New HSA “Grab Bag” Guidance Helps Employers

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July 15 , 2008

In late June, Notice 2008-59 provided employers with needed clarification on many issues relating to Health Savings Accounts (HSAs). The IRS Notice takes immediate effect and could spark an increase in HSA-related activity as benefit planning begins in earnest for 2009.

The IRS organized the 42 questions into seven topic areas:

• Eligibility
• High-Deductible Health Plans (HDHPs)
• Contributions
• Distributions
• Prohibited Transactions
• Establishing an HSA
• Administration

Eligibility

A limited-purpose Health Reimbursement Arrangement (HRA) can reimburse health plan premiums and still be compatible with an HSA, even if those premiums pay for non-HDHP coverage.

A post-deductible HRA or Health FSA can reimburse expenses that fall below an HDHP’s umbrella deductible as long as the embedded individual deductible meets the statutory minimum requirements. For example, a family has HDHP coverage with a $3,500 umbrella deductible and an embedded individual deductible of $2,200. The HRA or Health FSA could reimburse medical expenses after $2,200 in HDHP-covered expenses have been incurred.

Government-sponsored coverage can be tricky, and the IRS answered several questions. Medicare eligibility does not disqualify an individual from HSA eligibility. However, Medicare enrollment does. Eligibility for Veterans Affairs coverage does not make an individual ineligible for HSAs, even if an individual receives benefits that constitute disregarded coverage or preventive care.

Use of an employer’s on-site medical clinic will not disqualify employees from HSA participation as long as the clinic does not provide significant medical services. Insignificant medical services include physicals, immunizations, allergy shots, aspirin and other nonprescription pain relievers, and treatment for workplace injuries.

An employee who has family coverage is still eligible for an HSA even though one or more of the covered participants may have other non-HDHP coverage (e.g., through a spouse’s employer).

HDHPs
The IRS provided four examples on how an HDHP can allocate expenses when an employee shifts from family to self-only coverage mid-year. This could occur for a variety of reasons: divorce, death, or a dependent ceasing to be eligible under the plan. IRS endorsed a “reasonable method” approach, which could incorporate any of the following:

• If the family deductible was already satisfied, consider the self-only deductible to be satisfied
• Allocate those expenses incurred by the employee to the self-only deductible
• Allocate expenses on a per-capita basis, according to how many were covered previously

A plan must choose a single method and apply it consistently. This rule does not alter the current COBRA rules related to deductibles when a Qualified Beneficiary elects COBRA coverage.

HDHPs are subject to out-of-pocket maximums. Some HDHPs will have a separate, higher deductible for specific benefits (e.g., substance abuse treatment). Any post-deductible expenses that are paid by the employee to satisfy the specific benefit deductible do not count toward the out-of-pocket maximum.

An HDHP must provide significant benefits. Therefore, a hospitalization-only or in-patient care only plan is not an HDHP.

Contributions
An employee with family HDHP coverage can contribute the annual HSA family amount ($5,800 in 2008) even if one or more of the employees’ dependents has non-HDHP coverage. Of course, the employee cannot be covered under the non-HDHP plan.

The IRS addressed situations where a husband and wife each have separate HDHP coverage. In those cases, the combined total contribution to both HSAs cannot exceed the family contribution limit. The spouses can allocate how much is contributed to each HSA by agreement.

Employers can contribute to an HSA after December 31 and allocate that contribution to the prior year as long as they do so before Tax Day and notify the HSA custodian.

The IRS provided employers limited ability to recoup employer contributions. They may do so to accounts that are never opened by the employee or when the contributions exceed the maximum allowed (alternatively, deeming the contribution to be income on the W-2). However, an employer may not recoup amounts it contributes after an employee loses HSA eligibility.

Distributions
An HSA Debit Card may restrict its use to medical expenses as long as funds are readily available for non-medical expenses by other means like on-line transfers, check-writing, and paper withdrawals. An HSA owner can designate someone else to make a withdrawal from the HSA. This would include allowing a spouse to use the HSA Debit Card.

Prohibited Transactions
You cannot use an HSA balance as security for a loan. HSA loans and lines of credit are prohibited. However, a separate line of credit that is not secured by the HSA is permissible as long as the HSA is not used to repay the line of credit.

The consequences for engaging in a prohibited transaction are severe. For the employee, it means the HSA is immediately disqualified, and the balance is taxed and subject to a 10 percent penalty for the taxable year of the prohibited transaction. If the prohibited transaction is the employer's fault, the employer is liable for the penalty, but the employee is not.

Establishing an HSA
An HSA is established when it is funded, unless it is created by a rollover from another HSA or Archer MSA. In that case, you use the establishment date of the prior HSA or Archer MSA. Another scenario involves establishing an HSA, closing it with a withdrawal of all funds, and establishing a second HSA. If the second HSA is established within 18 months of the closing of the first HSA, the second HSA is deemed to be established when the first one was.

Administration
The IRS stated that HSA administration and maintenance fees withdrawn by the Trustee are reflected on Form 5498-SA in the fair market value of the HSA at the end of the taxable year. These fees are not reported as HSA distributions.

Infinisource will offer an HSA webinar, addressing Notice 2008-59 and recently issued HSA rollover guidance (Notices 2008-51 and 2008-52) on Wednesday, August 20, 2008. For more information, please go to the Seminars & Webinars page at www.infinisource.net.

Notice 2008-59 is available at www.treas.gov/press/releases/reports/notice200859.pdf.