Your Compliance Questions Answered

 

“The only factor that matters when determining whether an HSA-eligible person is entitled to a family or self-only contribution is the size of the contract. Period.”

William G. (Bill) Stuart

Director of Strategy and Compliance

November 1, 2018

An important part of my job is to answer your questions about Consumer-Driven Health (CDH) generally and Health Savings Accounts (HSAs) specifically. These questions are important for me because I learn what aspects of CDH are confusing to even the best benefits advisors and benefits managers. I then recommend changes in our materials or create other means of communicating rules more clearly.

Benefit Strategies offers this service because we want you to look in our direction first when you want to provide employees with the technology and service to make participation in a CDH program easy. We run the risk that you’ll do the equivalent of what many shoppers do: Discuss product features with a knowledgeable retail clerk, then order the product or service from another company (often online). Needless to say, we hope that you recognize that the expertise that we provide up-front reflects the level of service and knowledge that we deliver when you choose Benefit Strategies to administer an HSA, a Health FSA, a Health Reimbursement Arrangement (HRA), a commuter program, COBRA, or another product or program.

Here are some questions that I’ve answered recently that I suspect would trip up more people than merely the ones submitting the questions to me:

 

We’re finishing our first year of an HSA program. Do employees have to make new elections for the new year, as they do with Health FSAs?

No. A Health FSA is an annual reimbursement plan. Employees must determine each year whether to re-enroll and set the amount of coverage that they need.

In contrast, an HSA is not an annual plan or program (although the underlying medical plan is, and employees must re-enroll in coverage each year). Pre-tax payroll deductions continue until the employee changes them. Thus, a participating employee who’s contributing $50 per pay period in December will continue to contribute $50 in January unless the employee changes her election. She can make a prospective (it applies to future deductions only) change at any point, although her employer is permitted to limit the number of times per year an employee can make a change (as long as the limit is “reasonable”).

As an analogy, think of employee pre-tax payroll deductions into their 401(k) plans. Their elections remain in place indefinitely, until the employee requests a change. HSA work the same way.

 

I heard that the law changed so that working seniors enrolled in Part A are now HSA-eligible. My client offers an HRA to working seniors who aren’t HSA-eligible. How quickly can these working seniors disenroll from the HRA and begin contributing to the HSA?

That information is not correct. In late July, the House of Representatives passed two HSA expansion bills. Section 3 of the Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act of 2018 includes a provision that otherwise HSA-eligible working seniors who are enrolled in Medicare Part A are not disqualified from opening and contributing (or receiving an employer contribution) to an HSA.

This bill is not law! When it passed the House shortly before the summer recess, it moved to the Senate, where it was referred to the Finance Committee. There it sits. Finance hasn’t scheduled hearings on the bill. It’s unlikely that Finance will schedule hearings before this session of Congress expires at the end of this year.

The most realistic scenario in which this provision becomes law is if it’s attached to a spending bill, a tax bill, or a piece of lame-duck legislation before the end of 2018. This possibility isn’t out of the question.

The important point is to understand that the law has not changed at this point. Enrollment in any Part of Medicare is still disqualifying coverage.

 

My client is enrolled in his employer’s HSA program. On the anniversary, he’s switching to his wife’s HSA-qualified coverage. Can he continue to make HSA pre-tax payroll contributions to his HSA?

Probably not. It depends on his employer.

Employers set the rules of their HSA programs in their Cafeteria (sometimes called Section 125) Pan documents. As a review, a Cafeteria Plan allows employers to offer employees the opportunity to receive some of their income in the form of tax-free payroll deductions for certain items. Most employers offer a Premium-Offset Plan (POP), which allows employees to pay their portion of medical premiums with pre-tax funds. Other examples include an FSA program and an HSA. Each program requires its own amendment (or separate Cafeteria Plan document) that lists the rules of participation in the program.

