In the race between all types of consumer-directed health plans, health savings accounts (HSAs) are becoming a real contender.
Upon making their appearance in 2004, HSAs were at first impossible to set up because the qualified high-deductible health plans (HDHPs) described by the Internal Revenue Service (IRS) did not exist. Employers did not know they could offer health flexible spending accounts (HFSAs) and health reimbursement arrangements (HRAs) along with HSAs.
How can an employer offer an HSA, a health FSA, and an HRA program and still comply with every law surrounding these benefits?
First, a little background. HSAs are individually owned health care payment accounts that allow participants to contribute untaxed dollars. Interest or dividends accumulate tax-free; and when participants pay for qualified medical expenses, there will be no additional tax consequences.
In order to be eligible for an HSA, individuals must be covered by a qualified HDHP that satisfies minimum deductible amounts with certain out-of-pocket maximums. Account holders may not be covered by any other insurance plans that are not an HDHP or that include benefits provided by an HDHP. However, participants may obtain narrowly defined “permitted insurance” or “permitted coverage” products, such as policies that provide dental, vision, accident, disability and long term care benefits. For non-grandfathered plans, HDHPs also provide “preventive care” reimbursements that are below the minimum deductible amounts or without deductibles.
Other Insurance Coverage
Now let’s discuss health coverage provided through Section 125 HFSAs or HRAs and limited purpose HFSAs and HRAs, suspended HRAs, post-deductible HFSAs and HRAs, and retirement HRAs.
Limited-Purpose HFSAs or HRAs. HFSAs and HRAs are limited to payment of only permitted coverage items, such as vision and dental expenses, until the statutory minimum annual deductible is met. Limited-purpose HRAs can also compensate for permitted insurance plans that cover a specific disease or illness or that provide a fixed amount per day of hospitalization.
This range of benefits does not breach the “no other insurance” rule of HSAs. It should also be noted that the limited-purpose programs could pay for preventive care before the statutory minimum annual deductible is satisfied. The definition of preventive care was described in IRS Notice 2004-23.
Suspended HRAs. Suspended HRAs are employer-funded HRAs that pay all qualified health care expenses for eligible employees. For HSA-eligible employees, elections are made before the beginning of the HRA coverage period in order to forgo or suspend all payments that are not for permitted coverage, permitted insurance or preventive care expenses; thus barring reimbursement at any time of otherwise eligible expenses and retaining entitlement to make tax-free contributions to the HSA.
The employer would continue to “fund” the HRA account even though the employees have elected to suspend full usage of the arrangement. Thus, when the employees end their suspension periods, they are no longer eligible to make HSA contributions, because they are free to receive reimbursement of all health care expenses from the HRA.
Post-Deductible HFSAs or HRAs. With these benefits, HFSAs and HRAs are also considered to be high-deductible insurance products. Remember the rule about no other insurance coverage? These HFSA/HRA plans won’t kick off until after the minimum deductible is met. Reimbursement from HFSA or HRA plans do not have to wait until the HDHP deductible is met, but the “minimum” deductible standard must be met.
In addition, although the deductibles for the HDHP and the other coverage may be satisfied independently by separate expenses, no benefits may be paid before the minimum annual deductible is met, which is $1,200 for single coverage and $2,400 for family coverage in 2011.
Retirement HRAs. Retirement HRAs can accumulate funds during an account holder’s working years and make those dollars available upon retirement. HRAs may not reimburse any health care expenses except permitted coverage, permitted insurance and preventive care during an individual’s employment. When retirement HRAs begin to make reimbursements, participants are ineligible to make further contributions to HSAs.
Mix and Match. Combinations of the above plans can also work. For instance, employees could be covered by limited-purpose HFSAs and retirement HRAs and still be eligible to make contributions to individual HSA arrangements.
Yes—you can have it all. Employers sometimes don’t understand that they can and should have general-purpose HFSAs along with limited-purpose HFSAs and HSAs. Why would they want to do that? Some employees simply don’t want to establish and maintain an HSA. They are familiar with how HFSAs work (paying their large expenses even before they have made all their contributions for the year, unlike most HSAs, which generally limit distributions to amounts already accumulated) plus, there are also extra tax forms to complete. So make sure your employer/clients include the full range of benefits in their cafeteria plans, including general-purpose HFSAs and dependent care assistance accounts.
Contributions Versus Disbursements
Don’t confuse being “eligible to make contributions” to HSAs with being “eligible to receive payments” from them. HSAs can pay for qualified medical expenses of account holders, their spouses and dependents even though the account holders are no longer eligible to make contributions. Another note, spouses and dependents do not need to be covered by underlying HDHPs in order to have their health care expenses reimbursed from the HSAs.
Employee Education
Employee education is a must when blending benefits with so many specific rules. Start with the basic information about your employer/clients’ plans and try to keep educational materials simple and to the point.
