“But retaining the right to continuation of coverage and paying premiums are two different things. If that person ends up in the hospital in February, she’ll have to pay her premiums retroactively to last March to receive coverage.”
William G. (Bill) Stuart
Director of Strategy and Compliance
December 17, 2020
Mark Twain said it best: “It’s difficult to make predictions, particularly about the future.”
A year ago, I wasn’t thinking about how a global pandemic would affect reimbursement accounts in 2020. Call me myopic. But be honest – were you?
This year has produced a flurry of legislative and regulatory activity designed to help hard-working American families deal with the medical and financial consequences of a novel coronavirus that no one saw coming a few months into the year. Let’s review where we’ve come and, without making any predictions for 2021, discuss possible areas of further action.
Permanent Changes
The CARES Act, passed in March, made several important changes to items eligible for tax-free reimbursement from a Health Savings Account. The changes are retroactive to purchases made on or after Jan. 1, 2020.
Over-the-counter drugs and medicine. They’ve always been eligible for reimbursement. But the Affordable Care Act added a new requirement beginning Jan. 1, 2012: a prescription, which Health Savings Account owners needed to maintain in their tax files, and Health FSA participants had to submit for reimbursement. The CARES Act waived the prescription requirement, which put OTC drugs and medicine back on par with OTC equipment and supplies, which never required prescriptions. This change, which has been introduced in every Congress since 2012 and was passed by the House of Representatives as part of a bill in 2018, finally restored the old rules.
Menstrual products. The CARES Act added menstrual products (like pads and tampons) as eligible expenses. This change was the culmination of several years of industry lobbying of the Internal Revenue Service. More than 900 items were added to the list of eligible expenses.
Health FSA rollover. The IRS also issued a ruling increasing the amount of remaining election that Health FSA participants could roll over into the following calendar year. The amount had been fixed at $500. Under the new rules, the limit is 20% of the annual election, which is reviewed annually and adjusted for inflation. In 2020 and 2021, the election limit is $2,750, resulting in a rollover amount up to $550. As the election limit increases in future years (always in $50 increments), the rollover amount will increase as well (always in $10 increments).
The rollover provision doesn’t apply to Dependent Care FSAs. But employers can offer a grace period – additional time past the end of the plan year during which participants can continue to incur expenses – to both Dependent Care FSAs and Health FSAs.
Direct-primary care. Patients who want a strong relationship with a physician and doctors who want to treat patients independent of the insurer’s rules are driving the increase in direct-primary care, or DPC, arrangements. Doctors charge a monthly subscription, based on the patient’s age and medical condition. In exchange, they provide all primary care (like routine physicals, immunizations, simple lab work, treatment of simple conditions, and understanding of a patient’s health goals and treatment preferences) through a combination of physical and virtual visits, e-mail, chat, and patient groups.
Federal law has defined this arrangement as a medical plan. And since this plan delivers care below the deductible, patients aren’t eligible to open or fund a Health Savings Account. And the fees aren’t an expense eligible for a tax-free distribution from a Health FSA, a Health Reimbursement Arrangement, or a Health Savings Account.
Under new administrative rules, the monthly subscription fees are an eligible expense. But the Trump Administration didn’t accept the argument that DPC arrangements constitute a medical service, not a health plan, as 32 states have. Thus, any patient in a DPC arrangement is disqualified from opening or funding a Health Savings Account. That’s unfortunate since DPC providers can steer patients who need specialty care to providers based on value (the relationship between price and quality) rather than, as many primary-care physicians must, direct them within their affiliated hospital’s network, regardless of price.
But patients can reimburse these expenses tax-free, and employers can set up an HRA to pay these fees for patients. For people disqualified from funding a Health Savings Account, reimbursing DPC costs tax-free is a financial benefit.
Temporary Changes
Congress and the Internal Revenue Service made numerous changes in the law and regulations earlier this year to address situations unique to the pandemic.
Telemedicine. As much of the medical-delivery system shut down during the initial COVID-19 outbreak in the spring, non-urgent medical appointments were cancelled or conducted remotely. Telemedicine usage soared among Medicare patients (the first time Medicare had reimbursed remote care) and patients covered by commercial plans (where telemedicine had been largely a virtual alternative to a retail urgent-care clinic). The new rules allow insurers to cover telemedicine below the deductible through the end of 2021 without disqualifying an otherwise HSA-eligible individual from funding a Health Savings Account.
Flexibility to Change Elections. The pandemic disrupted many people’s lives, which in turn upended their careful planning for 2020.
The cost of after-school programs? Not relevant when there was no school and a parent was working from home.
Scheduled surgery? If it was not urgent, it was most likely postponed – perhaps into a new Health FSA plan year.
Several COVID-19 cases in the family? The cost of treatment may have stretched family budgets far beyond what they projected.
