“This strategy is particularly popular in the small-group market, where deductibles are high and employee claims experience isn’t factored into premiums. Groups that are healthier (either fewer total claims or high claims among only a handful of employees) can benefit from this approach.”
William G. (Bill) Stuart
Director of Strategy and Compliance
May 24, 2018
In my role, I’m frequently asked questions by benefits advisors and employers about HSA compliance. I’ve written a book on general compliance questions (it will be rereleased and available for purchase in late fall) and have spent the last 14 years poring through the Internal Revenue Code, administrative agency guidance and compliance web sites to keep current on HSA regulations.
At the same time, I’m not an attorney, I never played one on television and I didn’t stay at a Holiday Inn last night. The answers that I offer below are for informational purposes only and do not constitute legal advice. They are simply the answers that I’ve provided (with the same caveats) to benefits advisors and employers during the past six months. I offer them to you as information only.
Can an HSA-qualified plan have an embedded deductible?
Yes. As a refresher, under an embedded deductible, each family member’s claims are applied to individual deductible limits, up to the family maximum. Most early HSA-qualified plans had an umbrella deductible, under which all family members’ claims accumulate to a single deductible. At the time, HSA contributions were reduced if the medical plan had an embedded deductible. Also, most early plans had low family deductibles, generally in the range of $3,000 to $4,000.
HSA-qualified plans with embedded deductibles must follow one important rule: The individual deductible can’t be less than the statutory minimum annual deductible for a family contract. This figure is $2,700 in this year and next. Thus, a plan can’t reimburse any family member’s non-preventive services until the member is responsible for at least $2,700 of covered expenses.
Does an HSA-qualified plan have to have an embedded out-of-pocket maximum?
It depends. The Affordable Care Act (ACA) limits individuals’ out-of-pocket (deductible, coinsurance, and copays) responsibility for covered services in-network to $7,350 in 2018 (and increasing to $7,900 in 2019). If a plan has a family out-of-pocket maximum below that figure (say, $6,000), the out-of-pocket maximum doesn’t need to be embedded.
If the plan has a family out-of-pocket maximum above the ACA maximum (say, $10,000), then the plan must cap each member’s financial responsibility for all covered services at no more than $7,150.
Can an employee be HSA-eligible and still have access to a Health FSA?
Yes, with a caveat. Individuals aren’t HSA-eligible if they’re covered by any plan that’s not HSA-qualified or isn’t considered permitted or excepted benefits. A Health FSA is an employee benefit that is subject to some plans for medical coverage. Thus, the Health FSA can be disqualifying coverage.
A limited Health FSA allows employees to remain HSA-eligible while enjoying greater tax savings. A Limited-Purpose Health FSA reimburses dental and vision services only. A Post-Deductible Health FSA reimburses all qualified expenses after a deductible.
At Benefit Strategies, we administer dozens of Limited-Purpose Health FSA. We recently introduced a post-Deductible Health FSA that reimburses all dental and vision expenses (no deductible) and all other qualified expenses once a participant attests that she has met at least $1,350 (self-only) or $2,700 (family) of expenses applied to her HSA-qualified plan deductible.
Limited Health FSAs are a great way for employees to remain HSA-eligible while reducing their taxable income further, spending their entire elections early in the year to ease cash-flow issues and preserve HSA balances to grow and reimburse qualified expenses in retirement.
Can an employer offer an HSA-qualified plan with an HRA?
Yes. This approach is not uncommon; we administer more than 100 such plans at Benefit Strategies. Employers take this approach to reduce premiums. They then use those savings to fund the HRA. Employees aren’t eligible to open or contribute to an HSA unless the HRA is a Post-Deductible HRA that doesn’t reimburse any expenses below the $1,350/$2,700 threshold. Employers who aren’t concerned with employees’ HSA eligibility can offer a first-dollar HRA and a general Health FSA to help employees offset their deductible responsibility.
How does a Post-Deductible HRA work?
