HSA Enrollment Tips and Traps

“If you’re enrolled in any Part of Medicare, you can’t open an HSA if you don’t already have one, and you can no longer make or receive contributions to an HSA – even if you remain covered on your employer’s HSA-qualified plan and your employer contributes to every eligible employee’s HSA.”

William G. (Bill) Stuart

Director of Strategy and Compliance

May 30, 2019

It’s open-enrollment season for many Americans. If your employer offers the opportunity to own a Health Savings Account, you should seriously consider this option.

HSAs are the most powerful reimbursement option available because you own the account, you can alter your contribution levels as your needs change, you can contribute much more than you can elect to a Health FSA, you don’t forfeit unused balances, you can invest your balances, you take your HSA with you when you leave your current job, and you pass your unused balance on to an heir or heirs upon your death.

HSAs are also the most powerful retirement option because your contributions are pre-tax and tax-deductible, your balances grow tax-free, and withdrawals for a wide range of qualified expenses are tax-free. You make Roth 401(k) plan and IRA contributions with after-tax dollars, which then grow-tax-free and are withdrawn tax-free. Traditional 401(k) plan and IRA contributions are free of federal and state income taxes (though you incur federal payroll taxes of as much as 7.65%), balances grow tax-free, and all distributions – even for qualified medical expenses – are included in your taxable income in the year that you withdraw funds.

Yes, HSAs represent a compelling financial opportunity. But you need to understand some basic compliance issues to determine whether you’re eligible to make and receive contributions. Here’s what you need to know:

HSA-qualified Medical Coverage

Your medical plan must have a deductible of at least $1,350 (self-only coverage) or $2,700 (family coverage) – the statutory minimum annual deductible in 2019. All covered expenses except select preventive care (including preventive prescriptions on some plan designs) are subject to the deductible. That means that you’re responsible financially for every physician visit, every diagnostic lab test, and every treatment until you satisfy the plan deductible.

This is a very different design from traditional and other deductible plans. It seems daunting and downright scary at first for many employees. But the premium is lower, employers often offset some of the deductible with contributions to our HSA, and these plans often have lower-out out-of-pocket limits. They can be ideal for low utilizers (who incur few services subject to the deductible), moderate utilizers (who often find the premium savings and employer HSA contributions offset their deductible expenses), and high utilizers (total out-of-pocket costs may be lower than the ceilings on other plans offered).

To learn more, consult Chapter 16 of my new book, HSAs: The Tax-Perfect Retirement Account.

Disqualifying Coverage

Enrolling in an HSA-qualified plan isn’t sufficient to allow you to open and make or receive contributions to an HSA. You must also not have any disqualifying coverage. We review the most common types of disqualifying coverage below.

At a high level, here’s what you need to know: If you’re covered by more than one plan then each plan must be HSA-qualified before you you’re eligible to open an HSA and make or receive contributions to the account.

The good news is that most of your employee benefits – dental and vision coverage, life insurance, short-term and long-term disability coverage, long-term care insurance, a typical Employee Assistance Program – aren’t disqualifying coverage.

But some others – like general Health FSAs and general Health Reimbursement Arrangements, or HRAs – are. And some other potential coverage outside our employer’s offerings – like Medicare and Medicaid – are disqualifying as well.

HSAs and Health FSAs

You can’t open and make or receive HSA contributions if you are or your spouse is enrolled in a general Health FSA. What’s a general Health FSA? It’s the standard design, with first-dollar reimbursement for medical, dental, vision, and certain over-the-counter items.

General HSAs are disqualifying because they’re considered medical coverage because they provide first-dollar reimbursement for medical services, prescription drugs, and over-the-counter items. This coverage violates the central concept of an HSA-qualified plan – that patients are responsible for the first dollars of these expenses before they satisfy the deductible.

This issue applies to both your own and your spouse’s general Health FSA. Under federal tax law, a Health FSA automatically covers the employee who participates, as well as her spouse, her tax dependents, and her children to age 26. It doesn’t matter whether the Health FSA subscriber has waived her employer’s medical coverage or covers only herself on that plan. The Health FSA is a separate medical plan that automatically covers – and therefore disqualifies from HSA participation – her, her spouse, her tax dependents and her children to age 26.

A Limited-Purpose Health FSA, which covers dental and vision expenses only (and may reimburse medical, prescription, and over-the-counter items once the employee has met the $1,350/$2,700 deductible threshold) doesn’t’ disqualify covered family members from opening and making or receiving contributions to an HSA.

Read more about HSAs and Health FSAs here or consult Chapter 23 of HSAs: The Tax-Perfect Retirement Account.

