-59. For further information on the notice and which aspects of it might be most relevant to your company and your health care plan, consult with one of our benefits professionals.