Some benefit advisors counsel their clients to purchase medical coverage with a high deductible (say, an $8,000 or $10,000 family deductible) and then add a back-end HRA to reimburse much of the deducible. For example, an employer with a $3,000 family deductible today might increase the deductible to $8,000 and then use an HRA to reimburse the final $5,000 of deductible expenses.
This strategy is particularly popular in the small-group market, where deductibles are high and employee claims experience isn’t factored into premiums. Groups that are healthier (either fewer total claims or high claims among only a handful of employees) can benefit from this approach. Experience-rated companies benefit less, since their renewal premiums are based on their actual claims expenses in the corridor between $3,000 and $8,000 of covered expenses.
From Benefit Strategies’ perspective, HRAs are easy to administer. We receive claims electronically from the insurer. We accumulate those claims, then begin to reimburse the employee or provider once claims reach the threshold. Employees pay their portion of deductible expenses with personal funds, an HSA, a general Health FSA or a limited Health FSA, depending on their particular program.
Can an employer offer one medical plan with and give each employee a choice of an HRA or an HSA?
No. Section 125 plans don’t allow employer to offer this choice. Some employers do set up an HRA program for employees who aren’t HSA-eligible, for example, because they’re enrolled in Medicare. For employers who offer only a high-deductible medical plan with employees who can’t accept an HSA employer contribution to offset deductible expenses, an HRA can achieve the same objective. These working seniors can’t reduce their taxable income via HSA contributions or build medical equity to reimburse future qualified expenses tax-free. They can, however, receive employer reimbursements through the HRA and participate in a general Health FSA to reduce taxable income and reimburse qualified expenses tax-free.
An employer offers two HSA-qualified plans with different deductibles – say a $3,000 and a $6,000 family deductible. Can the employer offer two different levels of employer contributions – say $1,000 for the first plan and $4,000 for the second?
Yes. An employer must offer the same contribution (most employers adjust based on contract type, contributing more to employees with family coverage) to all employees enrolled in one product or the other. The employer doesn’t have to offer the same dollar amount or create the same net deductible between two plans. Employees can view the total package (benefits covered, plan type, deductible, employer HSA contribution and employee share of premium) when choosing between plans.
Can an employee whose husband participates in his employer’s general Health FSA program become HSA-eligible?
No. Under the tax code, Health FSAs reimburse qualified expenses incurred by an employee, her spouse, her tax dependents, and her children to age 26. Because the employee can access reimbursement from other coverage that’s not HSA-qualified, she can’t open or contribute to an HSA until the end of the general Health FSA plan year. She can’t become HSA-eligible by pledging not to seek reimbursement from her husband’s Health FSA, nor does she become HSA-eligible when her husband’s Health FSA election is exhausted. She remains enrolled in that disqualifying coverage through the end of the Health FSA plan year.
Can an HSA-qualified medical plan cover preventive prescription drugs below the deductible?
Yes. The HSA legislation allows insurers to cover certain preventive prescription drugs outside the deductible. Some insurers have taken that approach and designed plans that cover these drugs subject to a copay. Unfortunately, the IRS has given little guidance about what constitutes a preventive drug. Insurers have created their own lists, some conservative and some aggressive. When comparing plans, be sure to note how extensive or restrictive their lists are.
Does a telemedicine benefit disqualify a person from becoming HSA-eligible?
The IRS hasn’t provided guidance on this topic, as the industry has requested. Here’s some direction that we can provide:
First, it’s not true, as I’ve heard one telemedicine vendor state, that telemedicine is permitted because the Internal Revenue code focuses on disqualifying coverage and telemedicine is a program. This distinction is irrelevant.
Second, if the telemedicine benefit is built into the medical coverage and is covered like any other benefit (subject to the deductible unless it’s preventive), it doesn’t affect HSA eligibility.