Many employers don’t allow employees to make pre-tax payroll deductions unless the employee enrolls in the employer’s HSA-qualified plan. Why? Although employees are solely responsible for complying with HSA rules, employers have two distinct responsibilities. First, they must determine whether an employee is (1) enrolled in an HSA-qualified plan and any disqualifying coverage (like a general Health FSA or general HRA) that the employer sponsors and (2) age 55 or older and therefore eligible to make a catch-up contribution.

IRS guidance (IRS Notice 2004-50, Q&A 81) states that the employer can rely on an employee’s representation as to her date of birth. It doesn’t explicitly state that the employer can rely on the employee’s representation that she’s enrolled on her spouse’s HSA-qualified plan. Most employers choose not to venture into this gray area.

An employer might want to consider offering this service to employees. It’s much less expensive to offer an employee pre-tax payroll deductions when covered on a spouse’s plan, rather than have the employee switch to that employer’s HSA-qualified coverage for which the employer is responsible for paying much of the premium.

 

A husband and wife are covered on his HSA-qualified plan. They’re approaching age 65. She’s thinking about enrolling in Medicare Part A, which has no premium and might give her some secondary coverage if she’s hospitalized. Her decision will be based on whether they can still make a family contribution to an HSA or her enrollment in Part A drops them to the self-only contribution limit because only the husband will be HSA-eligible. Will her enrollment in Medicare affect their HSA contribution?

I’m often asked variations of this question. In simple terms, the questioner is asking whether someone can contribute up to the family or self-only HSA contribution limit if only one family member is HSA-eligible.

Before answering that question, I always pose this scenario: A single mother covers her two pre-teen daughters on her HSA-qualified plan. The daughters aren’t HSA-eligible since they’re their mother’s tax dependent. How much, I ask, can the mother contribute to her HSA?

In every case, people give the same answer: “Of course she can contribute up to the family maximum.”

Of course. Here’s the rule: Whether an HSA owner can contribute to the self-only or family maximum statutory annual contribution limit depends on the size of the medical plan contract, not how many covered family members are HSA-eligible.

Does the contract cover more than one person? If so, the family contribution limit applies ($6,900 in 2018, increasing to $7,000 in 2019). It doesn’t matter whether only one person is HSA-eligible and the others are tax dependents or enrolled in Medicare… domestic partners or ex-spouses… adult children who are no longer tax dependents… or family members enrolled in Medicaid.

The only factor that matters when determining whether an HSA-eligible person is entitled to a family or self-only contribution is the size of the contract. Period. [Note: Although contract size determines the contribution amount, an HSA owner may not be able to reimburse tax-free qualified expenses incurred by every covered family member. Expenses incurred by domestic partners, ex-spouses, and children who are no longer tax dependents, for example, are not qualified expenses and can’t be reimbursed tax-free, even if the presence of one or more of these people on the medical coverage allows the HSA owner to contribute up to the family maximum.]

 

Working seniors who are covered on medical coverage sponsored by a small (fewer than 20 employees) employer must enroll in Medicare Part A and Part B since Medicare is the primary payer, right?

It depends. Yes, Medicare is always primary coverage when a working senior is enrolled in the group plan and Medicare and the employer has fewer than 20 employees. The Centers for Medicare and Medicare Services does not require these working seniors to enroll in Medicare coverage, however.

On the other hand, many group insurers want to retain their secondary position, since they’re responsible for fewer claims. They often require working seniors to enroll in Part A and Part B. Be sure to check with the group insurer to understand its rules.

 

My client works for a company with fewer than 20 employees. He covers his wife and himself on his employer’s HSA-qualified plan, to which he and his employer contribute. He turned age 65.  His employer’s insurer is requiring him to enroll in Medicare Part A and Part B. Does he lose the advantages of his HSA?

It depends. He’s no longer eligible to contribute (or receive an employer contribution) to his HSA since he’s now enrolled in disqualifying coverage.

