In the past, we’ve discussed how contributing to a health savings account (HSA) or allowing employees to contribute to their HSAs pre-tax through an employer’s Cafeteria Plan can lead to terrific tax savings for both the individual account holder and sponsoring employer.
As a refresher, HSAs allow individuals to contribute money (up to a maximum amount set annually by the IRS) to be spent tax-free on qualified medical expenses. Unlike health flexible spending accounts (health FSAs) and health reimbursement arrangements (HRAs), HSAs are owned by the participant; this means that funds roll over indefinitely and the account is portable.
While the decision to contribute to an HSA may sound like a no-brainer, there are strict eligibility rules that employers and participants must keep in mind to avoid making excess contributions. It is important to note that HSA eligibility is determined on a monthly basis and the rules relate to whether an account holder is eligible to contribute to the account, not whether they can receive tax-free distributions; if there are accumulated funds in an HSA, the account holder always has access to those funds and is able to receive tax-free distributions for qualified expenses.
In general, an individual is eligible to contribute to an HSA if they are covered under a qualifying high-deductible health plan (QHDHP) with no impermissible coverage, cannot be claimed as a tax dependent on another taxpayer’s federal income tax return, and are not entitled to Medicare. A QHDHP must meet certain minimum deductible and maximum out-of-pocket limits.
Minimum Deductible and Maximum Out-of-Pocket Expenses for QHDHPs
The 2020 QHDHP minimum deductible and maximum out-of-pocket limits are:
While determining whether a plan qualifies as a QHDHP may be easy, it may be more difficult to determine whether an employee is enrolled in impermissible coverage or has their HSA eligibility disrupted by Medicare entitlement. In general, it’s the account holder’s responsibility to determine whether they are eligible to contribute to an HSA.
Let’s break down a few common types of impermissible coverage.
General Purpose FSA/HRA
The most common disruptor of HSA eligibility is impermissible coverage in the form of a general-purpose health FSA or HRA. An otherwise HSA eligible individual will be ineligible to make HSA contributions for any month that they are enrolled in, or covered under, a general-purpose health FSA or HRA that pays first-dollar coverage.
This issue can arise when an employer sponsors multiple pre-tax benefits, including an HSA, health FSA, or HRA, but it is more common when an employee is covered under a spousal employer’s general-purpose health FSA or HRA which permit reimbursement for §213(d) expenses incurred by the employee, their spouse and dependents.
When an employer does sponsor multiple accounts, an employer can design their health FSA or HRA as either a post-deductible or limited purpose benefit to maximum tax savings and avoid HSA disruption. A post-deductible benefit will not reimburse expenses until after the minimum QHDHP deductible is met. A limited purpose benefit would only reimburse preventive care, dental or vision expenses.
HSA eligibility may also be disrupted if an individual receives medical benefits from the Department of Veterans Affairs (VA). In general, an individual is ineligible to contribute to an HSA for any month that they have received VA medical benefits (other than allowable preventive care, dental or vision coverage) at any time during the previous three months, unless such care was in connection with a service-connected disability (i.e., a disability incurred or aggravated in the line of duty in the active military, naval or air service).
For example, if an employee receives VA benefits in January (for medical care not related to a service-connected disability), they would be ineligible to make HSA contributions for the months of January, February, March, and April. Assuming that the individual does not receive any VA medical benefits in the months of February, March, and April, they would then be able to resume making HSA contributions in May.
Note that this rule does not apply to TRICARE. Any individual receiving benefits under TRICARE is not eligible to contribute to an HSA (even if they are also enrolled in a QHDHP), because TRICARE does not meet the minimum annual deductible requirements.
Medicare entitled individuals (i.e., eligible for and enrolled in Medicare) are ineligible to contribute to an HSA. While this rule may seem easy, the biggest hurdle in determining HSA disruption due to Medicare eligibility arises from retroactive Medicare entitlement. Medicare entitlement can be delayed when an employee works past age 65 or has a spouse that is still working (so they continue to be enrolled in an employer’s group health plan).
When they do sign up for Medicare coverage, that coverage will be retroactive six months prior to the month in which they applied for benefits (but no earlier than their first month of eligibility). Although they may not initially enroll until later in their initial enrollment period or during a special enrollment period, they will be ineligible to make HSA contributions for all months that they become retroactively entitled to Medicare benefits. Because of this, HSA account holders planning to enroll in Medicare must be careful to adjust their HSA contributions to account for the retroactive enrollment.
PrimePay Can Help Guide You Through HSAs
These rules do not encompass all of the eligibility requirements for HSA individuals and other plan designs or benefits may impact HSA eligibility. PrimePay is here to help answer all your questions about HSAs including HSA eligibility for employees.
Please read our disclaimer here.