1/24/08

Steve LeRoux Consultant, IRAs/HSAs, Wolters Kluwer Financial Services

Health Savings Accounts (HSAs) are among the newest vehicles available to help consumers and employers contain health care costs. This article will review the positive and negative relationships between HSAs and other accounts designed to help control health care costs.

General HSA Eligibility
In order to be eligible for HSA contributions, an individual must have coverage only under a high-deductible health plan (HDHP).

Other Health Coverage
However, an individual can have additional insurance that provides benefits for the following items:

• Liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property
• A specific disease or illness
•  A fixed amount per day (or other period) of hospitalization

An individual can also have coverage (whether provided through insurance or otherwise) for the following items:

• Accidents
• Disability
• Dental care
• Vision care
• Long-term care 

Health FSAs and HRAs Together with HSAs
Participation in a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) may negatively affect an individual’s HSA eligibility. Even with HDHP coverage, an individual also covered by a health FSA or an HRA that pays or reimburses qualified medical expenses prior to meeting the HDHP deductible generally cannot make regular HSA contributions. An individual’s participation in one of these plans may also disqualify his/her spouse from an HSA.

However, IRS Revenue Ruling 2004-45 provides that an individual is eligible for a regular HSA contribution for periods he/she also has coverage under the following arrangements:

Limited-Purpose Health FSA or HRA
These arrangements can pay or reimburse the items listed under Other Health Coverage, except long-term care. These arrangements can also pay or reimburse preventive care expenses without having to satisfy the deductible.

Suspended HRA
Before the beginning of an HRA coverage period, a participant can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other Health Coverage. The individual’s HSA eligibility ends when the suspension period ends.

Post-Deductible Health FSA or HRA
These arrangements do not pay or reimburse any medical expenses incurred until the participant meets his/her minimum annual deductible. The deductible for these arrangements does not have to be the same as the deductible for the HDHP.

Retirement HRA
A retirement HRA pays or reimburses only those medical expenses incurred after retirement (and no expenses incurred before retirement). In this case, the individual is an eligible individual for the purpose of making regular contributions to the HSA before retirement but loses eligibility for coverage periods when the retirement HRA may pay or reimburse medical expenses. Thus, after retirement, the individual is no longer an eligible individual for the purpose of the HSA.

Participation in these arrangements, or combinations of these arrangements, does not disqualify an individual from being eligible for an HSA. 

Health FSA and HRA Rollovers to HSAs
Participation in a health FSA or HRA may positively affect an individual’s HSA contributions. Eligible individuals may directly roll over qualified health FSA and HRA distributions to an HSA. The requirements to complete this direct rollover are as follows:

1. The individual must have had a balance in the health FSA or HRA on September 21, 2006
2. The health FSA or HRA must be amended to allow a qualified HSA distribution
3. The health FSA and HRA may be terminated in conjunction with this process but it is not absolutely required
4.  The maximum amount that may be directly rolled over is the lesser of the balance on September 21, 2006 or the balance on the date of distribution
5. The qualified HSA distribution must be accomplished by December 31, 2011
6. The qualified HSA distribution may occur once in an individual’s lifetime unless the individual maintained balances in more than one health FSA and/or HRA on September 21, 2006
7. The individual must be eligible for an HSA on the first day of the month in which the distribution occurs

To avoid taxes and penalty on the qualified HSA distribution amount, the individual must remain an eligible individual (unless caused by death or disability) through the 12 month period (testing period) beginning at the end of the qualified HSA distribution month.

The HSA custodian/trustee reports the HSA contribution as a rollover contribution by the on IRS Form 5498-SA

IRS Notice 2007-22 may aid employers and health care plan providers with some procedural and fact-based information and examples. Employers and their advisers should review this guidance prior to amending their health FSA and/or HRA plan to provide this distribution option.

Responsibility
Ultimately, it is each individual’s responsibility to determine his/her HSA contribution eligibility and to understand the effect of a health FSA and/or an HRA on such eligibility. An employer and its health plan administrators are responsible for careful health plan design if HSA compatibility is the goal. An HSA custodian/trustee is responsible for providing appropriate documentation and accurately reporting HSA activity to each HSA owner and the IRS. An HSA custodian/trustee may rely on information provided by an HSA owner, an HSA owner’s employer, and a health FSA or HRA plan’s administrator as it relates to eligibility and reporting.