What about his wife? If she’s HSA-eligible (covered on his HSA-qualified coverage, not enrolled in disqualifying coverage, obviously not someone’s tax dependent – unless perhaps she’s disabled), she can open her own HSA with the administrator of her choice. Perhaps her husband’s employer will allow her to open an HSA with its preferred HSA administrator, although business practices vary among employers and HSA administrators on this topic.

She, her husband, and anyone else can contribute to her HSA. And since she’s enrolled on a family plan, their limit is the statutory maximum annual contribution for a family contract. Her husband can’t continue to make pre-tax contributions through his employer since the money isn’t going into his HSA. She may be able to make pre-tax contributions if her employer has an HSA program and her employer’s Cafeteria Plan allows her to make those payroll deductions based on her enrollment in HSA-qualified coverage not sponsored by her employer.

What about their respective employers: Can they contribute to her HSA?

The husband’s employer can’t contribute directly to her HSA. Any money that it provides is taxable income to him. He can then contribute to his wife’s HSA. They can then deduct the contribution on their joint personal income tax return. If they file separately, she can deduct the contribution on her tax return.

Her employer can contribute to her HSA if its Cafeteria Plan allows it. Why would her employer contribute to her HSA if she’s covered on her husband’s medical plan? Well, employers often give employees a financial stipend for waiving coverage if they’re enrolled in another plan. A payment of perhaps $1,000 or $2,000 is a small investment for an employer who wants to avoid perhaps $15,000 in premiums to cover an employee who has alternative coverage. If the employer’s Cafeteria Plan allowed a contribution of, say, $1,500 into an HSA owned by an employee who’s covered on a spouse’s medical plan, that looks like a win-win for both her employer and her. Since this contribution is coming from her employer and going into her HSA, she receives the funds pre-tax.

As we learned above, she can also make pre-tax payroll contributions if her employer’s Cafeteria Plan allows. Many employers don’t do so because they don’t want the responsibility for determining whether an employee enrolled in a family member’s plan has HSA-qualified coverage.

At worst, she can make personal (after-tax) contributions to her HSA and then deduct those contributions on her personal income tax return (whether her filing status is married filing jointly or married filing separately). She can recoup all federal income taxes paid as well as state income taxes paid (except in Alabama, California, and New Jersey). She can’t recoup the FICA payroll taxes that she paid when she earned the money that she contributes, however.

What We’re Reading

Amgen has announced an innovative reduction in the cost of a new high-cost drug to control cholesterol in patients who don’t respond to older, less expensive drugs. Grace-Marie Turner of the Galen Institute – a leading advocate for patients – analyzes this development.

The Trump administration has announced an initiative to lower drug costs by tying prices to an international index. Learn more here.

During the last two or so years, interest in HSAs as retirement accounts has exploded. Now that popular business sources like Barron’s are recognizing HSAs as a tax-efficient means of building medical equity, that interest will only accelerate. Read more here.

 

 

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6 thoughts on “Your Compliance Questions Answered”

  1. Cat McMaine says:

    My husband is covered on one health insurance plan (non HSA) and his employer offers a voluntary FSA (sec 125) plan. Our two children and myself are covered under an HDHP with an HSA. To date we have not contributed to the HSA because I seem to understand that if a member of the family is eligible for an FSA (with the exception of limited purpose), whether enrolled or not, you are ineligible to fund an HSA. Have I understood correctly?
    Question #2, The children are graduating college next year and have job offers that include HDHS insurance coverage with an HSA. Have I understood correctly that they will not be able to avail themselves of their HSA until after their 26th birthday even though they are no longer dependents unless their father gets an HDHP with HSA coverage or his employer no longer offers the FSA?
    Question #3, Is there any way around this? We had planned on not enrolling in the FSA offered by my husband’s employer for next year and funding the HSA to the maximum limits for eventual expenses for the other three members of the family but that does not seem possible after reading numerous informational posts on your site.
    Clarification please

    1. Bill Stuart says:

      No. 1: The fact that your husband’s employer OFFERS a Health FSA is not relevant. If he makes an election to that general Health FSA, he, you, and our children are disqualified from contributing to an HSA that year.