The IRS granted relief during the spring for 2020 only. It authorized employers to allow a special mid-year open-enrollment period during which benefits-eligible employees could start or stop their participation, or prospectively change their elections up or down, in a Health FSA or Dependent Care FSA. If employers adopted the change, employees regained additional control over their money.
The IRS also gave employers the option to allow employees more time to spend their FSA elections – through the end of December 2020. This relief helped participants who otherwise would have forfeited unused funds earlier this year.
COBRA
Many employees who lose their jobs are entitled to remain on their group medical coverage by exercising continuation rights under the Consolidated Omnibus Budget and Reconciliation Act of 1985, or COBRA. The catch: They’re responsible for up to 102% of the premium, versus the 20% to 35% that employees typically pay after their employer subsidizes their premium. They may go from a $500 per month pre-tax payroll deduction as an employee for their portion of the premium to facing a monthly bill of $2,040 for the same coverage when they’re out of work.
COBRA imposes strict deadlines on how long after termination of employment a person can elect COBRA, and then an additional deadline to pay the first month’s premium. Savvy people know how to use this time to keep their COBRA option as they search for a new job with employer-sponsored coverage and pray that they won’t need to pay for expensive coverage through COBRA.
New pandemic-inspired rules stop those clocks. A worker laid off in early April would have to begin paying premiums by July under the old rules. Now, that same person can enter the new year without paying any premium and retain her right to continue coverage intact.
But retaining the right to continuation of coverage and paying premiums are two different things. If that person ends up in the hospital in February, she’ll have to pay her premiums retroactively to last March to receive coverage.
During the 2008 recession, Congress appropriated funds to subsidize 65% of the COBRA premium, effectively replicating the employer contribution. Although some lawmakers have proposed subsidies this year (up to 100% of premium), as of now COBRA participants must pay the entire cost of coverage. There remains a possibility that Congress will approve a subsidy before it recesses for the Christmas holiday or the 117th Congress will do so in early 2021. Keep an eye on this development.
A Key Initiative for 2021
Health Savings Accounts aren’t likely to see major changes in 2021. President-elect Joe Biden will be active and aggressive on health-related issues, but his primary focus will be on controlling the spread of COVID-19, funding the manufacturing of vaccines, and organizing a system of delivery of the vaccines so that every American has an opportunity to be inoculated by summer.
One initiative that has gained momentum in 2020 that may carry over into the new year is the concept of decoupling. That’s a fancy way of saying that every American can own a Health Savings Account, regardless of underlying medical coverage. This concept requires a change in the law, which allows only people enrolled on an HSA-qualified plan who meet certain other eligibility requirements to open and fund a Health Savings Account.
The rationale for this proposed change: Today, the average deductible in the small-group market and nearly every deductible in public marketplaces exceeds the $1,400 (Self-only)/$2,800 (family) deductible threshold of an HSA-qualified plan. But most plans with high deductibles aren’t HSA-qualified because they cover some services – often physician visits and prescription drugs – below the deductible. So people enrolled in those plans have high out-of-pocket costs and can’t fund a Health Savings Account.
Decoupling would help many other Americans who could benefit from the 20% to 37% discounts available to owners of Health Savings Accounts through tax savings on contributions:
- Medicare retirees, who could pay their premiums and cost-sharing (an average of $6,000 per year) at a discount.
- The unemployed and COBRA participants, who could pay premiums with pre-tax funds.
- Self-employed, contract workers, and other non-employees, who don’t have access to an employer-sponsored Health FSA to pay their out-of-pocket expenses with pre-tax funds.
- Families with high medical, dental, or vision bills who either don’t have access to a Health FSA (many employers don’t offer them) or have expenses that exceed the $2,750 annual election limit. They could save between $200 and $370 on every $1,000 of eligible expenses.
- People whose medical expenses unexpectedly fluctuate wildly from year to year. A Health FSA’s fixed election leaves them vulnerable to forfeiting unused balances or missing out on tax savings when they make low elections and have high expenses. They could fund a Health Savings Account as they need funds, or keep steady contributions and build balances to meet high expenses.
The Bottom Line
A pandemic, a change of administrations, and many temporary provisions have created fertile ground for more changes next year. Keep reading this column to receive up-to-date information and analysis on legislative and regulatory changes in 2021.
What We’re Reading
How prepared are states to distribute the COVID-19 vaccine? The Commonwealth Fund looks at states’ histories with flu shots and previous pandemics to draw some conclusions.
Who’s eager and who’s reluctant to receive a COVID-19 vaccination? The Kaiser Family Foundation analyzes party affiliation, ethnicity, age, sex, and other factors to paint a picture.
Did you know that our online Health Savings Account library includes easy-to-digest information about common compliance issues? Here’s but one example, which focuses on rollovers from other accounts to a Health Savings Account. Access the library here.