Third, if it’s not integrated with the medical coverage but offers the service at what can reasonably be considered a market rate, it presumably isn’t disqualifying. What is a market rate? We don’t know. It’s probably reasonable to assume that $5 or even $25 is not market rate. What about $50? Maybe, perhaps even probably. It’s a gray area.
Fourth, if it’s covered on financial terms that look like an incentive to use the service (such as a $5 copay or three free consultations), anyone who utilizes the telemedicine benefit is probably disqualified from opening or contributing to an HSA.
Key point: IRS has issued no guidance on this topic. I think it’s reasonable to assume that the IRS would treat it as it would any other encounter with a physician for a non-preventive service. If the patient assumes full financial responsibility for the service at a market rate, the benefit probably isn’t disqualifying. If the cost to access the service is below-market or subsidized by the employer, it’s probably disqualifying.
How do concierge medicine and direct primary care, two emerging treatment trends, fit into HSAs?
At the moment, they don’t. The concepts are similar: A person contracts with a physician to provide unlimited primary care for a fixed monthly fee. The physician provides all treatment for that single fee (similar to a capitation reimbursement model offered by an insurer) and doesn’t deal with the insurer. The patient uses her insurance benefit when she has to visit specialist, undergo services that the primary-care doctor can’t provide (such as imaging and complex lab tests), undergo surgery, or have an inpatient stay.
The IRS considers concierge and DPC arrangements to be coverage. In this case, the patient pays a fixed dollar amount to the physician, who in turn provides care not subject to a deductible. Therefore, the patient is disqualified from opening or contributing to an HSA.
The fees paid to the physician aren’t qualified expenses under federal tax law. Therefore, individuals who have HSA balances from previous coverage can’t reimburse these fees tax-free from their HSAs. Any distributions for concierge or DPC fees are included in taxable income. They’re also subject to an additional 20% tax as a penalty if the HSA owner hasn’t turned age 65 or isn’t disabled.
A Final Note
Bear with me. I made a belated New Year’s resolution earlier this year after reading about the Oakhurst Dairy case. The case intrigued me because (1) I’m a closet grammarian and (2) I used to finish my daily group training runs right behind the Oakhurst Dairy facility on Forest Avenue in Portland, Maine.
The issue is the Oxford comma, a point of punctuation that has fallen out of favor in recent decades. The Oxford comma is inserted after the next to last item in a list. For example, I’ve always written “head, shoulders, knees and toes.” The Oxford comma is inserted after “knees,” making the phrase “head, shoulders, knees, and toes.”
It may seem nitpicky, but consider this sentence without an Oxford comma: “I went to the beach with my wife, a rapper and a body-builder.” Did I go to the beach with three other people, or is my wife a rapper and a body-builder? The Oxford comma would clarify this sentence so that the world knows that my wife is neither a music sensation nor an entrant in a Ms. Pumped Universe contest.
I ask your patience as I adjust my approach. I may let a list slip by without an Oxford comma. And that’s probably okay (though it will drive me crazy if I catch it or, God forbid, one of my readers brings it to my attention). The Oxford comma was worth $5 million to truck drivers in the Oakhurst Dairy case, so the implications can be pretty dramatic.
What We’re Reading
The Trump administration has taken a number of steps to loosen administrative regulations to provide additional coverage options for individuals facing high premiums and steep premium increases under the ACA. One area of focus is state waivers to deviate from the ACA. The Commonwealth Fund has created an interactive map showing which states have submitted waiver requests and the status of each request.
The Commonwealth Fund also conducted a recent survey on a timely topic, people’s confidence in their ability to afford health care. Not surprisingly, their confidence is trending down over time. This survey shows results over time, by income range and by coverage type.
How is Massachusetts, a state that reformed its medical coverage rules a decade before the ACA, doing with its goal to provide more transparent cost and quality information to patients? The Pioneer Institute reports that the state’s top three insurers have made substantial improvements since the effects of the 2012 transparency law were first analyzed in 2014, but that gaps remain.