Health Savings Accounts Explained
by Roy Ramthun
Even though health savings accounts have been around for almost four years, there is still some confusion about the basic elements. Many people still assume that HSAs are the same as flexible spending accounts (FSA). There are a number of similarities, but the use or lose it feature is not one of them. One of the advantages is that funds deposited in an HSA do not expire. They rollover automatically each year until they are used.
Confusion about eligibility seems to arise when family coverage is involved. Dependent children are not eligible to have their own HSAs, so you generally don’t need to be concerned that their coverage will disqualify their parents from having an HSA. The children can be covered by their parents’ policy, making it family coverage. Therefore, the higher family contribution amount is allowed rather than the single amount.
Another misconception is that only the spouse who is primary on the HSA-qualified policy can contribute to an HSA. In fact, both spouses are eligible and both can establish HSA accounts in their names. Their combined contributions to their HSAs cannot exceed the family contribution limit for the year of $5,650 in 2007 unless at least one of the spouses is 55 or older and is eligible to make catch-up contributions.
There is also confusion about when both spouses have coverage through their jobs. Peo-ple are confused about whether one spouse would not be eligible because they have other first-dollar coverage, such as Medicare. I recommend you review the examples provided in IRS Notice 2004-50 available online at http://www.treas.gov/press/releases/reports/hsanotice200450072304.pdf (See Q&A #31.)
Coverage by Medicare
Individuals age 65 and older, who are still working, may want to contribute to an HSA. But what about Medicare? Anyone who takes Social Security (as early as age 62) will be enrolled in Medicare Part A (hospital benefits) automatically when they turn 65. Generally, the only way to delay enrollment in Medicare is to delay taking Social Security. You can delay it until 70-1/2. However, many people enroll in Medicare before they are eligible for full Social Security benefits since you cannot qualify for full Social Security benefits at 65 anymore.
Remember that enrollment in any part of Medicare makes you ineligible to contribute to an HSA. I’m told that you can delay en-roll-ment in Medicare Part A, but expect some incredulous questions since you are legally entitled to the coverage and it is free to most people. There are no monthly premiums.
If you have other coverage while you are working, make sure that no late enrollment penalties would apply if you delayed enrolling in Part B (physician benefits) and Part D (prescription drugs).
Embedded Deductibles
Some people think that the “umbrella deductible is the only type of family coverage policy that is HSA-qualified. Under the umbrella deductible, one deductible applies to the entire family.” Yet, IRS guidance allows plans to apply deductibles to individual family members. (See IRS notice mentioned earlier). Each deductible that applies to family members must be at least as high as the minimum deductible required for family coverage under high deductible health plans. That amount is $2,200 in 2007 and 2008.
Source of Coverage
Some people assume they’re not eligible for an HSA if they don’t get their coverage through their job. Others think that if their self-insured company provides their coverage, it cannot be HSA-qualified. Some think that they cannot be eligible if the policy is not in their name. (Coverage under a spouse’s policy.) The important thing to remember is not where you get the coverage, but that you have HSA-qualified coverage and that you have no coverage that disqualifies you.
How Many HSA -Accounts are Needed?
Most families only need one HSA account. If both are eligible, it doesn’t matter which spouse owns the account since the funds can be used to pay for qualified expenses of either spouse and the dependent children. However, joint accounts are not permitted. When they are 55 or older, it is important for both spouses to establish separate accounts in their own names even if they only plan to deposit the catch-up contribution in one of the accounts. (This is if both are eligible.) Also, it could be an issue in divorce proceedings since assets follow the name on the account in some states.
A Spouse’s FSA or HRA
Many people don’t realize that the IRS considers general-purpose health FSAs and health reimbursement arrangements (HRAs) to be first-dollar coverage, which can disqualify them from contributing to an HSA even with an HSA-qualified plan. It is even more difficult to remember when your spouse has an FSA or HRA plan. You have nothing to worry about if the FSA or HRA is a limited purpose arrangement that only covers dental, vision, or preventive care expenses because it’s is permitted by the IRS. If it is not, the IRS assumes the arrangement is available to pay for out-of-pocket expenses incurred by any family member unless the company documents say otherwise. It is not good enough for you to promise that you will not use the account.
HSAs and Domestic Partners
The IRS has not formally addressed domestic partners and HSAs. However, it is possible for both domestic partners to be eligible for HSAs even if they have family coverage. Under IRS guidance, family coverage is any HSA-qualified plan that is not self-only coverage. Both partners could be eligible individuals under an HSA-qualified plan since many employers offer benefits to domestic partners under the same policy. If both are eligible, they can both establish HSAs in their own names and the family contribution limits would apply. However, HSA funds cannot be used tax-free to pay for the other partner’s qualified medical expenses unless the partner is a dependent under IRS definitions, which is rare.
Employer HSA Contributions
A lot of people ask whether employers can make different contributions based on the employee’s length of service with the company or whether the employer can contribute only for management employees. The short answer is that the IRS does not permit either of these scenarios. Comparability rules require that companies that are not using Section 125 arrangements have contributions to employees’ HSA accounts that are the same dollar amount or the same percentage of the employee’s deductible.
Companies can only vary these amounts based on full-time versus part-time status or type of family coverage (single versus family). The rules do not apply to employees who have separate benefits under a collective bargaining agreement. Also, they don’t apply to employees who are not eligible for HSAs because they are enrolled in traditional insurance plans. Thanks to a recent change in the law, companies can make greater contributions to lower-paid workers instead of higher-paid workers. However, no other options are permitted.
A different set of rules applies for companies that are using Section 125 arrangements. Under non-discrimination rules, company contributions are subject to an aggregate test to ensure that contributions do not favor highly compensated employees. HSA contributions are not tested separately, but are combined with other benefits offered through the cafeteria plan when applying the non-discrimination test.
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Roy Ramthun is a nationally recognized expert on health savings accounts and consumer-directed health care issues. He led the Treasury Dept.’s implementation of HSAs after they were enacted into law in 2003. President George W. Bush then tapped Mr. Ramthun to be his healthcare policy advisor at the White House where he developed the President’s proposals to expand HSAs. As President of HSA Consulting Services, LLC, he continues to be an advocate for consumerism in healthcare and is a frequent speaker at conferences and seminars around the country. Mr. Ramthun has over twenty years of health care experience, both in government and in the private sector. He and his family reside in the Washington, D.C. area. He can be reached at roy@hsaconsultingservices.com.