      No. 2: If your husband participates in his employer’s general Health FSA program, then, yes, your adult children would be disqualified from opening and contributing to their own HSAs. Under federal tax law,a Health FSA covers the subscribing employee, his spouse, his tax dependents, and his children to age 26. It doesn’t matter whether they’re covered on his medical plan. The Health FSA is, under the
      tax code, a separate medical plan in which they’re “enrolled.” Your husband can avoid this problem by merely not making an election to his emloyer’s general Health FSA.
      No. 3: Your strategy – not to participate in the general Health FSA next year – solves the eligibility issue. What matters is whether your husband makes an election to his employer’s general Health FSA, not whether his employer makes it available.

  2. Amber says:

    Hello! I have searched the interwebs high and low to find an answer to this and am stumped. So, my husband got a promotion at his company mid-year, which changed his insurance to a HDHP that covers the family (me included) plus an HSA. His employer auto-contributes twice yearly whether we want them to or not – so July 1, he had a contribution of $500. However, I have an FSA through MY employer that covers myself and my husband. So basically there was no possible way for us to avoid an overlap of the HSA w/contributions and my FSA. Is there any way at this point to avoid a penalty? We did NOT spend a cent from the HSA – just had contributions, no withdrawals. What’s the worst that will happen? There’s only about $500 in there – will it just be a 10% fine on that balance? Any help appreciated!!

    1. Bill Stuart says:

      Your husband needs to inform his employer that he’s not HSA-eligible. His employer has no way of knowing that he’s disqualified due to an event or situation outside of his company’s benefits program. His company will request that the HSA administrator return the funds to the company. HSA contributions almost always vest immediately, but one exception is when the employee wasn’t HSA-eligible and thus didn’t have a legal HSA into which to make the contribution.

      When he does become HSA-eligible (for example, if you don’t re-enroll in your employer’s general Health FSA), he can inform his employer that he is now HSA-eligible. He may need to contact his employer’s HSA administrator to re-open his HSA. The contribution that he receives for eligibility during a portion of his employer’s HSA program year depends on his employer’s HSA program design (which is spelled out in his employer’s Cafeteria Plan document). He can begin to contribute through pre-tax payroll deductions as soon as he becomes HSA-eligible.

  3. Katherine says:

    I am 65 but have chosen not to enroll in Medicare Part A because I am still employed, participate in my employer’s HDHP and HSA, and wish to continue to do so until I retire. However, I also plan to apply for spousal Social Security benefits at age 66 to receive 1/2 of my ex- spouse’s SS benefits until I turn 70, at which time I will apply in my own right for SS benefits based on my work. Question: Does applying for spousal benefits when I am 66 require me to become enrolled in Part A and therefore become ineligible for my HSA?

    1. William G. (Bill) Stuart says:

      Yes. When you enroll to receive Social Security benefits – your own or spousal benefits – you’re automatically enrolled in Part A and Part B. You can – and will – waive Part B, since you’re still working and the Part B coverage will provide little benefit for premium that you pay. (This statement assumes that you work for a company with 20 or more employees. If the company is smaller, Medicare is primary coverage, and your group insurer may require you to enroll in Part B as well as Part A as a condition of continuing the group plan.) You can’t waive Part A coverage if you collect Social Security benefits. You won’t be able to make or accept contributions to your HSA for any month after you begin to collect Social Security benefits.

      Some colleagues and I are fighting this rule, which is derived from Medicare’s operational manual, not actual legislation. But it was codified by a federal district court decision issued by Judge Brent Kavanaugh and a colleague in 2013. So, absent legislative action (which I’m trying to spur), collecting Social Security benefits precludes you from making future contributions to an HSA.

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