HSAs and HRAs

HRAs are typically integrated with the medical plan, are always funded solely by employers, and typically offset a portion of deductible expenses. To the extent that they reimburse expenses below the $1,350/$2,700 deductible threshold, they’re disqualifying coverage.

Many employers offer a Post-Deductible HRA that doesn’t begin to reimburse any services until the statutory minimum annual deductible is satisfied. Employers can offer a plan with, say, a $5,000 self-only deductible and then use a Post-Deductible HRA to offset the final $3,500 of deductible expenses.

Read more about HSAs and HRAs here or consult Chapter 24 of HSAs: The Tax-Perfect Retirement Account.

HSAs and Medicare

Working seniors enter another realm of HSA eligibility issues when they become eligible to enroll in Medicare. Fortunately, the rules are pretty simple: If you’re enrolled in any Part of Medicare, you can’t open an HSA if you don’t already have one, and you can no longer make or receive contributions to an HSA – even if you remain covered on your employer’s HSA-qualified plan and your employer contributes to every eligible employee’s HSA.

Here’s what they need to know:

  • Under federal Medicare rules, you don’t have to enroll in Medicare at age 65 – unless you’re collecting Social Security benefits at age 65.
  • If you’re collecting Social Security, you’re automatically enrolled in Medicare Part A (inpatient coverage) and Part B (outpatient services). You can disenroll from Part B (which most working seniors with employer coverage do because they must pay a monthly premium for Part B coverage that overlaps their group coverage), but not Part A.
  • Working seniors at companies with fewer than 20 employees may be required by their employer’s insurer to enroll in Part A and Part B as a condition of remaining on the group plan. This isn’t a federal requirement. Many – but not all – insurers require Medicare enrollment because claims are processed by Medicare first (leaving the employer’s insurer with less financial responsibility).

Here’s an important point or married couples to understand: Medicare offers individual coverage only. If you’re a working senior and are enrolled in Medicare, you can’t make or receive HSA contributions. But if your spouse is covered on your medical plan, isn’t enrolled in Medicare, and doesn’t have any disqualifying coverage, she can open her own HSA and you and she can contribute up to the statutory maximum family contribution ($7,000 in 2019), plus a $1,000 catch-up contribution if she’s age 55 or older.

Learn more about Medicare and HSAs here or consult Section 3 (Chapters 13 – 15) of HSAs: The Tax-Perfect Retirement Account.

HSAs and Other Coverage

If you’re enrolled in Medicaid, you can’t open and make or receive contributions to an HSA. But your HSA eligibility isn’t affected if members of your family are enrolled in Medicaid.

If you’re a veteran and enrolled in TRICARE, you’re not eligible to open and make or receive contributions to an HSA. TRICARE doesn’t offer an HSA-qualified option.

If you access non-preventive care through the Indian Health Services (IHS), you’re disqualified from making contributions for the three months following your care.

If you receive care through the Department of Veterans Services (VA health system) that’s not preventive or a service-related condition, you can’t make contributions for the three months after your care.

Your temporary disqualification when you receive IHS or VA care may not affect your contribution limit for the year if you can take advantage of the Last-Month rule. Learn more by reading Question 3 here.

Learn more about the interaction of HSAs and VA and IHS care here.

HSAs and Other Disqualifying Benefits

 You (and your employer) must be aware of some other benefits that may disqualify you:

  • Telemedicine – A stand-alone program that offers telemedicine for a discounted price (such as a copay or no charge) below the deductible probably is disqualifying, though we have no guidance on this issue. But when the benefit is integrated into the medical plan and subject to the deductible, it’s not an issue.
  • Onsite clinic – A work-based clinic that provides simple care isn’t disqualifying, but a more comprehensive service that offers counseling, physical therapy to rehab following an injury, or diagnostic blood work or imaging may be.
  • Free care – If you work for a medical provider and can receive free or discount care for lab tests, imaging, and other diagnostics and treatment, you risk disqualification.
  • Employee Assistance Program – Most plans provide minimal medical benefits and therefore don’t disqualify employees who utilize them. But when they provide significant benefits, they may be disqualifying.

Tax Dependent

If another taxpayer can claim you as a tax dependent (whether or not she claims you), you can’t open and make or receive contributions to an HSA.

What We’re Reading

When you enroll in Medicare after age 65, you may be hit with six-month retroactive coverage, which reduces your total HSA contribution. Read more here.

Thinking about switching jobs? Here’s a good guide to the question that you should ask your new employer’s group medical coverage.

Despite intending to work beyond age 65, some people must retire early due to a medical condition. This article provides some tips about how to manage finances and how some actions may close the door on other financial opportunities.

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