HSA Transition Period Ends For Separate Prescription Coverage

The transition relief period for individuals with a Health Savings Account (HSA) and a separate plan or rider for pre-deductible prescription drug benefits will come to an end on January 1, 2006. This leaves little time remaining for employers, health insurers and pharmacy benefit managers to modify High Deductible Health Plans (HDHP) to comply.

The IRS recognized the impact of HSA rules on individuals with separate prescription drug coverage or rider policies that pay benefits before the minimum annual HDHP deductible is satisfied. Under Rev. Ruling 2004-38, such prescription drug coverage would make the individual ineligible for an HSA. Therefore, Rev. Proc. 2004-22 provided a two-year transitional period that allowed individuals to participate in an HSA even if the prescription drug benefit would normally make them ineligible for HSAs. Beginning January 1, 2006, enrollees must satisfy the deductible – at least $1,000 for individual coverage or $2,000 for family coverage – before receiving coverage for prescription drugs.

The reason for this HSA rule is straightforward: a plan that provides benefits for prescription drugs is a health plan that is not in the list of permitted insurance or permitted coverage. Therefore, an individual who is covered by both an HDHP and a prescription drug plan would not be an eligible individual for the purpose of contributing to an HSA unless the prescription drug benefit is paid only after the required minimum annual deductible for the HDHP has been satisfied.

As health benefit costs continue to rise, more employers are seeking consumer driven health care (CDHC) programs to control costs. An HSA is an excellent vehicle for accomplishing that goal. Participants are now experiencing first hand the benefits of choosing a high deductible plan. They reap the benefits of continued health coverage at significantly lower premium costs. HSAs empower participants to become cost conscious consumers of health care. Participants also retain unused amounts in the HSA account, which may be rolled forward, without tax, to meet the needs of payment for services in later years, even the retirement years.

Infinisource Inc. offers an innovative HSA solution that boasts market-driven interest earnings on accounts and a high level of plan design flexibility for employers. Visit our website at www.benefitsolved.com for information on how you can deliver HSAs to your clients, or to set up an HSA you may also contact Infinisource at 800-779-6384.

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